A New Future for Diamonds

A New Future for Diamonds.

Diamonds are extremely hard pieces of carbon generated over millions of years. Their scarcity and brilliance and hardness have made them a coveted jewel for thousands of years. But a competitor has emerged: diamonds created in a laboratory. As a result, for the first time in history there are two markets for diamonds — a market for natural diamonds (which is dominated by De Beers) and a market for Lab-grown diamonds. De Beers also makes lab-grown diamonds, but here the barriers to entry are much lower and De Beers has no monopoly in lab-grown diamonds.

The following two charts show what has been happening to the diamond market. The total demand for natural diamonds had remained broadly constant at $75 billion since 2015. After a covid-related fall in 2020 it jumped up to near $90 billion. In the meantime the market for Lab-diamonds has grown from about $2 billion in 2018 to nearly $15 billion in 2022. So the share of the total diamond market accounted for by lab-grown diamonds has increased and is now about 14% of the total world diamond market.

Fuelling the growth for lab-made diamonds has been a fall in their price, absolutely and relative to natural diamonds. Why has their price fallen so much? It is because of an increase in supply — or, put another way, a fall in their cost of production. As the technology for lab-produced diamonds improves and new firms enter the market the supply curve shifts to the right, driving down price.

As can be seen in this diagram, as the supply curves shifts down with falling costs, the equilibrium price for lab-diamonds falls and the quantity bought and sold increases. This has been happening to Lab-diamonds and is the main factor driving their growing presence in the market.

It is not the only factor. Demand for lab-diamonds is also increasing for various reasons:

• They are seen as less environmentally damaging to produce as diamond mining is associated with environmental damage and bad working conditions for miners.
• Lab-diamonds can be grown to a larger size. There are more larger lab-grown diamonds and they are more affordable. The average lab-grown diamond in an engagement ring in 2022 was 1.8 carats compared to 1.5 carats for natural diamonds.
• Lab-grown diamonds can be made to different sizes and, because they are cheaper, can be cut more freely. They are thus more useful in things like watch making.

So in sum, demand for lab grown diamonds is growing.

Existing natural diamond producers like De Beers have responded to these trends by making lab-diamonds too. In effect they have segmented their market and engaged in price discrimination, charging high prices to those who still want a classic natural diamond and then charging a lower price to those willing to buy a lab-diamond. As this passage from the Wall Street Journal for 29 April 2023 explains:

So what does the future hold? It seems that going forward the price of lab-grown diamonds will only fall and that they will take a bigger share of the market as the stigma of having a lab-diamond fades. It may even become a stigma to have a natural diamond if diamonds follow the market for fur. What does this mean for natural diamonds? Demand will probably fall, leading to falling prices and output of natural diamonds. And since the supply of diamonds is relatively price inelastic this fall in price might be quite substantial.

While the price of natural diamonds has been buoyed up by the surge of post-pandemic weddings and celebrations, it seems very likely that as this effect wears off and global incomes are squeezed by rising prices, and as more people see that lab-diamonds are a cheaper and possibly environmentally better option than natural diamonds, the price of natural diamonds will fall. It will probably shadow the lab-price, being higher to the degree to which people are prepared to pay a premium for natural over lab-diamonds. There is good reason to expect this price premium to decline over time.