Demand and prices for natural diamonds have historically been balanced by mining supply. But during the COVID-19 pandemic, the supply chain was disrupted and many marriages and engagements were delayed. Meanwhile, many people stuck at home splurged on self-care gifts, and prices for diamonds increased more than expected.
Today, as the supply chain normalizes—and the traditional three-year cycle of engagement to marriage reemerges—prices are collapsing as a result of several recent trends. First and foremost, the massive success of lab-grown diamonds (LGDs) has reduced prices for natural stones well beyond what the mining industry had expected, driven largely by consumers who want more affordable options. Second, in the context of rising environmental, social, and governance (ESG) concerns, consumers are looking for improved sourcing traceability for their gems. And third, industry players are navigating sanctions against products from Russia, a major rough-diamond producer.
These factors are playing out in an environment of limited growth for natural-diamond supply, other geopolitical tensions, and shifts in financing. Where the industry goes from here depends on how companies respond to these changes. This article outlines factors that producers of natural and LGD diamonds should consider when redeveloping their strategies to connect with customers (see sidebar “What are lab-grown diamonds?”).
The state of the diamond industry
The diamond industry is primarily a B2C market, making it more vulnerable than other commodities to inflationary pressures and changing customer preferences. This was illustrated recently when diamond pricing recently reached a cyclical inflection point (Exhibit 1).
After supply-chain constraints in late 2021, which were compounded by COVID-19, an increase in rough-diamond prices created value overall for upstream players while squeezing out downstream players (see sidebar “Market changes across the diamond value chain”). In this high-price environment, consumer and retail markets experienced higher financing costs, and overseas cutting centers were under pressure because of high debts and margin squeeze. The price of diamonds plunged after hitting a peak in February 2022, prompting upstream producers to stockpile rough stones and cancel sales promotions in hopes of price recovery once midstream inventories were reduced.
In addition to market fluctuations, diamond production is further complicated by the fact that diamonds are one of the few commodities that can be economically replaced by a synthetic product that has not only nearly identical physical properties but also significantly lower costs (as much as 80 percent in some instances).
What’s ahead for the industry?
Today, five critical developments are at play in the diamond industry (Exhibit 2). First and foremost, customer demand for fine jewelry is shifting, driven by changing demographics and increased awareness of social and environmental sustainability. This directly affects two key technological advances: “mine to finger” supply chain traceability and LGDs. In addition, the industry faces supply chain disruptions and financing changes.
Shifting customer behavior for jewelry
Demographic and behavioral changes are shifting customer approaches to jewelry, primarily driven by generational shifts. As Generation Zers become part of the customer base for fine jewelry, customers are buying more often, more ethically, and through different channels.
According to a Euromonitor survey, Gen Z spends more on luxury apparel and accessories than previous generations: 58 percent of Gen Zers made fashion purchases three times last year, compared with 41 percent of baby boomers globally.1 The younger consumer base is also more interested in digital, branded, and socially conscious products. As a result, the market share of LGDs is rapidly increasing in certain segments.
The rise of e-commerce is quickly changing diamond retail. Consumers are increasingly comfortable buying big-ticket items online and have heightened expectations for online shopping opportunities. McKinsey research shows that online purchases of fine jewelry are expected to increase at a CAGR of 9 to 12 percent from 2019 to 2025, implying that 18 to 21 percent of fine jewelry transactions will be made through digital platforms.2 In the United States, 42 percent of Gen Zers’ purchases were made online, and the average online sale for diamond jewelry in 2021 was $2,204, compared with $2,994 in stores.3
Younger consumers are also driving greater brand enthusiasm. Gen Xers, millennials, and Gen Zers are more brand conscious than boomers. On this point, younger consumers want to purchase jewelry from companies that represent their values and often use their purchasing power to take a stand on social issues they believe in. More specifically, Gen Z is pushing for more-ethical stones, particularly around fair pay and safe working conditions for workers.
Additional microtrends include upcycling and customizability. Further, consumers are increasingly purchasing fine jewelry for themselves, rather than waiting for special events such as engagements and marriage. Consumers are also mixing and matching fine jewelry with casual apparel and purchasing antique or vintage diamonds, contributing to the uptake of both new and used jewelry products.4
Overall, diamond industry players can adjust their offerings and strategies to target this range of trends, including offering recycled diamonds or comparable products.
Traceability to meet ESG preference of customers
Rising awareness of ESG factors and growing concerns about the ethical implications of mining natural stones have resulted in decreasing demand for natural diamonds in Western markets. In fact, our research shows one-third of fine jewelry purchases could be influenced by ESG factors by 2025.
Diamond traceability refers to a record of a diamond’s journey from its origin to sale, including where it was sourced, cut, polished, and sold. Several retailers require suppliers to log purchasing contracts, chain of custody, and quality measurements as part of their traceability requirements. As a result, traceable diamonds can be regarded as a driver for increased transparency and trust among consumers, therefore likely commanding price premiums. Moving forward, markets may bifurcate based on diamonds that do or don’t meet legal or social-responsibility constraints.
Industrial players are increasingly using digital transparency software, such as blockchain, to enable tracking to address difficulties in transparency due to the fragmented value chain, especially for smaller stones. If done correctly, tracing may even become a sales argument, especially in digital channels, giving jewelry brands an opportunity to tap into the quickly rising demand for sustainable gems and tell a unique story for each stone. Diamond producers should continue investing in marketing and technology to ensure traceability while telling the unique story of their stones.
Future customer ESG requirements in the diamond industry could include mine safety, sustainable water use, and community involvement, especially given periodic news on the effect of diamond mines on workers and communities. Developing diamonds that meet the ESG demands of customers will likely require vertical integration and new streams of revenue to offset higher ESG compliance costs. For many industry players, strengthening strategic partnerships and branding between supplier and retail, including source-tracking and provenance, could help achieve such ambitions.
Finally, the focus on traceability, zero emissions, and ESG targets does not always bias consumers toward LGDs over natural diamonds. LGDs require a significant amount of energy (about 250 kilowatt-hours per rough carat). Further, the majority of LGDs are produced in China or India, both of which rely heavily on coal to power their electric grids.
Competition from lab-grown diamonds
As LGDs become increasingly popular because of their perceived ethical and environmental advantages, lower price, and physical and visual similarities to natural diamonds, the industry has seen consumer demand shift toward synthetic stones, which has contributed to the price decline of natural diamonds. This is likely the biggest challenge facing diamond producers today. Moving forward, traditional diamond industry players will need to adapt by diversifying their product offerings or communicating the unique value propositions of natural stones.
LGDs were originally developed for use in several industrial applications, such as drill heads and cutting and polishing equipment, as non-gemstone-quality substitutes. Since then, LGDs have grown into consumer jewelry markets, where technological advances continue to make inroads across quality and stone size (currently at around three carats).
Some branded jewelers are investing in lab-grown inventories, while other large jewelry companies are phasing out natural diamonds. At the same time, some leading producers of LGDs have secured funding from investment firms.
By contrast, other natural stone producers are reluctant to see the value of LGDs as a cheaper alternative to natural diamonds, for fear of cannibalizing their own markets. LGDs sold at a 20 percent discount compared with natural counterparts in 2018, whereas prices today are at an 80 percent discount,5 partly because of industry efforts to delineate the value and application of non-bridal stones.
Nevertheless, as the quality and availability of LGDs continue to improve, costs are expected to decline. Furthermore, as a potentially ESG-friendly alternative to natural stones and with the option to purchase large stones for low prices, LGDs could be increasingly attractive for younger buyers in Western countries, whereas buyers in China lean toward natural stones. The Knot, a global marketplace for wedding vendors, reported that 46 percent of engagement stones in 2023 were synthetic diamonds, compared with 12 percent in 2019.6
Given these points, a few scenarios could come to pass. First, LGDs could take over the majority of the market outside niche luxury segments, similar to collecting classic cars or luxury vintage items. Second, the price of LGDs could drop so low they effectively become fashion accessories that no longer compete with diamonds. Related to this point, assuming consumers cannot tell the difference between natural stones and LGDs, all diamonds could simply go out of fashion, lose their appeal, and are no longer seen as a must-have for engagement rings.
Disruptions and limited growth for natural-diamond supply
Our estimates show that natural-diamond production is expected to grow at approximately 1 to 2 percent per annum until 2027, below previous trends of 3 to 4 percent. Growth will likely be constrained by a combination of major mine closures, production ramp-ups for existing mines, and price volatility. Further, any major new mines could take more than ten years to come online, and increased geopolitical tension and government intervention could limit access to diamonds.
With prices fluctuating, and with open-pit resources depleted and becoming more expensive to maintain, several companies are looking to increase the lifetimes of their existing mines by moving to underground operations. De Beers spent $1.0 billion to expand its Jwaneng mine in Botswana (12 million carats) and $2.3 billion to expand the underground portion of the Venetia mine in South Africa (five million carats) and increase its operational life to 2045.7 Burgundy Diamond Mines is restarting the Ekati mine in Canada (two million carats). Rough-diamond producers need to conduct a critical cost-benefit evaluation of mine productivity and supply chains given these volatile diamond prices. To stay competitive, mines can continue running regular price scenarios to model investment outcomes ahead of expansions or to reduce costs. Mines can also invest in operational efficiency and technology innovations to improve the production of natural diamonds. New technologies in improving the productivity and refining of diamonds can unlock new production. Examples of such technological breakthroughs include seismic or magnetic detection technologies to find new locations for diamonds, X-ray transmission technology to find new large stones prior to breaking rocks, and X-ray fluorescence technology for sorting minerals from diamonds after mining. Such X-ray technology was used to find the biggest diamond in more than a century in Botswana in August 2024.
Digital and AI tools can also be used to increase productivity of mines by analyzing real-time drilling productivity, using geologic data to identify new reserves or locations for mines. More specifically, analytics and digital twins can help reduce downtime or material movement of existing mining processes and increase efficiency and output. Complementing this data with financial impact and frontline workforce adoption can further drive value, and several of these technologies are already being implemented or under consideration at diamond mines.
Government interventions also have an impact. The industry was led in its early days by private Western players, but public authorities across countries with large natural stone occurrences have taken a growing equity stake in incumbents across the supply chain. Rough-diamond producers need to place increased emphasis on working with these regional governments to maintain more transparent and sustainable diamond pipelines.
Geopolitical tensions also affect global supply chains. Though global diamond prices fell in 2022 despite US sanctions on Russian diamonds, dislocations on a regional level are still expected, with a strong impact on midstream and downstream players, such as cutters and polishers or specialized retailers. The world’s biggest diamond producer, Alrosa, which produces around 90 percent of diamonds mined in Russia, has been on the US sanctions list since 2022 and was recently added to the EU sanctions list.8 The G-7 has also expanded restrictions on Russian diamonds to include 0.5 carats and above.
These sanctions are expected to come into full force by March 2025, including all stones of 0.5 carats or larger, and will likely have a significant effect on diamond supply and price levels. Therefore, rough-diamond producers may need to create differentiated sourcing strategies or entities for different regions.
Financing regulations and financing practices
The diamond industry has experienced important changes in financial regulation and financing practices over the past few years, including an interplay of stricter financial reporting and increased liquidity as well as changing financing practices in India. Historically, the diamond industry has been lightly or inconsistently regulated. However, there have been recent calls for tighter regulation and increased transparency.
In 2021, Belgium, host to the world’s diamond capital in Antwerp, updated obligations for diamond trade members to keep cash payments to less than €3,000 and comply with authorities on suspicious transactions, to prevent the use of diamond trade for money laundering or terrorist financing.9
Financiers have historically held a critical place in the diamond market, especially for midstream players, where access to financing has enabled business operations during volatile prices in the diamond market. In 2021, several global banking industries imposed stricter lending norms, requiring increased financial transparency from midstream diamond players. At the same time, some financial institutions used asset-backed securitization to adapt to these changed circumstances, assuming clients had scale and legitimacy. These increased regulatory and financial stringencies will likely be challenging for smaller diamond players, while larger diamond players should continue developing partnerships for robust financing arrangements.
In the current market, midstream diamond companies are trying to hold less inventory to increase liquidity and buy with cash rather than credit. With increased liquidity, diamond companies rely less on bank loans and operate their businesses with more financial autonomy. However, it is important to remember that inventory and liquidity are dynamic.
Lending in diamond markets in India, the world’s largest exporter of diamonds and midstream cutting and polishing centers, has also been volatile. Previously, lenders were motivated to loan to export markets, such as diamonds, in exchange for low interest rates, thereby providing access to significant low-cost capital to Indian diamond players.
Next steps for diamond players
The diamond industry is evolving at an unprecedented pace, and this is expected to continue. Although the natural-diamond industry has traditionally overlooked LGDs out of fear of cannibalizing their core business, LGDs are expected to become an increasingly important component of the overall diamond industry.
Both natural-diamond and LGD industry participants have the chance to benefit from consumer demand if they can play into their differentiating factors, whether rarity, price, or volume. As customer behavior and preferences continue to evolve, strategies addressing upstream levers will likely be critical to build necessary digital infrastructure, implement traceability standards, and align brand values with customers’ changing needs. These strategies will also need to consider the growing market share and dropping prices of LGDs, which have emerged as a strong competitor to natural diamonds, and the supply volatility and increasing regulation of the diamond industry.
Players across the value chain can tackle these challenges in multiple ways. Some may choose to make significant changes to the existing business. For example, safeguarding host government agreements and collaboration with local communities can help build a license to operate for rough-diamond players. These players can also set higher standards for ESG in natural diamonds to more favorably position products toward the next generation of consumers.
Other players may choose to build new businesses or reassess evergreen business ideas. This could include LGD or recycled-diamond businesses and branding-related considerations, such as establishing new affiliated brands or business lines beyond diamonds. They could consider expanding into additional markets such as supercomputing, transistors, and scientific instrumentation, where the diamond’s high thermal conductivity and high electrical insulation could enable new graphics and central processing unit (GPU and CPU) architectures. Players can also assess opportunities to increase their share of wallet across the value chain—for example, by increasing their role in sorting and grading or growing the share of direct-to-consumer sales.
Change in the diamond industry will not be fast or simple. Open questions remain around how diamond players can build strong business strategies given diamond price volatility, how the natural- and lab-grown-diamond industries will intersect, and who will own the diamond value chain in the future. Answering these questions, and staying ahead of the changing market landscape, could mean the difference between finding stability in the years to come and falling behind.
