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“Square-cut or pear-shaped, these rocks don't lose their shape. Diamonds are a girl's best friend.”

The jazz song performed by Marilyn Monroe in the 1949 Broadway production of Gentlemen Prefer Blonds is one of the most classic and successful cases ofproduct placementinmarketinghistory.

The diamond company De Beers, who dominates the world market for diamonds, engaged advertising company N.W. Ayer in the 1930s and 1940s to make diamonds more popular.

The advertising company came up with the idea of placing diamond jewelry on idols in popular movies. Diamonds were displayed in several Hollywood films, making engagement rings with diamonds popular, and made the diamond sales rise dramatically.

However, with prices tumbling around the world this year, the rough-diamond sales of the one-time diamond monopoly fell in the ninth cycle of the year as it continued with reduced diamond availability while macro-economic challenges weighed on the sector.

De Beers sold just $80 million of rough diamonds at the end of October, compared with $454 million a year earlier. The Anglo American unit gave buyers the right to pretty much refuse to purchase all the stones they’re contracted to buy for the last two sales of the year.

De Beers’s main rival, Russia’s Alrosa PJSC, halted sales altogether in September amid slumping demand from buyers in India where about 90% of all diamonds are cut or polished into jewelry. India then halted much of its imports.

De Beers saw its revenue dive by 21% in the first half of 2023. And it's not alone. London-based diamond producer Petra Diamonds Ltd. reported a 44% revenue drop for the 2023 fiscal year. Rio Tinto reported its consolidated sales revenue was down 10% for the first half of 2023.

While there are many different diamond categories, prices for wholesale polished diamonds have tumbled about 20% this year, firing a more dramatic fall in rough — or uncut — stones that have plunged as much as 35%, with the steepest declines happening through late summer and early autumn.

What’s behind the free fall of diamond prices?

The diamond industry had been one of the great winners of the global pandemic, as stuck-at-home shoppers turned to diamond jewelry and other luxury purchases.

Notoriously cyclical and closely tuned to consumer confidence, diamond demand often fades in tough times, especially when potential buyers are battling high interest rates and cost of living pressures.

Diamond demand has weakened after the pandemic, as consumers splash out again on travel and experiences, while economic headwinds eat into luxury spending in the key US and Chinese markets, leaving many in the trade holding too much stock that they’d bought for too much money.

But the speed and severity of the collapse in diamond prices caught many by surprise.

What looked like a cool down quickly turned into a plunge. The US economy, by far the industry’s most important market, wobbled under rising inflationary pressure, while key growth market China was hit by a real estate crisis that sapped consumer confidence.

To make things worse, the growing share of the gem market is falling under the control of man-made, or laboratory (lab-grown) diamonds.

Dismissed in their early years as unlikely to catch on, lab-grown stones have been slowly eating into the overall diamond market, especially at the cheap end of the business.

But with improvements in technology and no barriers to new entrants, the lab-grown sector has blossomed, crashing prices, and bruising the concept of a diamond being a high-end luxury product.

About five years ago, lab grown gems sold at about a 20% discount to natural diamonds, but that has now blown out to around 80% as the retailers push them at increasingly lower prices and the cost of making them falls. The price of polished stones in the wholesale market has fallen by more than half this year alone.

De Beers also started selling its own lab-grown diamonds in 2018 at a steep discount to the going price, in an attempt to differentiate between the two categories. But it has been forced to pull out of a major sector in September, engagement rings, blaming low prices.

Diamond research house Rapaport said last month that its RapNet diamond index showed that the price of a three-carat stone was down 15.3% on a year earlier, one-carat stones were down 25.9% and half-carat stones were down 31.6%.

Yet there are specific peculiarities to the diamond industry that make it more vulnerable to slowing consumer demand. De Beers sells its gems through 10 sales each year in which the buyers — known as sightholders — generally have to accept the price and the quantities offered.

When prices are rising, as they did for much of the past two years, these buyers are often incentivized to speculate, betting that paying for unprofitable stones now will pay off if prices continue to rise. Buyers are also rewarded for making big purchases by being given bigger allotments in the future, known in the industry as “buying for position.”

These mechanisms often lead to speculative bubbles, which pop when consumer demand slows and polished diamond inventories build up.

In response, Alrosa stopped selling diamonds altogether for two months, and De Beers has allowed its customers to refuse all purchases without it having any impact on the future allocations.

While the two dominant diamond miners have a long history of curtailing supply or letting buyers refuse some goods when demand weakens, the speed and scale of the combined actions is extremely unusual outside of a major crisis such as the outbreak of the pandemic.

In the near future, sales will much depend on the crucial holiday season, which spans from Thanksgiving to Chinese New Year, and how the big miners who have accumulated large stocks of unsold gems feed them back into the market.

Diamond losing charm with Gen Z

There also remains uncertainty in the industry about how much of the slowdown is being driven by macro-economic weakness, versus a more worrying shift in consumer choices.

Lab-grown diamonds have made rapid progress in some key segments of the market, while there are lingering concerns in the industry about whether Gen Z consumers look at diamonds the same way as previous generations do.

Research by wedding website The Knot found the number of couples opting for lab-grown stones had more than doubled since 2020 after major jewelry brands such as Pandora started offering the sustainable alternatives.The survey found that 36 percent of engaged couples has opted for a lab-grown ring, up from 18 percent in 2020.

A 1 carat lab-grown diamond is on the market for as little as $1,430. Comparatively a diamond of the same size which had been mined naturally would cost $5,635.

Natural diamonds are made of pure carbon below the earth's surface and are the hardest natural mineral found on Earth. But the way they are mined with fuel, hydrocarbons and heavy machinery has been linked to heavy air pollution and climate change. The industry has also come under fire for a bad record over conditions inflicted on diamond miners.

Historically, natural diamonds have also been associated with elite society, and an exclusive and opulent lifestyle. Today, Gen Z has a more fluid and inclusive mentality on diamonds and jewelry. By comparison, lab-grown diamonds are considered more eco-friendly as they recreate the same conditions but in a laboratory.

Apart from being less obsessed with natural diamonds, the younger generation is also looking for more cost-effective alternatives.

Recently in Wuhan, central China’s Hubei Province, the Gemmological Institute of China University of Geo-sciences becomes a must-go tourist spot for youngsters who are looking for a nice bargain for colorful gemstones.

In a street just a few hundred meters outside the campus, there are large buildings designated solely for jewelry trading. Jewels inlaid with colored stones are sold in surprisingly low prices. A 188 yuan sapphire ring, a 200 yuan ruby bracelet, or a 440 yuan aquamarine-diamond bracelet, all up for grab.

One can always rest assure about the authenticity of the gems, as people who sell stones there are “professionals” — they are often the graduates or even retired faculty of the university. And even if you buy nothing, they are more than happy to tell you the anecdote of a famous brand that used to work for European royals, the latest designer trend, or practical tips for shoppers to identify gems.

Many of the jewelry sellers there are engaged in digital marketing, such as influencer collaborations, social media interactions and live-steaming, which characterize the expectations of Gen Z consumers, let alone affordability.

“I’m tired of paying high premium for luxury branded jewelry and too young to begin investing in gold. I just want to buy the right jewelry at the right price,” said a young customer on social media platform Xiaohongshu.

Diamond down, gold up

A diamond might be forever, but not its high price. And the next valuable sparkle, gold, is now in hot demand. From central banks to ordinary buyers, the world embarked on a gold-buying spree this year.

Gold is once again proving itself to be the safe-haven asset of choice by central banks. They are accumulating gold reserves this year at a pace never seen since 1967, when the US dollar wasstill backedby the precious metal.

In the quarter ending September, demand for gold was up 28% year-on-year, reaching 1,181 tons, according toa new World Gold Council (WGC) report.

China now has thesixth biggestcentral bank bullion stockpile, and some analystspredictthat number is only going to go up. China topped up its gold holdings for a 12th straight month in October, as the official gold reserves reached 71.2 million ounces at the end of October, up from 70.46 million ounces a month earlier.

The retail market for gold jewelry is also buzzing with sales activity despite pure gold jewelry prices still rising to above 600 yuan per gram.

China's gold consumption rose 7.32% year-on-year to 835.07 metric tons during the first three quarters of the year, while output climbed to 271.25 tons, according to the China Gold Association.

In terms of gold jewelry, China's total demand in the third quarter amounted to 154 tons, marking a 6% year-on-year decrease. However, it rose by 16 percent compared to the second quarter, the WGC report said.

The consumption of gold jewelry in the world's largest consumer market of the precious metal increased 5.72% to 552.04 tons in the first nine months of this year, while the consumption of gold bars and coins rose 15.98% year-on-year to 222.37 tons.

Latest data from the National Bureau of Statistics indicated that the growth rate of retail sales of gold and silver jewelry continued to outpace other product categories. In the third quarter, the price of gold remained at high levels, it said.

The pent-up demand for wedding jewelry since last year also provided a boost to gold jewelry consumption. Compared with other types of goods, gold jewelry's financial value helped gain favor, which is the opposite of diamonds in the secondary market.

Last June, De Beers charged about $1,400 a carat for the so-called select makeable cuts, or rough diamonds between 2 and 4 carats that can be furnished in bridal rings that are high quality but not perfect. By July 2023, that fell to about $850 a carat — and secondary market prices remain even 10% lower than that, which could mean more downside ahead.

Just to put things into perspective, on Sept 14, the price of gold futures AU 2312 on the Shanghai Futures Exchange reached a historic high, exceeding 470 yuan per gram. The benchmark LBMA (London Bullion Market Association) pm auction gold price averaged $1,928.5 per ounce. While this was 2 percent lower than the record high set in the second quarter this year, it still represented a 12 percent increase compared to the same period last year.

Executive Editor: Sonia YU

Editor: LI Yanxia

Host: Stephanie LI

Writer: Stephanie LI

Sound Editor: Stephanie LI

Graphic Designer: ZHENG Wenjing, LIAO Yuanni

Produced by 21st Century Business Herald Dept. of Overseas News.

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