Flawed Diamonds Are Seeing a Complex Downturn

The price gap between nicer and inferior diamonds has widened in the lower clarities as buyers cherry-pick the best stones, according to manufacturers and exclusive Rapaport data.

Weak consumer sales have focused demand on goods with fewer visible flaws, while inventories of unsalable items have piled up, dealers said in the past three weeks. The price premium for the best-looking slightly included (SI) diamonds — such as eye-clean stones, which appear inclusion-free to the unaided viewer — has grown, sources explained.

SI1 and SI2 diamonds have inclusions that are “noticeable to a skilled grader under 10-times magnification,” according to the Gemological Institute of America (GIA) definition. These pieces are typically popular in the US market, since they offer a balance between budget and appearance. Their beauty can vary greatly, even within the same subclass, depending on the location and size of the blemishes.

Stateside slowdown

The overall drop in middle America’s discretionary spending this year has hit the category hard. Prices for 1-carat stones from D to L color and IF to SI2 clarity fell 3.7% during July, according to RapNet data. This was a steeper decline than for the 1-carat RapNet Diamond Index (RAPI™), which tracks D to H, IF to VS2 goods and slid 2.7% for the month.

Around a year and a half ago, a “decent” 1-carat stone in one of the SI categories might go for a discount of 30% off the Rapaport Price List, while a “bad” stone with the same clarity grade would fetch up to 34% off, said an executive at a large Indian cutting firm. Now, he reported, discounts range from 34% to 45% for the same types of merchandise. This translates to a value gap of around 20%.

Another anonymous trader, this one based in Antwerp, estimated the difference was more like 25%. This has been the case for “three to four months,” he asserted. The gap exists in some higher clarities but is smaller, he added.

Asking prices for 1-carat, H, SI2 diamonds on RapNet in July 2023 showed a broader distribution of discounts from the Rapaport Price List compared with March 2022, indicating the same trend.

Buyer’s market

Manufacturers “can’t sell a monthly production as quickly as they used to be able to do,” said a New York-based dealer on condition of anonymity. “So their customers…come and pick the best out of each category, if they’re going to buy at all. The manufacturers are left with the weaker SIs.”

As the downturn has led to lower production and availability, clients that need goods will tolerate buying lower and lower qualities until they reach a “bottom,” he pointed out. “I guess they’re far away from that bottom right now,” he said.

The bifurcation is more likely to happen in a weak market, as sales are limited and buyers selective. “When the market gets stronger,” he said, the lower qualities will “get sucked up by people that just look at a piece of paper” showing the clarity grade, he said.

The discrepancy is particularly acute in SIs because it’s such a large category, he added. Inconsistency between grading labs, or between in-house graders and external assessors, has blurred the line between adjacent scores such as VS2 and SI1, traders also warned.

Supply issues

Two further factors have exacerbated the situation, dealers said. One is lab-grown diamonds, which enable consumers to buy eye-clean stones for the same price or less than a natural stone with visible inclusions. The other is the general reduction in India’s polished production this year, which has created shortages of the top SIs. “Those [better] goods are still in demand, and there is less manufacturing going on,” said the Antwerp dealer. “So it’s a two-way scenario.”

The supply problem is not easy for manufacturers to solve. Rough tends to be sold in assortments containing mixtures of better and worse goods, even on the open market — with the notable exception of Lucara’s Clara platform. Meanwhile. De Beers sightholders are committed to purchasing certain boxes from the miner, with limited flexibility, traders cautioned.

“If there would be a low [enough polished] production, it wouldn’t matter,” said the New York-based dealer. However, the systems in place within the rough market make it hard to escape the reality of bloated inventories. “That’s what causes the problem — the desperation of the seller.”

Main image: A polished diamond under inspection. (Shutterstock)