Some among the many challenges that the industry is facing have common roots, and they should be tackled together to maximize the efficiency of new policies.
A typical case is the one of access to credit for midstream diamantaires and promotion of diamonds as investment. Despite involving two different sections of the pipeline, these two challenges seem to share the same cause: lack of confidence in the purchase and sale processes.
ACCESS TO CREDIT
Since the new regulations on financial risk assessment introduced by the Basel international agreements entered into force, entrepreneurs have found it increasingly difficult to obtain sufficient credit to carry on with their activity. Banks have tightened the purse strings while requiring at the same time higher loan guarantees.
Diamantaires have been doubly hit by new banking policies. On one side, creditors are now asking up to 100% guarantees on the money lent; on the other they often decline to accept diamonds as collateral, as they fear they might not be able to sell them with profit. This is particularly frustrating for the high-value diamond industry, as it cannot gain access to inventory funding needed for buying or processing stones.
DIAMONDS AS INVESTMENT
The diamond market has largely proved to be a solid one. Over time, it has shown steady growth and very low volatility. This is music to investors’ ears, and some of them are beginning to consider diamond as a valuable alternative to the traditional gold and platinum markets.
Despite these favourable conditions, direct investment in diamonds is still quite rare. Potential buyers feel that they are not competent enough to evaluate and sell stones, and therefore tend to rely on specialized intermediaries to manage investments on their behalf.
The limiting factor for both easy access to credit and full exploitation of the potential of diamonds in the investment market seems to be, again, fear. Diamonds have a strong potential, but outsiders are afraid of handing them. The reasons for that are in some cases “structural”, meaning that they are inherent in the diamond market; in some other cases, though, they are merely due to policies that have been employed by the industry.
STRUCTURAL CAUSES
Structural causes are those linked with the physical properties of diamonds. While precious metals such as gold and platinum present homogeneous characteristic, every diamonds is different from the others due to a series of features. These features are commonly known as the 4Cs (carat, cut, clarity and colour). Among them only one, carat, is purely quantitative and objective. All the others require a certain degree of judgment by an expert. Additionally, diamonds can be synthetically produced in a laboratory. Man-made diamonds are indistinguishable by the naked eye from natural diamonds, but their value is not quite as high. This means that special controls need to be employed to prevent frauds.
Taken together, all these causes make the diamond evaluation process all but straightforward, and definitely not within reach of an inexperienced investor. On the contrary, the value of a diamond must be established by highly skilled personnel using expensive machinery and employing slow and complex procedures. As of today, there is no way around these procedures, and this is undoubtedly a big obstacle.
Last but not least, diamonds cannot be joined together and, if a single one is divided, it loses its value. This is a big disadvantage compared to precious metals, which can be joined, divided and reshaped at will. In other words, while two half-bullions of gold have the same value as one bullion of the same weight, a 1 carat diamond would cost at least twice as much two 50 points. This makes trade more complex.
CURRENT POLICIES
Considering that the diamond industry is facing heavy structural limitations, it would be quite expected for it to counter them with robust policies. Unfortunately, this is only partially true.
Grading is a typical case. The idea of accompanying every diamond with papers that certify its characteristics and value is in theory an ideal solution to many of the aforementioned structural limitations. The problem is that today there are several institutes that compete for providing this kind of service. Apart from the Gemological Institute of America (GIA), which takes the lion’s share on diamond grading, there are many other players such as the Diamond High Council (HRD), the International Gemmological Institute (IGI), the American Gemological Society (AGS), and European Gemmological Laboratory (EGL) just to mention some of the most renowned grading labs.
These institutes do not share common standards and evaluation methodologies. As a result, depending on the grading institutes that examined a certain diamond, price estimates can shift by up to 40%. This is of course a big source of uncertainty both for potential investors and banks willing to accept diamonds as a collateral. Who would light-heartedly buy diamonds knowing that an inflated diamond certificate might jeopardize his profits?
As said before, the fact that every diamond is unique is in some ways a limitation. To sell a diamond, one has first to find a buyer who is interested in purchasing a stone with those exact characteristics at that exact price. But as of today though there is no spot market for diamonds. Large part of the diamond trade takes place through private contracts, in which sales price can vary sensibly. These contracts are usually kept secret, and average prices can only be guessed through indirect indicators. As there is no “official” diamond price, inexperienced investors find themselves in a weak position. Contrarily to buyers, they do not have full access to information on price levels and could be easily tricked into divesting their portfolio of diamonds at a price below market level.
WHERE TO GO
In conclusion, while structural limits cannot be removed, they can be dealt with through better policy. The industry should consider taking some serious steps to improve diamonds’ appeal both for private investors and bank institutes. If they want more transparency as a precondition to play in the business, then it is probably time to review the existing processes so that they become less opaque to outsiders.
By working on some key steps such as standardizing grading procedures and creating a spot market, the industry would catch two birds with one stone: opening an alternative market to the jewellery one and lifting the interest of new banking institutes towards the business of diamonds.
Matteo Butera, Rough&Polished
