Whatever is said about investing in diamonds, there is one blunt fact sticking out on the post-crisis scene: in the first half of 2010 investment diamonds upped 17 percent outperforming the overall investment market, gold including, and quietly continuing to match the latter up to the last month, however within a more narrow fluctuation range.
This may once again heat up the idea of diamond derivatives which was hot on the anvil three years ago forged by the diamond industry teams headed by Rapaport and PolishedPrices and supported by ABN AMRO, Leumi Bank and ICICI Bank, which at the time estimated the market for diamond derivatives at $150 billion.
According to opponents, diamond derivatives, including wide-spread futures, may turn out to be hard to pin the price to because diamonds are very different from each other in terms of properties making their value divergent in a great way and thus making it impossible to sell them by standardized units. In their view, if there will be no physical sales to discipline the futures market the latter may well generate another paper bubble ruinous for the whole diamond industry.
On the other hand, Rapaport and PolishedPrices, each in their own way, tried to prove the idea was viable.
According to Rapaport, tender offers are good ways to create an index for a futures market because they involve multiple buyers and sellers willingly negotiating prices within auctions and hence providing spot cash transaction prices.
PolishedPrices is a fast-growing independent benchmark for diamond prices and indices based on actual transactions. Bloomberg views it as an “important source for comprehensive information on the diamond industry.”
For banks associated with the diamond industry getting an accepted diamond price benchmark would be a key condition for developing any diamond linked products.
Rough&Polished offers some views of this problem shared by diamantaires in Asia at a time when global diamond business coming out of recession seems to be heading towards a new market reality. Later these will be followed by opinions expressed by their colleagues in Europe.
Eran Mandler, General Manager at Beta Diamonds Shanghai (wholesale):
The global community is now back to discussion on creating derivatives contracts linked to diamond prices and we would love to hear from you on this matter.
Generally speaking, I am against since it might kill the small profit we still have in the diamond business.
Do you think that diamond derivatives may have a future on the stock market like other commodity-based derivatives?
No, there are too many kinds of diamonds and this field is too wide; it will be difficult to find a benchmark.
The derivative contract on diamonds may be designed in a number of ways. Many experts mention the so-called “diamond basket” as an overall pricing benchmark. Other experts feel that a series of diamond indices or basket of stones would be more suitable than one overall benchmark basket. Please state which opinion you share and why.
As I said, none of the ways will be good enough to be a benchmark.
In your opinion, what are the pros and cons of the diamond derivatives idea?
I must say I have no idea.
In your opinion, would diamond derivatives better be listed on stock exchanges or traded over-the-counter?
Over the counter; to deal with diamonds you must be professional.
Do you share the concern that making the diamond derivatives idea come true could potentially damage the “diamond brand” and some of the associated glamour and luster promoted by the industry as diamonds will start to be treated like any other commodity?
No.
Or vice versa, diamond industry would benefit from the increased liquidity of diamonds and established legal, taxation and operational system for derivative contracts on diamonds? Which opinion do you support and why?
It’s a subject which I never thought about. I am too used to the diamond in the old fashioned way as it is now and from my point of view. I prefer it like this now.
Luo Sen, Director of the Shanghai Pudong Development Bank Branch:
Do you think that diamond derivatives may have a future on the stock market like other commodity-based derivatives?
I believe that at present it you can’t say it for sure because there is great disagreement about making diamond prices transparent or creating sophisticated financial products in the global diamond industry.
The derivative contract on diamonds may be designed in a number of ways. Many experts mention the so-called “diamond basket” as an overall pricing benchmark. Other experts feel that a series of diamond indices or basket of stones would be more suitable than one overall benchmark basket. Please state which opinion you share and why.
Diamond indices or a basket of stones would fit better.
In your opinion, what are the pros and cons of the diamond derivatives idea?
In my opinion, the advantages are as follows:
1. Opportunities to establish a new market for financial products which meaning new revenues from these operations for banks.
2. Increased liquidity of diamonds and as a result of this - a more transparent diamond market. For example, buyers there would have many advantages in pricing issues.
3. Facilitating lower market risks due to sharply increased diamond prices.
And the shortcomings will stem from qualitative difference between diamonds which will be the greatest obstacle to transacting such derivatives.
In your opinion, would diamond derivatives better be listed on stock exchanges or traded over-the-counter?
The best way to trade diamond derivatives will be at stock exchanges.
Do you share the concern that making the diamond derivatives idea come true could potentially damage the “diamond brand” and some of the associated glamour and luster promoted by the industry as diamonds will start to be treated like any other commodity?
I don’t think there will be any damage.
Or vice versa, diamond industry would benefit from the increased liquidity of diamonds and established legal, taxation and operational system for derivative contracts based on diamonds? Which opinion do you support and why?
I believe that establishing a legal and operation system for diamond derivatives may create good development prospects for the diamond industry.
Olga Patseva, Editor of the Rough&Polished Asian Bureau in Shanghai
