Rough&Polished continues to explore the diamond derivatives field, this time kindly assisted by our industry interlocutors in Europe.
Lynette Gould, Media Relations Manager, De Beers:
There are intrinsic barriers to developing a spot market for diamonds. A diamond is a so called non-fungible product, i.e. each diamond is totally unique and thus also has a price point unique to them. This is quite unlike precious metals or other widely traded commodities such as oil, gold and platinum, for example. This uniqueness therefore constitutes a real barrier to a spot market.
For this reason, many attempts to create a diamond contract to be traded have not progressed in the past. Some attempts have focused on one size and quality, severely limiting the scope of a possible market.
In the 1970s and 1980s, the Chicago Board of Trade (CBOT) and the London Commodity Exchange, separately, looked at diamond futures, and rejected the idea. In 1982, Martin Rapaport submitted an investment contract to the Commodity Exchange, Inc (COMEX, now NYMEX) but it was rejected on account of a lack of price transparency and the difficulties of standardising a contract for a non-fungible product.
Also, the relatively low historical price volatility of diamonds has not created an industry appetitive for hedging instruments which usually help support such exchanges. However, closed-end funds that buy and hold diamonds for investment have been launched in the market but these types of funds do not depend on a standard product or contract.
Caroline Germain, Communications Officer of the Antwerp World Diamond Center (AWDC):
The diamond industry has indeed been discussing the possibility of diamond derivatives.
In 2007, a Working Panel Session for Diamond Derivatives was organised at AWDC, by PolishedPrices.com.
There is indeed an interest in this matter. But it is too early to see any further development of the idea, nor is AWDC currently involved in any further actions at this moment.
Victor van der Kwast, CEO of the International Diamond and Jewelry Group at ABN AMRO Bank N.V., a major financier of the global diamond business:
In your opinion, what are the pros and cons of the diamond derivatives idea?
Establishment of diamond derivatives and considering diamonds as a commodity could on the one hand lead to margin reduction for diamantaires, because of increased transparency. Increased transparency, however, also brings forth many advantages, such as access to new capital, new investors and the possibility to hedge and could have a stabilizing effect on the industry. What is key is to recognize that diamonds are not a commodity per se: diamonds foremost have an emotional value for the consumer (bridal, celebrations), its value or investment component is secondary.
Can we consider shares and bonds issued by a diamond mining company to be diamond derivatives? Do you think they may have a future on the stock exchange?
Mining company stocks are not derivatives as most miners are not only mining diamonds. De Beers and ALROSA might be possible stocks that could be floated to attract alternative capital, but this will affect the controls too. Perhaps an ETF or Fund of miners might make a directional derivative in some form, but with limited impact.
Do you share the concern that the activation of such instruments could lead to a situation when diamonds will start to be treated like any other commodity?
In diamonds one has a lot of varieties due to the 4 Cs, which limits its success and transparency as a regular commodity, and thus make its treatments as an ordinary commodity more difficult. By using certification and only certain standard categories of diamonds, diamond could turn into a wholesale commodity. But we do not consider diamonds a suitable investment for an average client considering the volatility and price fluctuation.
Do you think it is necessary to improve the existing diamond pricing system to be able to sell and buy any future diamond derivatives? In what way?
Yes I do. I think that transparent pricelists are essential.
To make an asset attractive from the investment point of view there should be some wheelwork to guarantee its high liquidity. Buying and selling of a “blue chip” is executed in a fraction of a second at any point worldwide from any PC connected to a stock exchange system. How much time would a diamond owner need and what would be the selling procedure for an investment diamond should he or she decide the price is right to sell?
It is about quality, transparency, certification, custody and shipment. If the quality is known, standardized and priced transparently, than one can easily buy and sell now, and deliver within 2-5 days.
The crisis has expanded the range of price fluctuations in the diamond market making it more vivid and thus attractive for professional investors. Do you think this may generate some diamond derivatives customary for commodity markets?
Basel 2 regulations and efficient inventory management would perhaps generate the desire for large manufacturers to find a hedging instrument. Also miners or the respective governments involved would like their proceeds to be more stable and they might like a hedging opportunity. However, derivatives will be easier to establish for polished, certified goods, than for rough diamonds.
Currently, the most reliable diamond certificates are those issued by GIA, HRD and IGI. What do you think, if these institutions were able to certify a major part of globally polished diamonds would their certificates turn such diamonds into a commodity and would their certificates be viewed as a kind of financial instruments to be traded on the stock market?
Yes, as mentioned above, certification could turn diamonds in certain standard categories into a wholesale commodity. We do not consider diamonds as a suitable investment for an average client.
Recently, Avi Paz, Israel Diamond Exchange President, appealed to Israeli banks to recognize rough import as collateral for new credits to diamantaires. Do you think this situation if spread worldwide may generate diamond derivatives to be traded on the stock exchange?
Rough can be used as collateral at times, but it is not allowed in every market to finance diamond inventory, as per local regulations. I think this is a long shot and a more difficult road then polished turning into a selective derivative or ETF, especially if there is a solid certification foundation and a stable funding/investment vehicle.
Alex Shishlo, Editor of the Rough&Polished European Bureau in Brussels
