The Dubai Diamond Exchange (DDE) is taking on an ambitious project to commodify the diamond trade for the first time globally, bringing transparency to pricing and creating potential for a futures market for the precious stones, according to the head of the exchange. International Diamond Laboratories (IDL), a new diamond certification service and a joint venture project by Dubai Multi Commodities Centre (DMCC), has been created to help move the project along, said Youri Steverlynck, Chief Executive Officer of DDE.
IDL will be headquartered in Dubai, with branches in Antwerp and Mumbai, and will be administered by a board of directors, including international authorities in the global diamond business.
Commodifing diamonds, or turning the stones into a commodity, would allow consumers and dealers to compare prices of similar stones. In the case of gold, commoditisation allows ordinary consumers to gauge real value and avoid being charged too much by unscrupulous traders.
For centuries, diamond trading has taken place through personal negotiations, and unlike precious metals – such as gold, silver and platinum – diamonds have never been considered a commodity.
“We are trying to commodify diamonds. Face-to-face business is the normal practice in diamond deals where traders physically verify the stone’s features, make private valuations and check the diamond’s authenticity. The value of a diamond varies for different viewers and no two diamonds have the same value,” Steverlynck told Emirates Business.
Commodifing the stones, he argued, would introduce transparency into the international trade. Currently, diamond pricing takes places behind closed doors and lists of prices are rarely published.
Diamonds are valued for their cut, colour, clarity and size and the conventional wisdom is that no two diamonds are the same.
While Steverlynck admitted that the project was a daunting one and would likely take a few years of study and implementation to become functional, he said there was a lot of interest in the market in normalising pricing.
“Gold has been traded like a commodity and its purity can be checked through various means. Standardisation for diamonds is a big problem and Dubai is taking a big step in this direction. We are trying to establish a scientific basis for colour grading of diamonds, which is normally done with naked eyes. It is a very exciting idea because once standardisation of diamonds is accepted, it will lead to the creation of a whole lot of financial products linked to diamond financing. Futures contracts are currently possible with other metals, but not with diamonds,” he added.
The stones are a capital-intensive investment and normal deals financed by diamond banks range from $2 million (Dh7.3m) to $100m (Dh367m). However, diamonds lack some of the basic attributes of other investment vehicles and without a commonly accepted pricing and evaluation mechanism, it is buyer beware.
If a consumer does not know the fair price of a product, traders can charge any price for its notional value. Commoditisation will help the diamond industry develop from a monopolistic cartel to become more of a free market, he added.
commoditisation will also create a lot of interest in diamond investment, said Steverlynck, because it will allow the establishment of diamond futures markets, allow the industry to manage risk, open up financing options and help to boost consumer confidence.
Insiders were excited about the prospect but cautioned that there was still a lot of work to be done to create a coherent international standard.
Wouter Decoster, Dubai representative officer for the Antwerp Diamond Bank, said: “The commoditisation of the diamond trade could strengthen the diamond business all over the world.
Commoditisation could create a clear criteria to decide the value of a diamond.” Ashok K Gupta, chief executive officer of Bank of Baroda, a major financier of the diamond trade in the UAE, said DDE’s leadership was a welcome step, but “commodifing diamonds is a big challenge. It is very difficult to value diamonds with a common yardstick. However, commoditisation will help the diamond business”.
Creating a standard for value is a major challenge for diamonds because of the number of imitations and altered stones on the market. For example, high heat can enhance the colour of stones and good quality diamonds can now be grown in a lab. Such treated, cultured and synthetic diamonds are widely available and should be priced 30 per cent below natural diamonds.
However, once a diamond standard was established, the stones could be bought and sold like any other commodity. A pricing benchmark would also allow investors to hedge or sell forward.
Meanwhile DDE’s strategy does not end with commodisation. The exchange is also planning to introduce an Electronic Diamond Exchange at its new headquarters in Al Mad Tower. Steverlynck said: “After standardisation and commoditisation, the exchange will start the Digital Electronic Trade Network and Dubai will be the first exchange in the world to launch.”
The diamond monopoly
For more than a century one company, De Beers, controlled the world diamond trade by enforcing a restricted supply chain of rough diamonds. The system created a global cartel, 85 per cent controlled by the South African giant, in the multi-billion dollar precious stone businesses.
De Beers enjoyed a monopoly through its syndicate for more than 112 years, which allowed it to keep the price of diamonds artificially high and stable by matching its supply to world demand for most of the 20th century.
In 1888, South Africa’s diamond mines were consolidated into a company that would become De Beers. The company’s owners formed a cartel with the world’s 10 largest of diamond merchants.
Each merchant was guaranteed a certain percentage of the diamonds pouring out of De Beers’ mines and in return traders provided the company with data about the market, putting De Beers in a position to ensure a steady, controlled supply. Even though De Beers refined its system for disseminating diamonds and its original partners in the cartel were replaced by 125 of the world’s most powerful manufacturers, the principle underlying their relationship remained the same: to match the supply of diamonds at one end of the pipeline with the demand on the other.
The same monopoly system prevailed in the diamond trade where intra-trade agreements kept the pricing of diamonds a secret.
De Beers’ London-based marketing arm, the Diamond Trading Company (DTC) purchased the production of 13 mines owned or co-owned by De Beers in South Africa, Botswana, Namibia, and Tanzania. In 1999, this amounted to more than 44 per cent of the world’s annual output.
The DTC also bought $120 million (Dh440.7m) of diamonds from Canada’s Ekati mine and another $1.5 billion (Dh5.5bn) from Russia, which together made up an additional 25 per cent of the world’s $6.8bn (Dh24.9bn) annual diamond production. Faced with anti trust initiatives in the EU and challenges from other diamond retailers with large stockpiles of their own, the cartel broke up in 2000, sold its shares in Anglo American and de-listed.
Youri Steverlynck, CEO of Dubai Diamond Exchange, estimates that today De Beers controls around 45 per cent of global diamond business.