What would any self-respecting female do if offered a diamond on paper? Just a certificate!? Well, I ask you! No wonder the plans to start a diamond futures market are taking so long to get off the ground!
Since 1982, US diamond trader Martin Rapaport has been trying to set up a derivative market in diamonds. Just about any old derivative would seem to do. He is talking futures markets, indices, and Exchange Traded Funds (ETF).
But who would settle for less than the real thing? This time around it’s aimed, apparently, at the $12 billion or so that bankers lend to the diamond business. A derivative paper contract would give them a ‘hedge’. It would provide a facility for buying and selling stones at a future date, not just a rock now.
Could be an insurance certificate against trade risk
Manufacturers and retailers could also use it. It would act like an insurance certificate for their risks. Rapaport says he would not aim at investors. Wait a bit! Investors? Maybe it’s not such a stupid idea. After all, look what’s happened with gold. State Street Global Advisers launched the first physical gold ETF in November 2004. Now it has $13.6 billion worth of bullion.
It’s not the most buzzy of words, but 'derivatives' - securities based on anything from assets like currencies to indices or even weather - have totally taken off. Thousands of billions of dollars worth are traded globally everyday.
Why should Rapaport say he can make diamonds a derivative trader’s best friend?
Rapaport likes publicity. Stories on Martin Rapaport usually come with "maverick" or "controversial" tags. Keeping himself in the limelight does his business no harm at all. He is the founder of what is termed the world’s largest wholesale diamond trading platform. It sells on the internet. He started Rapaport Diamond Report, essential for trade pricing, back in the 1970s.
For years he has tried to push the boundaries on diamond trading, but he is disliked because his selling methods cut prices (a lot). By enabling tough competition, say some, his report has put a lid on diamond price rises.
Pro -campaigner Rapaport is accused of cutting prices
He also debunks a lot of the carefully built marketing "magic" that protects diamond prices.
The stories claim, even though it is offered as a trade-only service, the public does manage to slip through to use Rapaport’s wholesale trading platform. That also raises temperatures.
Feelings run high. There are anti-Rapaport blogs. Harsh words get bandied around. One of his price-setting competitors, Charles Wyndham of PolishedPrices, criticised the methodology, claiming the Report’s prices are too low.
Rapaport says his first attempt at a futures market was rejected only because the "diamond industry didn't want price transparency." He refused to be defeated and refuted the rejection that diamonds fail to count as a valid commodity.
Diamonds, he maintains, are definitely a commodity. His reasoning? "You buy and sell them for cash. They're a natural resource with limited supply; they're well defined; they're certified; they're analyzed, graded, and in-trade around the world."
From the other side comes De Beers. The diamond trade’s top propagandist, it paid for Marilyn Monroe to add to the magic with the immortal line "diamonds are a girl’s best friend".
Now supplying only 50 percent of the world’s rough diamonds, as opposed to controlling the industry as they had in the past, De Beers is still very important. Its riposte to Rapaporte? "The plain fact is that diamonds are not a commodity; they are unique."
What is different this time is that Rapaport is not alone. Rival PolishedPrices is also trying to get diamond derivative business going. Top German organization Deutsche Bank has looked at the idea along with ETF group PowerShares. The Chicago Board of Trade — a major commodity exchange — has also held talks.
A need for objective price information
Major diamond-industry bank ABN AMRO likes the idea. While taking no sides, it highlights a good reason for more broad-based trading — the need for objective price information. Currently, this is something the market lacks.
The trick to getting diamonds commoditised is definition. Commodities are defined as goods of uniform quality, even if produced in vast quantities by many different producers. If, as De Beers maintains, every stone is different in quality and price, conformity is difficult to establish.
Rapaport thinks he has found an ‘in’. He is offering diamonds down at the level where there can be conformity. He sells diamonds of one carat and a little more. The crème-de-la-crème of well-cut small stones would qualify, he says.
Rather than Antwerp or London, which are close to the diamond trade, Rapaport is targeting New York for his market. The reason he gives is that it is a major diamond hub, with half the diamonds sold globally going to the US. Another advantage is that it is less tied in to traditional trading methods — which Rapaport attacks as monopolistic and hostile.
America has the attraction of being very pro innovative commodity contracts — this is a country, after all, which invented trading in liquid eggs. Rapaport finds the US regulatory regime ‘user-friendly’ for his plan.
So, how is he getting on? Well, he’s held the first of a planned series of monthly auctions. Here only 27 of the 210 lots offered were sold. He hopes that this month’s auction and the next will raise more interest. No rush, he says. Meanwhile, the price information gleaned could be used as a sort of index, a forerunner for the first contract.
Perhaps an exchange may get going by 2009 or 2010. There is little danger of being offered a paper diamond yet.
Phew!
Keep polishing.
Erin and Isabel
