Industry News

FA in the Financial Times – Moves To Mine Gem Potential

Financial Times – By William MacNamara

Published: November 20 2009 19:33 | Last updated: November 20 2009 19:33

Investors wanting exposure to gold or other precious metals have an array of options, whether it is buying the physical items or purchasing mining stocks, commodity indices or exchange-traded funds. With diamonds the opportunities have been far more limited. But that may be changing.

De Beers and others in the diamond industry are exploring how to create a viable market for diamond investment.

Aside from the age-old practice of buying jewellery and putting it on a finger or in a vault, diamond-investing opportunities have been limited to diamond mining stocks. But even then, the top two producers, De Beers and Alrosa, are unlisted.

The diamond market’s lack of price transparency and liquidity – the two are linked – has held back development of diamond funds. Diamond trading occurs between dealers, not on an open market. There are thousands of varieties of diamonds, creating thousands of pricing structures and defying hopes for a benchmark diamond price.

But the industry has noted rising investor interest in alternative asset classes. And it is starting to push for price transparency.

On November 17 the World Federation of Diamond Bourses endorsed a “suggested retail price” (SRP) list for different categories of polished diamonds.

The SRP will be carried out by Idex, a market data company. Idex and Rapaport, its larger rival, already provide real-time diamond prices for diamond dealers.

The SRP initiative suggests the basic infrastructure for a diamond investment market is being developed, says Saul Singer, a former head of research at Rapaport, the industry information platform. He is now a principal at Fusion Alternatives, a start-up company devising ways for the investment market to grow beyond niche purchases of gemstones.

“For this to work it has to come from within the industry,” he says, “The involvement of the leading players would be vital.”

De Beers, the world’s biggest diamond miner and marketer, says after “several approaches” it has been discussing informally how it might help the development of a niche investment market. The company has been trying to find new sources of revenue since the rough diamond market collapsed around November 2008, sending its profits plunging.

“We are not opposed to the idea of diamond investing in principle,” says Stephen Lussier, head of corporate affairs at De Beers. “But our view on the concept is that it is more like art investing and less like commodity investing,” he adds. The market would have to be niche because of the difficulty in standardising the product as well as the small size of the diamond market relative to gold or platinum.

He says there is the risk of investment demand distorting jewellery prices, as has happened with gold.

Mr Singer of Fusion Alternatives estimates that diamond investment could be worth $500m-$750m, in a polished diamond market that is worth about $20bn a year. That does not include the potential for derivative contracts. It is simply the value that could be achieved if investors were able to access diamond assets as they do gold ETFs.

“How would it work?” is the central question for proponents of diamond investing. Several industry veterans are sceptical about the chances of establishing a market, given repeated attempts since the 1970s. They all foundered on pricing. “Diamonds are terrifically difficult to value or to audit the value,” says Ian Henderson, a resources fund manager at JPMorgan in London. “The only time the value is certain is when it crystallises in a sale”.

If standard and trusted price references came into being, as the World Federation of Diamond Bourses is attempting, what types of stones would trade? Industry experts say investment would be limited to certain varieties of polished diamonds above a certain weight, such as one carat or above. Transparently priced varieties would be packaged into a standard “diamond basket”.

“What you would need is an electronic trading platform backed by many more diamonds than are available today [for trading]”, says Mr Kilalea.

An open trading platform would depend on the cooperation of polished diamond dealers, who would need be incentivised to divert some stock to funds. De Beers says it could facilitate this through its relationships with its “sightholders,” or the buyers of De Beers’ rough diamonds who are collectively a powerful force in the industry’s distribution channels.

“We have had some approaches and we have outlined the sorts of things we can do using our expertise. When you have people asking us, ‘How can I put together $100m worth of diamonds [for investment], that is where we can offer help: through our existing client network,” says Mr Lussier.

Such statements suggest change may be in the offing.. “It’s only recently that De Beers would come close to even hinting that diamonds are a commodity,” says one industry investor. It may be because the company and its suppliers are emerging from a traumatic year that has exposed the limitations of the traditional revenue models.

“It’s up to the industry, more than ever, to create alternative sales channels and push them through the pipeline,” Mr Singer says. “The pricing systems are already there for diamond investment, especially if you compare it to other niche asset classes like wine or stamps or uranium.”

For now, the question is why a commodity universally recognised as holding long-term value does not even have the public trading infrastructure of the wine market?