New era dawns for diamond traders

Published Oct 31, 2014

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Thomas Biesheuvel

SIX diamond dealers meet to bargain over $1.5 million (R162m) of uncut stones. They’re not in Tel Aviv or Antwerp. They’re in the cloud.

In an online trading room that resembles an eBay auction, deals worth millions are sealed with a click. The button is marked mazal, Hebrew for luck, and a holdover from the old ways. But the other practices that defined the trade for generations – the handshakes, phone calls, and furtive negotiations – are being challenged.

The launch last year of the Bluedax website marked the first time the $18 billion-a-year trade ventured on to the internet. Each month the site lists as much as $50m of the gems for sale at fixed prices, and it will start auctions from next month. Anyone registered can see the results, giving them real-time price data they can use as a reference for deals.

It’s this transparency that sets Bluedax apart. From shabby shopfronts on Manhattan’s 47th Street to the invitation-only “sights” at the Botswana offices of industry giant De Beers, the prices diamonds command are a closely guarded secret. Traders rely on experience, intuition and gossip to fix values for one of the best-performing commodities of the last five years.

“The industry needs more pricing data, from producers and other parties,” said Jeremy Wrathall, head of global natural resources at Investec in London. “We need to see better clarity, and shareholders need to see what they’re investing in.”

The impact of price clarity has the potential to spread outside the close-knit industry. Investors, bankers and even governments have found diamond pricing impenetrable, making it hard to evaluate project values, estimate returns and calculate tax receipts.

Anglo American’s De Beers, the biggest producer, doesn’t disclose how much it sells diamonds for, or which of its mines produce the most valuable stones. While WWW International Diamond Consultants provide an index for rough diamond prices and Rapaport lists asking prices, it’s a long way from the live spot prices for other precious commodities.

“It’s another guide for outsiders to see what’s happening in the diamond industry,” said Guy Harari, co-founder of Bluedax and a former “rough trader” with Rubin Steinmetz and Sons and Graff Diamonds. “For the investment community it gives them a very good indicator of what is happening in our industry. It is the last frontier in the diamond business that is in the dark.”

Rough diamond prices have gained about 75 percent in the last five years as the US recovered from the financial crisis and Chinese demand increased. Prices have gained about 7.5 percent this year, according to WWW International Diamond Consultants, the best guide available.

Gains have been underpinned by declining output at many of the biggest mines as supplies of accessible gems near the surface are depleted. The richest mines are now decades old – De Beers opened the Orapa mine in Botswana in 1971 and its Jwaneng project, the largest diamond mine, in 1982.

From a mine in southern Africa to an engagement ring in Shanghai, diamonds take a tortuous path. The uncut stones are sorted into parcels based on their size, shape, quality and colour: De Beers has more than 15 000 categories. The stones are then sold on, often criss-crossing trading hubs in Antwerp, Mumbai, New York and Tel Aviv multiple times before finding a buyer.

A large share of those stones start their journey at the “sights” held 10 times a year by De Beers. About 37 percent of all rough diamonds are sold by the miner, and the majority are marketed at sales, open to about 80 buyers, at its offices in Gaborone, the capital of Botswana.

Each participant is given a box containing plastic bags filled with stones. The buyer has been invited to place an order in advance, but all he knows for sure before he opens the box is the price, a fixed sum, often in tens of millions.

Whatever the buyer finds, it’s take it or leave it. If he takes the deal, he can sell the gems on down a long line of middlemen, commanding a premium as a privileged “sightholder”. If he walks away, he risks losing his spot.

Anglo bought the Oppenheimer family’s 40 percent stake in De Beers for $5.1bn in 2012, increasing its holding to 85 percent and ending the dynasty’s 80-year ownership. Botswana controls the rest of the business.

A De Beers spokeswoman in London said the company was aware of the Bluedax trading platform and declined to comment further.

Bluedax aims to capture traders selling De Beers sight boxes and parcels from the miner’s rivals, including Russian producer Alrosa.

The website, which was launched by Harari with his brother David last year, will open trading rooms to selected clients after the De Beers diamond sale next month. It has about 1 000 clients and plans to increase that.

Users must demonstrate they are financially sound and agree to pay a flat commission of 0.5 percent per trade.

For Bluedax the biggest obstacle may be the ties to tradition. “The mentality of the diamond business, it’s 100 years old, it maybe needs more time than other industries to adapt to new ideas like this,” said Harari. – Bloomberg

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