Commodity OnlineMUMBAI:Rapaport that has come out with a major report on diamond Futures has categorically stated that commoditization of diamonds will not deny retailers an opportunity to add value to their diamonds, just as the commoditization of gold has not inhibited the ability of jewelers to sell gold jewelry. They also pointed out that they did not expect a surge in consumer confidence as some of the mystery of diamond pricing is eliminated due to transparent markets.
Overall, the jewelry industry appears to be against the idea, experts said. Some would even say that Rapaport has rankled others in the industry with his diamond-commoditizing plans and diamond-pricing list, which was established in 1978.
Transparent pricing would end the secrecy that has until now decided prices behind closed doors. It would also remove resale opportunities for the many intermediaries found between manufacturer and retailer. Diamond derivatives would allow retailers and manufacturers to hedge against future needs - important, given the surge in demand from India, China and the Gulf region - rather than buying up large inventories to ensure supply. Industry debt has doubled in the past four years to more than $12bn, largely through the buying-up of inventories
The following are the key points that have emerged in the Discussion Paper prepared by ABN Amro, Polished Prices, ICICI Bank and Leumi Bank (Israel).
Hedging Tool The lack of a structured OTC or listed diamond derivative means that industry players are not able to hedge their future diamond demand or supply, when they know that this will be subject to peaks and troughs at pre-determined times in the future. The lack of a forward market, normally the pre-cursor to the establishment of a derivative market, means that all trades are done for cash or credit settlement, where credit is becoming increasingly extended, so the only way to speculate on future price movements is to increase buys or sales of physical diamonds in the physical portfolio. This has a consequent knock on effect on funding requirements from banks and is a more expensive mechanism than using a hedging tool, where margin is required to be lodged which does not represent the whole value of the stone. Posting margin with a clearer gives leverage to the diamantaire since for the same amount of money he would use to buy one stone he is now able to buy additional stones synthetically through the derivative contract.
Price Transparency As all diamantaires know prices are generally quoted against a spread to the Rapaport price, the highest New York asking price. Other pricing benchmarks exist however Polished Prices(PP) is unique in being the first to base its prices on actual traded prices and listing its prices and indices on Reuters and Bloomberg to ensure their acceptance in global financial markets. PP’s prices are based on actual transactional prices, be they buy or sell. There is no discounting or premiums added to prices, and for each individual price point PP shows all the data that has been used to reach that price, so the user can confirm how up to date any individual prices may be. Also this detail highlights the natural spread in each individual price point.
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