The recent open tenders of polished managed by Rapaport in New York were not as successful as hoped, but certainly were a great leap forward in the move to a transparent pricing index and commoditization. The tenders did generate some interesting comments in the diamond press. De Beers was being very noncommittal preferring to wait on the side to see what happens and believing that commoditization cannot work because every diamond is unique. Each pig has its own individual DNA and therefore each pig belly is unique, and I am assured that no two pork bellies have an identical weight or flavour, but there is a very active commodity market in pork bellies. There are very few women who actually take a loupe to enjoy the matchlessness of the diamond of their engagement ring, and most probably even fewer men, so it really would not preclude diamonds from commoditization.

Although, offering one's beloved a pork belly as proof of one's devotion, might not hit the mark as well as a diamond ring. I am sure that a lot of readers will be familiar with the various stock exchange futures such as S&P 500, Nasdaq 100 or the FTSE 100. These are weighted baskets of large numbers of shares which are grouped together to enable large investors to hedge their exposures to adverse market swings. All it would need is for a basket of 20 or 30 benchmark diamond specifications of size, colour, clarity, cut and shape and an index could be easily compiled. It is possible that the price for a particular 1 carat diamond would be a benchmark very much like a barrel of Brent crude is in the oil industry, but that does not prevent commoditization.

At the other extreme, Polished Prices was expecting that the market for diamond derivatives could reach $150 billion to $200 billion. Well, the total polished market is between $18bn to $20bn. Some of that is from large integrated diamond companies who go from the rough right through to jewellery so they will have little need for diamond derivatives although they may dabble in currency and interest rate derivatives. Then, there are those polished manufacturers who have regular and committed customers for large quantities whose demand for derivatives maybe for financial hedging, but not for diamond derivatives. Then, for a derivative contract to be worthwhile one would be talking about only the larger polished transactions, as the transaction costs would make the derivatives only viable for big sales. Therefore, I would exaggerate a guess that we are talking about a $3bn market.

So even if you double-dip and count both the buy side and the sell side and assume that each and every polished diamond is commoditised and each contract is flipped four or five times, how do we get to $150bn?

Then there were those who were worried about price manipulation at the tenders in order to affect the prices of the futures. Price rigging by a group of bidders pushing up or not bidding for goods is a problem with any market, and it is not difficult to push up the price of a small cap share. Clear r ules and supervision from the appropriate regulatory body will be required to prevent abuse. It is a bit ironic that these futures would be completely outside the umbrella of a diamond bourse. Oddly enough, it is the rough producers who set the rough prices which affect the market and have the, inadvertent I would hope, ability to make or break a six month future contract.

In fact, I am surprised that it has taken so long for the move to commoditise diamonds to commence. T here is a lot of fear in the market about what diamond derivatives will bring, and it is too early to foresee the full ramifications. There may be possible conflicts of interest for Rapaport which is also involved in regular diamond activities. The US has clear regulations about this, or he may have to spin off the tenders to a third party.

As mentioned before, I more concerned with the accounting and compliance ramifications, which could inadvertently throw the baby out with the bathwater. And that would be a great pity.