Big Macaport List

Sergei Vybornov, CEO of Alrosa, gave a lot of food for thought when he floated the idea of moving away from the US dollar as the basis currency for the diamond industry. The immediate response is that if gold, platinum and petroleum are still priced in dollars, then why should diamonds be different?

First of all, the other three commodities have all experienced recently large price increases, which have also been influenced by the weakening of the dollar.  This is partly because the costs of mining and refining which are paid for in local currencies have increased relative to the weakening dollar.

These commodities, along with a large number of others, are also susceptible to speculation driven price fluctuations.  In general, high demand is reflected in high prices while an oversupply is reflected in low prices.  But, it does not matter whether oil is at $13 per barrel or $90 per barrel, it is priced in dollars.  And, it also does not matter whether the dollar is trading at 1.44 to the Euro or at 0.83 to the Euro.

It is true that the weakening dollar is hurting a lot of diamond mining companies and manufacturers, but they did not complain when the dollar was strengthening against their currencies..  The Indian manufacturers in particular suffer as their orders are priced in dollars, but by the time their US customers have paid, often more than six months later, they are getting fewer rupees to pay for their local expenses.

Large companies can afford to hedge their currency exposures with sophisticated banking tools, but these are not suited to the smaller companies.  What would be needed is a more stable and neutral currency.

In an attempt to create a transparent currency index, The Economist reasoned that a BigMac Hamburger should cost the same around the world and created its famed Big Mac index.  By comparing the exchange rate implied in the costs of the Big Mac with the actual exchange rates, the Big Mac index has been a good indicator of exchange rate disparities.  In the longer term, these have moved in the direction implied by the Big Mac index.

Mr Vybornov suggested a move towards pricing diamonds in Swiss francs as a stable currency, but according to the Big Mac index, the Swiss are also worried about their weakening currency.

Perhaps the solution would be to price dollars in Big Macs?  That would only be a partial solution to adverse currency fluctuations.  Changing the base currency of the diamond trade is a temporary solution. But as long as the majority of diamond jewellery is retailed in the US, there is little point in changing the base currency.  Currency fluctuations are a risk that every international business has to manage, including the diamond industry.

socrates@diamondfinance.info