| |
A sparklingly good idea?
David McKay
Posted: Thu, 21 Dec 2006
[miningmx.com] -- ONE consequence of De Beers’ weaker grip on the world’s diamond market is that the supply of rough stones is less predictable – and so are prices. Gone are the days when De Beers would parsimoniously feed the market with diamonds from its $5bn plus stockpile, stowed somewhere beneath London’s Charterhouse Street.
So in these changing times it shouldn’t be hugely surprising that Dutch bank ABN Amro is considering creating a derivatives market for diamonds, a development that will enable producers to hedge their production.
ABN Amro’s proposal is also receiving the support of PolishedPrices.com, a publisher of a diamond price index, and other interested parties. The idea still requires concerted support from the market, including a sponsor.
It also needs clarification, said James Allan, of James Allan & Associates. He asked whether a derivatives market for
diamonds is workable.
“I’d just want to know how the derivatives are to be backed. I haven’t seen the proposal and as ABN Amro is heavily involved in the diamond business I’m sure they’ve researched the product. But if a trader goes long on the contract what’s behind the contract?”
The main issue is that diamonds are not fungible. “While an ounce of platinum is the same as another ounce of platinum, and similarly with gold and other metals, the difference with diamonds is that one carat isn’t the same as another carat,” said Allan.
Emma Muller, who writes on diamonds, said on behalf of PolishedPrices.com that common sense would rule. “Because of the non-fungibility of diamonds we’ve suggested a cash adjustment so the delivery amount equals stones and cash,” Muller said in an e-mailed response to questions.
“Obviously, the lack of fungibility allows the deliverer some discretion over the stones he tenders within each category. It also relies on the
vault having a verification process that the stone matches the category.”
What then of De Beers, the former custodian of the diamond market? Does a derivatives market in some way affect its market position?
“It’s such a new idea that I don’t think we’ve really considered it properly. Knowing ABN Amro – it’s one of the world’s top diamond banks – it will be a good idea. Perhaps it will assist with funding the pipeline,” said Tom Tweedy, a spokesman at De Beers in Johannesburg.
Jonathan Oppenheimer, deputy chairman of De Beers, did not respond to a telephone message.
Said Allan: “It will be interesting to see what the backing is for the contracts. Given the fundamental shortfall in diamond supply this probably provides a speculative avenue for investment. The
question is: Can and will producers use it to hedge production?”
| |
