There was an article in the Trader Magazine:
This should be interesting for all
For decades, Martin Rapaport has tried to create diamond futures, running afoul of the industry. A study in tenacity.
By: Roxanne Downer
May/June 2008
"We're at the very beginning of the birth process,” says Martin Rapaport of his crusade to launch a futures contract for diamonds. His tone is strikingly upbeat for someone whose life’s work has been marred by so much failure. “Something has to happen.”
Rapaport, 56, is the founder and chairman of the Rapaport Group, a diamond brokerage and clearinghouse, and the industry’s leading provider of diamond pricing and market information. Over the course of three days last September, he held his first “Rapaport Certified Diamond Auction” online, the seminal step on the road to establishing an index based on monthly transaction prices and eventually, he hopes, a futures market tied to the index. To hold this auction, Rapaport’s company selec*ted and approved the stones while the Gemological Institute of America rated them, similar to the way Moody’s or S&P rates a bond. Rapaport’s vision of commoditizing diamonds goes back three decades — but only recently has success seemed even remotely possible.
Should his plan ever come to fruition, the larger financial community — speculators — could trade the diamond market the same way it trades energy and precious metals. Diamonds are perhaps the last significant commodity not currently traded via some specific financial instrument.
“Diamonds are, in fact, already a commodity in all but name,” says Tom Zoellner, author of The Heartless Stone: A Journey Through the World of Diamonds, Deceit, and Desire. “Treating them as commodities will only help bring more transparency to this business, and perhaps chip away at the artificial scarcity that has kept the retail price so far out of whack with economic realities.”
Says Rapaport: “It doesn’t just happen that a guy wakes up in the morning and says, ‘I’m going to make a futures contract for diamonds.’ ”
Indeed, Rapaport grew up in Miami, then moved to Antwerp to apprentice as a diamond cleaver. He relocated to New York in the mid-1970s and started a diamond brokerage. At the time, inflation was on the rise, the dollar was sinking and diamond prices were all over the map, largely because the industry was dominated by a few large producers — principally De Beers, which controlled 80 percent of the market. Deals were typically solidified by little more than a handshake. “Consumers were clamoring for transparency,” Rapaport says.
So in 1978, he started publishing a consensus price list. Power brokers in the highly insular diamond universe were not enthused. Many feared the list would undercut prices and put them all out of business, a fear that seemed to materialize when diamond prices took a nosedive that same year. “They didn’t like me at all,” Rapaport says. “They threw me out of the diamond industry — I had to wear a bulletproof vest for two years.”
Faced, he claims, with threats against his life if he didn’t back down, Rapaport chose to expand his list into the Rapaport Diamond Report, which over the last 30 years has become an important industry tool. His company now employs more than 100 people in New York, Las Vegas, Antwerp, Mumbai, Dubai, Johannesburg, Hong Kong, Shanghai and Tel Aviv.
Further vindication came in 1987, when the same industry honchos who had earlier demanded his exile elected him to the board of directors of the New York Diamond Dealers Club, where he served for the next six years.
In recent years, Rapaport has focused on his diamond futures quest. He has tried (and failed) to launch diamond futures in New York before. In 1982, he filed a proposal for diamond derivatives with the New York Commodities Exchange, which met with stiff opposition from industry stalwarts.
Fast-forward to 2007 and a changing climate in which individual diamond producers are able to exert less influence: “The diamond industry is emerging from a century of monopoly,” he says. Once-monolithic De Beers, for example, reports that its market share has dropped to around 45 percent. If Rapaport’s idea will ever take hold, now would appear to be the time.
Suppliers are faced with increasing demand from ballooning middle classes in countries with rapidly developing economies, such as China and India.
To meet this demand over the next decade, suppliers will need to access more liquidity to increase production — a difficult challenge in an already over leveraged industry whose bank debt has doubled in the last four years, to more than $12 billion. “The timing to introduce diamond-backed financial instruments is impeccable,” Rapaport argues. “The industry needs it; global markets demand it.”
A diamond futures market would give producers access to more bank credit, allow dealers to hedge against the demand from new economic powers and offer an alternative to stockpiling, a controversial tactic that presents market-manipulation risks. It would also offer a new tool for traders — as good as metal or energy futures, Rapaport believes — to hedge against the market effects of globalisation.
Rapaport continues to take criticism from some who believe that trying to commoditize diamonds is a fool’s errand. One upscale jeweler tells Trader Monthly that no one in the industry thinks a diamond futures market is realistic, pointing out that diamonds would have to lose their emotional salience to become a truly viable futures market. Rapaport counters, “Guys trading on the exchange won’t be thinking about emotional salience.”
Some naysayers also argue that since no two diamonds are alike, it is impossible to group them together like, say, pork bellies. Rapaport believes he has a solution for that, too: In his online auctions, he focuses on buying and selling one-carat stones certified by the Gemological Institute of America within a very specific color, clarity, cut and quality range. Zoellner, summarizing why he remains skeptical of diamond futures, points out that in the 1970s, an “investment diamonds” market briefly surfaced and was “laden with fraud.”
Rapaport is steadfast: “I’m coming in and shining a spotlight on a particular corner of a very dark room,” he says. “I don’t need to light up the whole room. People can get the landscape of the room in relation to that light.”
So far, his auctions have yet to yield the results he seeks. In September’s — the first of four held in 2007 — Rapaport sold just 27 of the 210 diamonds on the block, while only one was sold at October’s auction. He came to believe the chosen stone specifications proved too steep a premium for early investors. For November’s auction, he introduced two new classifications to widen the range of his offerings.
That plan met with slightly more success; he sold just under half of his 40 gems that day. “Of course it was disappointing, but I know it’s a process,” he says. “I have to let the market lead.” He intends to keep running auctions every month throughout 2008 and hopes to have enough spot cash-transaction prices to turn his index into a bona fide futures contract by the end of 2009.
At a recent diamond-industry conference hosted by Rapaport’s company, Ed Zwick, the producer of the film Blood Diamond, gave a keynote address urging industry-wide reform. “The one thing I learned over two years working on the film was that there really is no such thing as the ‘diamond industry,’ ” he said. “It’s a community of souls, of people, of thousands of individuals.”
Rapaport is only one of those souls. Sometimes, though, in the struggle for monumental change, that’s all it takes.
