Diamond Futures Contract

In the last few years, Indian diamond industry has seen many ups and downs. It would not be wrong to say that have been many bad times than the good. So it is obvious to find alternative sources. Looking at gold being is used as an investment and financial hedging tool; it didn’t come as a surprise when the Union Government of India gave nod to SEBI for the first new commodity futures contract – diamonds in January 2017. If gold can be a financial hedging tool then why not diamonds? For the investors who are on a lookout of a safe bet, diamonds can be a good option. These diamond futures contracts, if successful, would surely add extra sparkle to diamonds, explores Kavita Parab.

Being open to newer ideas is indispensable to growth and the newer ideas are sure to meet some initial resistance. Diamond Futures Contracts, too, have met some criticism, be it certain section of media or the industry itself. However, one needs to look at them with positivity and hope that this new change would give the industry a new outlook.

Since long, diamond industry has been a limited exclusive insider circle. Not everybody and anybody had an access to diamond trading. Considering India’s position as the largest cutting and polishing centre for diamonds in the world and the industry contributing more than 85 per cent of Diamonds trading in India, the Diamond Futures Contracts are expected to enhance competitiveness of Indian exporter in the world market.

“With the Diamond Futures Contract, the power of pricing will shift into the hands of Indian diamantaires,” said Sanjit Prasad, MD & CEO of ICEX.

Diamond Futures Contracts
ICEX is coming up with Diamond Futures Contract in 3 categories of diamonds. There will be three separate monthly contracts of diamond having lot size of 1 carat, 50 cents and 30 cents with compulsory delivery at Surat, the basis centers for price and delivery, at the expiry of the contract.

The contracts will be monthly, with diamond quality specifications and the stipulation that it must be mined by a Kimberly-approved diamond mine, including those owned by De Beers, ALROSA, Argyle and Rio Tinto. The International Institute of Diamond Grading and Research (IIDGR), which is part of the De Beers group and has a branch in Surat, will do quality testing and grading before the diamonds are delivered on the exchange.

Surat is the global centre of the diamond cutting and polishing industry. In particular, Surat enjoys a complete monopoly on the smaller and cheaper demands, where the value addition by cutting and polishing is the greatest. It is also the second largest diamond trading hub in India, after Mumbai. More than 800,000 people in this city of 4.5 million are involved in this Rs. 80,000-crore industry (as owners of cutting and polishing units are called), wholesalers, traders, brokers, retailers and jewelry fabricators.

Diamond Pricing
Though people have been trading in gold, stocks, diamonds have been missing from the investors list due to a lack of feasible exit option and volatile prices. ICEX is creating entirely a new market where the seller can offload their certified quality diamond among different set of buyers. The buyers will be able to quote his buy price. The platform is expected to have balance of buyers and sellers with equal participation. “Till now India is the price taker, however the scenario will change post diamond futures trading whereby price discovery shall happen in domestic market and world market may take a cue from India,” said Sanjit Prasad.

While Rajesh Lakhani, Director, Kiran Gems Pvt. Ltd. felt “Diamond futures is a new concept for the industry. The real demand at the industry level is currently based on pure demand and supply. The affect of futures on the diamond pricing is yet to be seen.”

Talking about the pricing, Hitesh Patel, Director, Dharmanandan Diamonds said “Few Indian companies are amongst the top manufacturers of polished diamonds, however pricing is an issue. So, future contracts seem very interesting only if it takes shape in a positive way. We are not sure about how it going to work now and in future and possibly can not assume its effect on the diamond industry, but we are keeping very close eye on it. It will be a good future for future contracts if pricing transparency would take place with it.”

Do they have a ‘Future’?
ICEX is quite positive of Diamond Futures Contracts’ future in the country. Diamond Futures Contract on ICEX is intended to provide the diamond industry with the price risk management tool and new set of buyers and investors. Explaining the situation, Sanjit Prasad said “The Indian Diamond Industry which fetches over 20 billion USD from export has been in trouble in recent past mostly owing to falling prices. In last couple of years, diamond price has fallen by 25-30 per cent in USD terms. Indian Diamond industry were carrying huge inventory that resulted into loss and capital erosion. However, this loss could have been minimized, had there been futures market in the diamond where they could have hedged their position.

Absence of hedging mechanism exposed the Diamantaires to price risk resulting into losses and closure of several units.”

ICEX shall allow transactions of only certified quality diamonds on its platform. At the expiry of the futures contract, sellers will have to deliver Graded Diamonds on the Exchange, whereas buyers will have to take delivery of these graded Diamonds in electronic form. This will open a completely new market segment for the jeweller and diamond industry. Traditionally in physical market, the investor buyer faces a lot of difficulty while reselling the purchased stone. Keeping in view the ICEX has made the provision of certified temper proof stone so that it could be resold on the exchange platform upon verification and validation.

The buyer shall get electronic units in his account at the time of expiry. For the delivery of stone in physical form the buyer has to accumulate the units’ equivalent to the stone size as per the contract.

ICEX has been working diligently for last two years to create awareness amongst the diamond eco-participants- manufactures, jewellers, traders, brokers and investors. ICEX has been conducting awareness program across the country. Many of the leading manufacturers and sightholders have taken ICEX membership so that they can sell or hedge on the exchange.

Traumatic Past
In 1972, the West Coast Commodities Exchange started trading “diamond futures” contracts in the U.S. However, soon the prices crashed and investors lost a lot of money. This led to closure of the Diamond Futures Contracts trading.

Later, in 1980 Martin Rapaport too proposed to introduce a plan where future prices were to be traded based on regular diamond tender. However, New York Commodities Exchange rejected the proposal because “the diamond industry didn’t want price transparency,” he was then quoted as saying.

Launched in May 2016, Singapore Diamond Exchange (SDiX) was established to provide the only transparent price discovery mechanism for the global diamond trade, giving financial markets and investors a benchmark price to value diamonds as an asset class, and to unlock new investment opportunities for global investors.

Biggest Challenge
Designing a delivery based contact is very challenging. But it’s important to have delivery based contract so that it stymies un-bridled speculation.

Awareness Plans
Business Development Team of ICEX is constantly on the move explaining the details and finer points pertaining to the contracts available for hedging on our trading platform.

The Exchange will be conducting extensive educational seminars/road shows at major locations before launch of the contract.

The Bottom Line
Whether the Diamond Futures Contracts will have a successful run in India, will be known soon. However, it would be too early to comment or criticize them. As mentioned by Rajesh Lakhani “Nothing can be directly turned down without actually assessing its potential in real world. Therefore we remain interested in watching its development in the trade and its affect in the industry.”