More than 600 Israeli diamond manufacturers have signed a letter that calls on the bourses to support a decision taken by the World Federation of Diamond Bourses (WFDB), which is meant to improve transparency in the rough diamond trade. If enforced, it will greatly reduce the level of risk that has for so long been part of the business.
Let’s think for a moment about a game of poker. All those around the table understand that, even though some players may be more talented than others, the mathematical risk is equally distributed. Imagine now though that one of the players knows what cards the others are holding. Could the game continue to be played out fairly with even the losers walking away satisfied that they had been provided a fair shot? Clearly not!
Indeed, it is unlikely anyone would have even joined the game if they realised that the risk was unevenly distributed.
Until recently the rough diamond trade shared certain characteristics with the game of poker.
While the talent, experience and knowledge of rough traders definitely were factors, the internal characteristics of a stone – which ultimately determine its value on the polished diamond market – were concealed equally from all participants. Like poker, rough diamond trading can be a high-risk business; however, it is one that we agreed to join because the rules were fair.
But then something happened that undermined the premise of equally distributed risk, and that was the development of technologies that enable one to analyse the interior of a rough diamond, revealing its real economic value.
To return to our poker analogy, it was as if spectacles had been invented that empower the wearer to see what cards all the players around the table are holding.
Now, ask yourself, if one or more poker players are wearing those spectacles, should the other participants in the game continue playing? Almost certainly not but in the rough diamond business some would disagree.
The game changer was Galatea, which is a system developed by a group of Israelis that was purchased by Sarine Technologies in 2008. It enables the comprehensive and accurate detection and mapping of inclusions in rough diamonds and, in so doing, potentially eliminates much of the risk that has so long been part of the trade.
Game over? Not so quickly. Galatea reduces a buyer’s risk as long as the buyer is able to use it before making the purchase. It’s common sense, surely. You would ask a motor mechanic to check a used car for hidden defects before actually buying it and not afterwards, correct?
Passing the stone forward
What is common practice with used cars is not necessarily so in the rough diamond business. The following is a far more likely scenario:
Buyer A purchases a rough diamond for a considerable sum, let us say US$1.8 million (AU$2.8 m), on the assumption that it will yield one or more high-quality polished stones that provide a healthy profit. However, after submitting the diamond for examination using Galatea technology, Buyer A discovers that the stone’s potential value had grossly been overestimated.
Buyer A is left with two choices – either absorb the loss or sell the rough stone to Buyer B, most probably at a modest profit. Guess which option is chosen?
So Buyer A has created the baseline and each time the rolling stone is sold, the price edges upward. Eventually, however, Buyer C or Buyer D or Buyer E decides to cash out and cut the diamond. Only then does he discover that he is holding a losing hand.
Once upon a time, the last buyer in the chain would have considered the loss fatalistically. After all, each of the earlier buyers had the same set of choices because the risk was equal, but in the ‘Age of Galatea’, it is always possible that one or more of the buyers in the chain was playing with marked cards, knowing full well that the stone being sold was worth considerably less than what was being asked for it.
In the Age of Galatea it is unlikely that the person who was burned would ever agree to do business again with the individual who sold him the stone. The rules of the game have changed.
The mission to halt mistrust
The creeping level of mistrust in the rough diamond trade, brought on by a conscious lack of transparency, is proving devastating. Friends of mine, some of them respected manufacturers and even sightholders, have left the business disillusioned. Colleagues are switching professions, looking for more stable and more promising prospects in other fields.
If this were another business sector – the pharmaceutical industry, for example – we would assume that full disclosure was being practiced from the very beginning, and this is what we should aim for. With the technology that is available, mining companies would ideally sell rough with Galatea reports, enabling the first buyer in the chain and all those who follow to make properly informed purchasing decisions.
Before that goal is achieved, there are other steps that can be taken. More than two years ago, the WFDB decided that, while a diamond dealer is not necessarily obliged to reveal the results of a Galatea analysis, he or she is obliged to inform a potential buyer that such a report does exist and should be confirmed by a laser inscription on the stone.
This cannot be defined as full transparency but it definitely is a move that encourages transparency. The problem is that the bourses, which are expected to implement WFDB decisions, have been slow to follow through; however, one that was ready to pick up the gauntlet was the Israel Diamond Exchange.
In the meantime a group of young Israelis, most of them second-generation diamantaires, have established a group with the goal to encourage as many bourses as possible to join the WFDB initiative.
Their mission is to salvage the ethos of integrity in the business and the response has been overwhelming. In just several days, more than 600 of their peers signed on. Something good is happening.
It is my fervent hope that this movement for greater transparency, with the support of the Israel Diamond Exchange, will reverberate throughout the trade. Manufacturers will come to know that, if they want to reduce their risk level and optimise their chances of getting a fair return on investment, it would be wise to purchase rough where the business is more transparent.
Winners and losers
Unlike poker, it is not a foregone conclusion in the diamond trade that there inevitably are both winners and losers. In a transparent business environment, it is altogether possible that all players in the chain come out winners.
Neither is it a foregone conclusion that your colleagues seek to deny you earning a fair profit.
Jonathan Fields, an entrepreneur and the best-selling author of Uncertainty: Turning fear and doubt into fuel for brilliance, recently posted a blog about Chris Guillebeau’s Adventure Capital program, which assists business enterprises in bringing products to the market, generating both buzz and sales.
At the end of Fields’ post he gave his readers two ways to visit Guillebeau’s page:
- Option one was an affiliate link, for which Field made an honest disclosure that, for each person choosing the option, he will receive a commission;
- Option two was an ordinary link, which, Fields explained, would yield the same result but would not generate any commission.
What Fields sought to discover was the percentage of his readers who would be satisfied with him benefitting from providing them a service versus how many would prefer to avoid the possibility of him benefitting, even if it cost them nothing.
The results of the experiment were eye opening; some 76 per cent of his readers selected the affiliate link, and so contributed to Fields’ income.
Do you know why?
Clarity and transparency enhance trust, outweighing suspicion and misgiving. If you provide people with a fair choice, their inclination, generally, is treat you equitably.
It is a lesson that we should learn.
Editor’s note: The call for greater transparency in the rough diamond trade should generate further debate with the 37th World Diamond Congress occurring this month. Organised by the WFDB, the meeting will focus on transparency, responsibility and sustainability.