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THE DIAMOND PIPELINE

Diamond Polishing

A diamond on the polishing wheel during the manufacturing process. Photo courtesy of De Beers.

POLISHED DIAMONDS, ON THE CUTTING EDGE

PART 3 OF A 4-PART SERIES

The midstream of the diamond pipeline is term used nowadays to refer to that section of the chain of distribution during which rough diamonds are purchased, cut and polished, and then sold loose to jewelry manufacturers, wholesalers and retailers. With the lowest profit margins and highest degrees of risk, it is the sector responsible for transforming the stone into a product that is valued by consumers, converting it from a nondescript mineral into a true luxury product.

Midstream diamond companies are located on all five continents in multiple countries, but a number of centers are dominant, and it there that one can really measure the pulse of the industry. None is quite like the other.

Antwerp, in Belgium, is the oldest of the midstream diamond centers, and today owes its prominence largely to its status as the world’s primary independent rough diamond marketplace.

Ramat Gan, a neighboring city to the Israeli business capital of Tel Aviv, is arguably the world’s largest polished diamond trading center, a status it earned by becoming the dominant supplier of loose polished diamonds to the world’s preeminent jewelry market, the United States.

The Indian city of Mumbai is the trading capital of the giant Indian cutting industry, which today processes more than nine out of every ten diamonds sold worldwide. But it is not the country’s largest production center. That title is held by Surat, an industrial city located some 300 kilometers to its north.

A diamond being examined during the polishing process. Photo courtesy of De Beers.

New York is the gateway to the giant North American jewelry market, and Hong Kong enjoys that status in respect to China and the other growing markets in Southeast Asia.

The newcomer to major diamond trading center club is Dubai in the United Arab Emirates. As the access point to the lucrative diamond markets in the Arabian Gulf region, it also owes its status to a liberal economy and tax regime.

While the six major centers handle the bulk of the midstream trade, there are a number of other important cities that also play key roles. Moscow is a home to the Russian rough diamond trade, and a gateway to the markets of Eastern Europe and Central Asia. Bangkok is home to massive cutting and polishing center, although it more dominant in the colored gemstone business. Shanghai is considered the center of the Chinese industry and trade, and Istanbul is a center of growing importance in Turkey and the Balkan region.

The trading floor of the Israel Diamond Exchange. Located in Ramat Gan, the WFDB-affiliated organization is the world’s largest diamond bourse.

The glue that binds the far-flung midstream diamond centers together is a network of diamond exchanges affiliated to the World Federation of Diamond Bourses (WFDB).

There are today 29 WFDB diamond exchanges operating in 21 countries, with roughly 15,000 members, who by extension account for the activities of about 25,000 diamond traders. Together they handle in excess of 90 percent of the diamonds reaching the world market.

The diamond exchange should not be confused with a stock exchange or commodities exchange. It is a unique institution, developed specifically to support the trade in loose diamonds, and sometimes the trade in other gemstones as well.

By definition a diamond exchange is a club of members who deal in diamonds and/or colored gemstones, and who have agreed to abide strictly by certain rules and regulations when doing business with one another. Transactions are conducted one-on-one, dealer-to-dealer. But given the inherent value of a diamond or colored gemstone, it is unlikely that any one dealer will hold a full selection of what a buyer is seeking. However, when they gather together, a critical mass is achieved, enabling buyers to fulfill all their requirements, and at the same time negotiate a fair market price.

The diamond exchange provides other critical functions. Unlike standard commodity exchanges, the actual product is almost always brought onto the premises, and, given its inherent value, the space thus needs to be secure, to protect the safety of the members and the merchandise. Also, because the appearance and value of diamonds and gemstones are affected by the way that they reflect light, the diamond exchange needs to ensure that lighting conditions are uniform and optimal. Internal judicial systems allow trade disputes to be settled quickly through arbitration, both between members of the same bourse and members of sister bourses.

Yellow polished diamond

A polished fancy yellow colored diamond being examined prior to sale.

White-polished-diamond

A white diamond being examined.

The midstream is the workhorse of the diamond pipeline, and not only in terms of it being the stage where polished diamonds are manufactured. While diamond manufacturers generally are required to pay for their rough supply in cash, their clients frequently will demand that they receive goods on consignment – what is referred to as “memo” in industry jargon, or generous terms of payment. As a consequence, the midstream has become the primary financier of the entire supply chain.

It is also a part of the industry that has experienced massive change in recent years. Most cutting and polishing activities has shifted from higher-wage centers like Belgium, Israel and the United States, to lower-wage centers, such as India and China. But the same time, technologically advanced systems, involving computer-aided design and manufacturing, have enabled companies based in one country to maintain close tabs on production taking place in other countries.

Companies is the midstream of the diamond pipeline are considerably more involved in marketing and driving demand downstream than their forebears were just one generation ago, and a rising percentage are dealing not only in loose diamonds, but diamond jewelry as well.

And more change is coming, with online trading and pinpoint marketing through the social media providing members of the midstream access to buyers and markets that they previously could not reach. The journey along the diamond pipeline may not only be getting faster, but shorter as well.

NEXT: PART 4 – The most valuable meter in the pipeline, the jeweler’s countertop

PART 1:  A journey along the diamond pipeline

PART 2:  Roughly speaking, a journey from the depths of the earth

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