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RA PAPORT DIAMOND REPORT The diamond industry must establish fair, open, efficient, competitive diamond markets.

BY MARTIN RAPAPORT ommoditization: the transforma - tion of a product into a commod - City is often seen as undesirable. Sellers believe that unique products can - not be effectively priced because they cannot be compared to similar products. The inability of consumers to compare or discover enables sellers to charge higher prices, resulting in higher profit margins. At the core of this thinking is the idea that the less consumers know about a product and/or its , the greater the retailer’s profit . In the early 1930s, there were no dia - mond grading standards. Many retailers REUTERS /Mike Segar would call all their diamonds “perfect,” or “blue-white.” Honest retailers who grading standards as well as the Gemo - It would seem that the more honest fairly described their diamonds as less logical Institute of America (GIA) labo - and transparent retailers are, the less than perfect lost customers to dishonest ratory to grade diamonds objectively. money they make. While most retailers retailers who falsely described all dia - Ever since, the diamond industry has would never tell an outright lie, the ques - monds as “perfect.” Confusion about had a love-hate affair with standards. On tion of just how much to tell consumers grading standards created a situation the one hand, standards are necessary to is a big issue. Many ethical jewelers spend whereby big liars built big businesses and maintain a level playing field among hon - hours educating consumers about cut, honest retailers went out of business.The est firms and provide basic consumer and a few might even show a consumer situation got so bad that the U.S. Federal confidence. On the other hand, standards a Rapaport Price List. However, it is Trade Commission (FTC) outlawed the are communicated to consumers, who unlikely that any jeweler will ever pro - description of diamonds using terms use them to compare prices, resulting in vide consumers with competitive price such as “perfect” or “blue-white.” The lower retailer profit margins. (SeeTivol’s information or show a consumer an American Gem Society (AGS) established Dilemma, RDR, October 2, 1992.) (Continued on page 28)

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Commoditization ing and banking sectors are all being shaken to their core. Old (Continued from page 1) distribution models that pamper retailers, provide unrealistic credit terms and absorb retailer inventory risk are bankrupt. internet price list.There is this great fear among retailers that While we acknowledge the tremendous added retail - if consumers knew how much profit retailers were making, ers provide, we also encourage them to change. Business can - consumers would not buy diamonds from them. Jewelers lack not go on as it has in the past. Retailers need to recognize that self-confidence about the price they charge for their added as pricing transparency increases, their future profits will be value proposition. defined by the cost benefit of their added value and not by There is an “understanding” that it is okay to educate con - protection from the wholesale trade. sumers about the product, but not the price. In general, retail - ers provide enough partial information to convince consumers ADDED VALUE they are being educated and that the product being offered is As the diamond industry moves into the twenty-first cen - worthy of purchase. Competitive price information — some - tury, increased product standardization, internet communica - thing consumers really need — is never discussed or disclosed. tion and consumer integration of product and price information are facts of life. Consumers are staking their legit - ETHICS imate right to fair market information and they are obtaining Many retailers believe that it is unethical to disclose com - competitive price information from third-party sources. petitive price information to consumers.They feel that retail - In the new world of pricing transparency and product com - ers are entitled to interdealer price information, but that moditization, consumers often know the low internet price consumers are not. Furthermore, they expect the wholesale for certified diamonds and other commoditized products trade to “protect” them by not selling to consumers, or pro - before entering brick-and-mortar stores. Consumers know viding consumers with prices. they can get a better price on the internet, yet they visit stores In the early 1980s, when wholesale diamond prices were because they don’t just want the lowest price; they want the plummeting, I was thrown out of the NewYork Diamond Deal - right bundle of price, product and added value. Consumers ers Club because I dared to provide retailers with NewYork are shopping for the added value a store offers and weighing wholesale prices. Dealers at that time felt that retailers had no the cost benefit of the added value provided. right to interdealer prices. I believe that the democratization of The challenge for retailers is to identify the optimal added price information must be universal. If retailers have access to value package complementing the product and charge a fair price information they need, why shouldn’t consumers? More price for that added value. Retailer profit margins are no longer to the point, is it ethical to deny consumers the price informa - based on the cost and sales price of the product but more impor - tion they need to make informed decisions? Is it ethical to“pro - tantly on the cost and sales price of the added value components. tect” retailer profit margins at the expense of consumers? The real questions are: Can retailers justify the price they COMMODITIZING DIAMONDS are charging above the interdealer price by the added value To a large degree, GIA and other laboratory-graded certi - they provide? Can retailers survive in a transparent environ - fied diamonds are already highly commoditized. Third-party ment? Is an educated consumer our best customer? independent grading along with the Rapaport Price List and Amazingly, some retailers think that it is perfectly okay for unlimited internet price and availability information have cre - them to cut out their dealer/wholesaler suppliers and buy direct ated highly transparent B2B and B2C markets.When it comes from overseas manufacturers, but that it is unethical for whole - to pricing certified diamonds, the cat is out of the bag. Few salers to sell directly to consumers.What are 47th Street whole - cutters, wholesalers or dealers can make extra profits from cer - salers to do? Commit financial suicide to protect the retailers tificates based on their customer’s lack of price information. who are bypassing them after years of loyal service and credit? Profit margins are squeezed with little left to lose by commodi - Clearly some retailers have a skewed sense of ethics and reality. tization.While the diamond industry experiences what some It’s no use blaming each other.The fact is, the world is rap - consider the “disadvantages” of commoditization, it does not idly changing and all of us have to adapt and evolve to stay in enjoy the benefits that commoditization can bring.The battle the diamond business.The diamond manufacturing, wholesal - against the price transparency that commoditization brings has already been lost. As the De Beers monopolistic market structure disintegrates about us, the industry is at grave risk.Trade credit is maxed out Commoditize: at $12 billion — double the level of four years ago. refuse To render a good or service widely available and greater credit limits and a liquidity crisis looms. Highly selective interchangeable with one provided by another rough diamond distribution schemes have destroyed the ability company (Merriam-Webster Dictionary). of the market to balance rough and polished prices. Too-high (Continued on page 30)

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Commoditization Regulation. We will seek U.S. government regulatory (Continued from page 28) approval for all of our activities and establish best practices that ensure compliance and eliminate conflicts of interest. rough prices destroy industry profitability and liquidity.A plum - Transparency. We will disclose our plans and actions in a meting volatile dollar interacting with the globalization of dia - timely manner. Our methodology and mode of business will mond demand is creating extreme pricing uncertainty. Suppliers be transparent. who maintain large inventories and guarantee customers fixed Communication. We will communicate with all stake - pricing to meet seasonal demand are taking unacceptable risks. holders and seek their perspectives.We will work to eliminate Inexpensive smaller diamonds may undergo a period of the negative unintended consequences of our actions.We will decline as the ability of a saturated mature U.S. market to absorb add to and modify our best practice principles as necessary, polished may decline faster than the ability of India and China based on communication with stakeholders. to increase demand. At the same time, surging global wealth and a declining dollar are boosting demand for 3-carat-and- CREATING FUTURES MARKETS larger, better-quality diamonds. A speculative boom that will The creation of our diamond futures markets will, with G-d’s make the boom/bust cycle of the late 1970s look like child’s help, be a two-step process. First, we will establish a formal play is developing. monthly Spot Cash Auction market that will generate well- Let me be clear.The diamond industry is undergoing a com - defined cash transaction prices for finely selected diamonds. plex transition from monopolistic cartel control to free mar - Second, we will create a diamond index based on the cash kets at a time of great global change. The level of risk is transaction prices realized at auction. The regular monthly increasing exponentially.The diamond trade no longer con - index will serve as the basis for a cash settled index based futures trols the diamond industry. If we do not move forward and market. All of the above is subject to regulatory approval and replace the old monopolistic order with new and better ways discussion with stakeholders. of managing risk and doing business, the diamond industry Our initial Spot Cash Auction will take place in NewYork, will spin out of control within the next few years. September 17 to 20. It will offer Rapaport select, certified and guaranteed, GIA graded, Round, 1.01-1.19 ct., D-H, IF-VS2, MOVING FORWARD X-VG diamonds on a regular monthly basis. Terms are Cash, The diamond industry must establish fair, open, efficient, FOB Rapaport NY. Diamonds will be available for inspection competitive diamond markets.While not all diamonds can or at Rapaport NewYork and offered for sale on the internet at should be commoditized, total price transparency must be Diamonds.Net in an ongoing auction mode.The auctions will be established in select areas so that futures markets can be devel - open to everyone, including the public.There will be a 3 percent oped. The diamond industry must get its financial house in fee to sellers.A yet-to-be-determined buyer’s premium will be order.The wall between the financial commodity sector and charged to the public and waived for members of the trade. the diamond industry must come down, allowing billions of Anyone wishing to offer diamonds for sale in the auction is dollars of and liquidity to enter our trade. urged to email [email protected] as soon as possible. The establishment of diamond futures markets will provide The initial and future auctions may offer diamonds in additional our industry with an unimaginable cornucopia of benefits. sizes, qualities and grading reports. No decision has been made as Futures markets will allow us to properly manage risk, obtain to the exact specifications of the diamonds that will be included unlimited finance for worthy projects and establish unprece - in the indices used to establish one or more futures contracts. dented levels of consumer confidence. will evolve Establishment of the will require U.S. gov - from a threat to a benefit, as the financial risk speculators assume ernment regulatory approval and may take well over one year. is channeled through the futures market to provide reduced Discussions with the diamond trade, as well as other stake - risk and greater financial liquidity to our industry. Diamond holders in the financial markets, will be taking place on an trading opportunities will expand exponentially as profes - ongoing basis. Readers are encouraged to contact me person - sional commodity and diamond traders interact on a global ally via email — [email protected] — with comments. level. New ideas, products and opportunities will flourish. Additional information, a FAQ and interactive online forum The Rapaport Group is fully committed to establishing spot will be posted on Diamonds.Net in the near future. cash markets and futures contracts for diamonds and will be As we embark upon this important process, I take this oppor - taking important steps to accomplish this goal in the very near tunity to assure fellow members of the diamond and jewelry future. Our first step is to establish, communicate and commit industry that we will do everything we can to ensure that the to a number of best practice principles that will ensure that the implementation of our programs is done fairly, taking into full markets we create will be fair, open, efficient and competitive: consideration the concerns and perspectives of the trade.We Inclusiveness. All members of the diamond industry will are committed to working together with all stakeholders to be given the opportunity to participate in and enjoy the ben - ensure the development and expansion of fair, open, efficient, efits of the markets we create. competitive diamond markets.

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