Previous month:
October 2006
Next month:
December 2006

4 posts from November 2006

Conflict Diamond Backlash

Blooddiamondssoldiers During the 1990s and into the current decade, rebel armies in Angola, Sierra Leone and the Democratic Republic of the Congo (DRC) financed their wars of insurgency and atrocity by taking over the diamond fields of these countries and smuggling the diamonds to other countries to enter the international diamond marketplace.  As much as 15% of the world’s $10 billion annual rough diamond production was probably conflict diamonds also known as "blood diamonds."  The result of these conflict diamond financed wars was the loss of hundreds of thousands of lives, the displacement of millions of people and the destruction of the health, education, and economic infrastructure for many poor countries.

To deal with the issue of conflict diamonds, the World Diamond Congress of 2000 created a World Diamond Council to act on behalf of the international diamond industry.  The result was the development of the Kimberley Process Certification Scheme (KPCS), implemented in 2003.  Over 45 participating countries, plus all those represented by the European Community, agree to issue a certificate to accompany any rough diamonds exported from its territory, certifying that the diamonds are conflict-free. Each country must therefore be able to track the diamonds offered for export back to the point of import and must meet a set of standards for these internal controls. In addition, importing countries agree only to allow rough diamonds into their territory if they have an approved KPCS certificate.

The Kimberley Process has been successful in helping to reduce the percentage of conflict diamonds down well below 1% of the world’s rough diamonds.  This decline is also a result of wars ending in Angola and Sierra Leone.  The political situation in the Democratic Republic of the Congo is still unstable but it is no longer a significant source of conflict diamonds.  Liberia’s terrible war is also ended and the country expects United Nations diamond embargo to be lifted in 2007.

Today the only significant source of conflict diamonds is in the rebel-held regions of northern Côte d’Ivoire (Ivory Coast), with most of the diamonds smuggled through Ghana.

Leonardodicaprioblooddiamond_2While this dramatic reduction in conflict diamonds is good news, the diamond industry is bracing for repercussions as millions of people worldwide are introduced to the history of conflict diamonds in the form of a Hollywood movie and documentary films.  December 8th is the scheduled premier of Blood Diamond, starring Leonardo DiCaprio, Djimon Hounsou and Jennifer Connelly.  The 2006 film, directed by Edward Zwick (The Last Samurai, Courage under Fire), is the tale of an unscrupulous American diamond smuggler who sets out to retrieve a very large diamond at the height of Sierra Leone’s horrific civil war.

Two documentary films coincide with the release of Blood Diamond. The first, Blood on the Stone, produced by Insight News Television, illustrates that the issues raised in the fictional story (Blood Diamonds) remain alive and well today.  The second documentary, Bling, follows three hip-hop artists to Sierra Leone where they observe the condition of today’s diamond miners. 

Alluvialdiamonddiggers The diamond industry is concerned that public backlash to the films will reduce demand in general and produce a boycott of African diamonds, particularly from Sierra Leone, Angola, and the Democratic Republic of the Congo (DRC).  Many moviegoers will assume that conflict diamonds are still sourced from these countries even though the wars are ended and diamond trade is now legitimate. In fact, these countries now depend on their diamond trade to rebuild their war torn countries.  The victims of the wars would suffer from any backlash.  There are as many as 120,000 diggers in Sierra Leone, 800,000 in the DRC and many tens of thousands in Angola whose livelihood depends on diamonds mined and sold under the Kimberley Process.

Artisanal_diamond_miners_1 This potential backlash also comes at a time when the diamond industry is trying to convert diamonds into the engine for development in many other poor countries where the miners have not received their fair share of the wealth.  In 2005, the Diamond Development Initiative was launched to improve the working conditions and futures of the hundreds of thousands of artisanal diamond miners, who for the most part use shovels, pans and their hands to extract the diamonds from the earth.  For decades, these miners have remained in absolute poverty while the other parties in the diamond pipeline have shared substantial wealth.

Now, the diamond industry wants to initiate change that will ensure a better life for these miners.  Key players during the Diamond Development Initiative startup phase have been Partnership Africa Canada, the Foundation for Environmental Sustainability and Security, Global Witness, De Beers, the Rapaport Group, the International Diamond Manufacturer’s Association and the Communities and Small-Scale Mining Secretariat of the World Bank.

Hollywood, with powerful images and big names like Leonardo DiCaprio, will soon be a catalyst for change in the perceptions of diamond buyers worldwide.  We only hope that the public will not overreact and cause continued suffering and pain. Yes, conflict diamonds must be eliminated as soon as possible. However, that does not mean that diamonds are somehow tainted or corrupted, especially from the countries that need this valuable resource to rebuild their war torn communities.  The world needs to help these poor countries, not punish them.

Flood of Fluorescence

FluorescencecolorsFluorescence in diamonds is a form of illumination created when a diamond is exposed to Ultraviolet (UV) light.  Exposure to UL light can occur from the "backlights" often found in nightclubs, the drying lights used in nail salons, fluorescent lights or direct sunlight. Diamonds emit light due to fluorescence when small amounts of the elements nitrogen or boron are present in the stone. Blue is the most common color of fluorescence, but other colors (yellow, greenish blue, green, white and pink) are also possible.

About 35% of gem quality diamonds have fluorescence visible under an ultraviolet light. About 10% of gem quality diamonds have enough fluorescence to make a noticeable difference in the diamond's color when viewed under incandescent light (low in UL) and in sunlight or fluorescent light (high in UL). In less than 2% (some estimates are as low as 0.2%) of diamonds, the level of fluorescence is high enough to cause the diamond to appear foggy or milky in appearance.

After years of debate and controversy, the diamond industry is still not clear on the visual and financial impact of fluorescence in diamonds.  In the early days of the diamond industry, diamond merchants and consumers valued diamonds with fluorescence because they felt fluorescence improved the color appearance (whiter looking) under lighting with UL components.

FluorescencegradesIn the early 1970’s inflation was soaring and speculators purchased high-color, high-clarity diamonds as investments.  The perceptions of fluorescence took a dramatic turn in the late 1970s when diamond prices were at crazed levels and the speculators attempted to sell their diamonds.  Suddenly they discovered that many of the diamonds they had purchased had very high levels of fluorescence and that when they went to sell their diamonds, stones with higher fluorescence sold for lower dollars.  This shocking revelation spread through the media and the public got its first education about fluorescence in diamonds.

The diamond industry had another fluorescence shock in the 1980s was Russian diamonds were pouring on the market.  These diamonds seemed to have a higher percentage of Medium to Strong fluorescence than had been seen from traditional African sources.  This influx of fluorescence diamonds fueled the debate over fluorescence and created increasingly negative perceptions within the diamond industry.

In 1993, a television “expose” in South Korea (We Want to Know That) aired the negative image of fluorescence in diamonds and brought it to the attention of consumers.

The consumers negative view of fluorescence was quantified in 1997 when the Rapaport Diamond Report (diamond industry’s pricing Bible), indicated that higher-color (D-H) diamonds with Very Strong Fluorescence were selling for 15% less than comparable diamonds without fluorescence.  The perceptions became reality.

The GIA conducted a scientific study in 1997 to better understand the effect of blue fluorescence on the appearance of diamonds.  The study concluded:

1) Observers who were not in the diamond trade could not see any meaningful difference in diamond color or transparency between diamonds with fluorescence and those without.
2) Observers in the diamond industry found not visible difference due to the strength of fluorescence when the diamonds were viewed table-down, as is typical for color grading.
3) Observers in the diamond industry found that diamonds with higher levels of fluorescence had better color appearance (whiter) than diamonds with lower fluorescence levels when view in the table-up position, which is how diamonds are viewed by consumers.

Even though the scientific study indicated that consumer could not see the difference, the introduction of online diamond information at the end of the 1990s meant that consumers were now looking at certifications for information about a diamond rather than relying on the work of the jeweler and their eyes.  The fact that Fluorescence was an easy to understand specification on the grading report, made it easier for consumers to select diamonds based on fluorescence levels.  Even novice diamond shoppers quickly determined that if they wanted their diamond “pure” and free from imperfections, no fluorescence was better than Faint and it was best to avoid the Strong and Very Strong levels.

Over the years, it has become more difficult for retailers to sell diamonds with higher levels of fluorescence.  Even with prices significantly discounted, supplies were greater than consumption.  De Beers’ sightholders are required to accept all the rough diamond in their allotment and a certain proportion of those have stronger fluorescence.  The diamond cutters can choose what shape to cut out of the rough crystal, the size of finished gem and the quality of the proportions for the gem and to some extent the clarity by cutting away from inclusions.  However, they cannot change the color of the stone or its fluorescence.  The cutters must pass on the fluorescent diamonds to the wholesalers and retailers who then must attempt to get the consumer to buy them. 

FluorescencestonesThe diamond industry now has a glut of fluorescent diamond on the wholesale market and on the retail shelves.  Consumers are becoming increasingly wary of purchasing diamonds with high levels of fluorescence so the pipeline is getting full of them.

Because the sourcing of fluorescence diamonds continues, the diamond industry has two recourses: 1) they can reduce prices to entice consumers, but this strengthens the perception that fluorescence is a negative and could result in a bigger glut, or 2) change the consumer’s perception of fluorescence. 

There seems little organized effort by the diamond industry to change the direction of the consumer’s negative perception of fluorescence.  With increasing knowledge, the consumer seems to be more discerning in their diamond shopping with respect to cut parameters, color, clarity, finish grades, and certainly fluorescence.  Time will only tell how the diamond industry will react to the glut of fluorescence that bloats inventories, raises inventory costs, and increases the financial strain of an industry already reeling from high interest rates and squeezed profit margins.

Diamond Demand and Prices to Increase

LoosediamondsbagFor the first seven months of this year, polished diamond prices continued to increase compared to the same months last year but August through October have seen prices fall compared to last year.  Polished diamond prices peaked in the fall of 2005 and the worldwide market has softened since that time.  The lower prices are the result of a slowing global economy (expected to continue to 2007) and high interest rates, which limit retail inventories and reduce consumer purchasing power.  Even though the 2006 retail holiday demand for diamonds is expected to be strong, the high interest rates have kept jewelers’ inventories lean.  The result could be weak sales despite the strong demand.

While polished diamond prices have declined in recent months, prices for rough diamonds have held steady.  This has created intense pressure on diamond cutters and polishers who were already feeling the financial burden of rising interest rates. 

At the recent World Diamond Conference held in Perth, diamond production projections for 2010 are $11.3 billion compared to $12.67 billion estimated for 2005.  In other words, production of diamonds will be down more than 10% from today’s levels.  At the same time, demand projections are growth increases by as much as $5 billion.  The supply shortfall could be as much as $3 billion by 2008 and $6 billion by 2010.  This is the first time in 25 years that world diamond production is on the decline.

With these large supply shortfall projections, prices for rough diamonds are expected to rise significantly by 2008 if not sooner.

EkatimineWith prices expected to be on the rise, what is the diamond industry doing to increase supply? The key to the supply question lies with exploration.  There has been no major diamond deposit discovery for 15 years.  The last big discovery was in 1991 at Point Lake in Canada’s Northwest Territories, which led to the large mines in the area like Ekati.  However, resources at the Ekati mine are expected to be depleted by about 2015 and there are no major finds to replace them.  Diamond mines are very capital intensive and take years to put into operation once the diamond deposits are verified. Unless diamond exploration is accelerated soon, the shortfall projection will become reality.

My advice to diamond shoppers is to enjoy the relatively stable prices we have now.  In the future, we will be talking about 2006 as the good old days of low diamond prices.  Diamond prices in future years will be soaring, especially for larger diamonds.

Emerald Cut Grades by AGS Laboratories

Agslogo_1 The American Gem Society (AGS) Laboratories, headquartered in Las Vegas, announced they will begin including their cut grade on Diamond Quality Documents for emerald cut diamonds February 1, 2007.  The AGS had previously announced they would be including the cut grade for emerald cuts, but only recently established a date when they would start.

Ec_104_ct_147_ratio1The cut grades will be included for three emerald-cut shapes: square emerald, rectangular emerald cut and the octagon step cut.  The AGS had introduced their Performance-Based Cut Grade System in 2005, first with round brilliant diamonds and then for princess cuts.

Royal_asscher_1572Most other cut grading systems are proportion-based which use external measurements of the diamond to determine the cut grade.  By contrast, the AGS’s Performance-Based Cut Grade System includes the light performance of the diamond by estimating the movement of light through the diamonds and establishes a cut grade based on the brightness, dispersion, leakage, contrast and weight ratio, as well as the proportions, polish and symmetry.

Because the AGS’s Performance-Based Cut Grade System makes it easier to establish cut grades for different shaped diamonds, we would expect to see the AGS Laboratory establish cut grades for many of the common fancy shapes in the next several years.