Unlocking the financial power of diamonds
It’s been only one year since the world’s first Diamond Futures Exchange began its operations in India and already it has started changing the rules of the game. If the trading data are any indication to go by, more and more investors are making diamonds their best friend. In a freewheeling conversation with Sanjit Prasad, MD and CEO, Indian Commodity Exchange Limited (ICEX), Floroscent brings to you a detailed report on how the Exchange has changed the perception about diamond in India.
On August 28, 2017, India became the first country in the world where polished diamonds are traded on a commodity exchange. Within one year of its operations, the Indian Commodity Exchange (ICEX) has delivered staggering results.
As per their data, the average daily open interest on ICEX diamond derivatives segment increased by more than 263.76 per cent from 139.49 carats in the first month (Aug 28-Sept 29, 2017), to 453.97 carats in the recent month between June 05 to July 05, 2018. At present, the total open interest in diamond at ICEX is 1,12,163.9 carats. Average Daily turnover has also increased from Rs. 6 crores in Aug 28-Sept 29, 2017 to Rs. 19.35 crores from June 05 to July 05, 2018. In terms of volume, the exchange registered a rise from 4.39 lakh lots to 10.7 lakh lots in the same period.
According to Sanjit Prasad, Managing Director and Chief Executive Officer, ICEX, the exchange has seen healthy growth in trading volumes, which shows that it has emerged as a good investment option for common investors. “It’s been a highly encouraging journey for ICEX Diamond Futures. There has been a steady month-on-month increase in participation, turnover and open interest since we commenced operations in August 2017,” he added.
Understanding the diamond market
A SEBI regulated exchange and promoted by a mix of public-private partnership comprising of PSUs including MMTC, Reliance Group among others, ICEX has been able to understand the various issues related to the Indian diamond industry and offers suitable solutions.
“Diamond has never been able to become an investment product due to low transparency in pricing. Moreover, in the recent times diamantaires have been exposed to the price risk impacting their capital and margin. We have studied the commodity and found it is one of the excellent products suitable for futures’ trading and we could provide hedging instruments to the diamond industry to manage their price risk. It all started from there to launch the diamond futures contract. Similarly, there is no futures trade in diamond anywhere in the world making it an excellent choice,” he pointed out.
“raditionally, diamonds haven’t been part of most people’s investment portfolios. Investors look for two basic things: returns and exit route. In the case of diamonds, neither of these factors appear particularly favourable. The diamond index has ensured that investors can enter and exit the market in an organised manner.” Sanjit Prasad, MD and CEO, ICEX
In order to provide sellers with an investment tool, ICEX offers trading in diamonds of three sizes: 30 cents, 50 cents and 1 carat (1 carat equals 100 cents). An investor can buy diamonds through the systematic investment plan (SIP) route by buying as low as 1 cent in one trade, for as little as Rs. 3,200 and continue to buy further. One can seek physical delivery of the diamond after accumulating at least 50 cents.
Only certified diamonds
The transparency offered by the exchange is another positive in the extremely opaque diamond market. The exchange follows strict international guidelines to ensure that buyers get authentic natural diamonds. Plus, the diamonds delivered at the vault in Surat are certified by De Beers for genuineness, quality, cut, polish, etc. “In first place, India is the signatory of Kimberley Process Certification Scheme of diamonds which certifies whether it is a blood diamond. The rough diamond import into India is scanned by custom department as per KPCS. ICEX adheres to the principle of the organised market place and permits delivery of certified diamond as per the quality parameters,” he informed.
Diamonds at wholesale price
Unlike retail market, the diamond purchased at ICEX is not only certified but there is a lot more for the investor in diamonds at ICEX. The price that one gets here is 25 to 30 per cent lower than the retail rate.
“Diamond price which is quoted and traded on exchange platform are of wholesale rate. The rate of same quality diamonds is 25 to 30 per cent higher in the retail market. One carat of diamond costs around Rs. 3.5 lakhs, which for the investor or buyer is a big amount. But in ICEX trading unit is one cent i.e. 1/100th of carat and hence, one could buy in a staggered manner in smaller units of one cents and multiple either for investment or for physical delivery when accumulated units become 100 cents – an equivalent unit of 1 carat. As described in above points, value proposition for the retail buyers are huge at ICEX,” he explained.
Investing made easy
Since it began its operations, ICEX has been able to provide rich dividends to diamond manufacturers and the investors as well. The diamond trading on ICEX is largely benefiting the small players in the industry. The small traders have started getting more value of their diamonds, as they don’t have to depend on international agencies for diamond pricing.
“Traditionally, diamonds haven’t been part of most people’s investment portfolios. Investors look for two basic things: returns and exit route. In the case of diamonds, neither of these factors appear particularly favourable. Over the past five years, diamonds haven’t appreciated across the board. Given the absence of an organised resale market, investors have also been unable to exit the market easily so far. The diamond index has ensured that that investors can enter and exit the market in an organised manner,” he shared.
Make in India pricing
One of the most important contributions of ICEX Futures is the enablement of price discovery of roughs. On the exchange, buyers and sellers have started discovering diamond price through a democratic and hi-tech platform. Companies and individuals who trade, process and participate in the diamond industry have discovered the fair price of the diamond, purely on demand and supply factors.
“Almost 90 per cent of gemstone cutters in the world are from India. Indian karigars are undisputedly the best in the world, determining the facets of each diamond that finds its way into the market from their workshops. Why then, should India not determine the price of diamonds?”
“Almost 90 per cent of gemstone cutters in the world are from India. Indian karigars are undisputedly the best in the world, determining the facets of each diamond that finds its way into the market from their workshops. Why then, should India not determine the price of diamonds?” he asked.
He goes on to add: “With India processing nine out of 10 diamonds sold globally, our intention through the launch of diamond contract is to provide a ‘Made in India’ price for the global trade. Hence with time, a transition where India will move away from being a price follower to a country where fair price of diamonds is determined is expected.”
Huge scope for growth
Quite obviously, with India being the largest exporters of polished diamonds, it is but natural to provide them with the required hedging tool which will strengthen their business. The diamond industry needs to reinvent itself and find ways to expand beyond the current market. Adding an investment market to the diamonds will only do good to the trade. “After all, the physical diamond market of India is approximately Rs. 1,70,000 crore and Futures’ trade volume in established contracts range anywhere between 20-30 times of physical market value on a conservative estimate. So, there is a big scope of growth,” he concluded.