Bright shine that may be short lived - Financial Times

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10 ★ FINANCIALTIMESSATURDAYSEPTEMBER 11 2010 Watches&Jewellery Spotlight on some bloodstained stones Kimberley Process Claire Adler on trouble with the UN’s verification scheme The celebrity-studded war crimes trial of former Liberian warlord Charles Taylor, with testimonies from Naomi Campbell and Mia Farrow, has turned the world’s attention back to conflict diamonds 12 years after they came to light during the war in Sierra Leone. Mr Taylor is accused of using funds from sales of illegal diamonds to pay for a campaign in Sierra Leone and Liberia, that saw tens of thousands killed and many more assaulted, raped, displaced and tortured. Now, troubles in Zimbabwe’s diamond sector have sparked a debate in the highest echelons of the diamond industry about the future of the Kimberley Process Certification Scheme, a United Nations initiative established in consultation with the diamond industry in 2003 to ensure diamonds do not come from regions embroiled in rebel conflict. The scheme brings the diamond industry together with the UN, 75 national governments, including the European Union, and human rights organisations headed by Partnership Africa Canada/Global Witness, the non-governmental organisation co-nominated for the 2003 Nobel Peace Prize for first uncovering the role of diamonds in funding conflict. In 2006, one of the largest diamond finds in southern Africa in a century was uncovered in Celebritycircle:NaomiCampbell(thirdfromleft)withCharlesTaylor,theLiberianwarlordontrialforwarcrimes.Hertestimonyturnedattentiontoconflictdiamonds Sipa Press Marange, Zimbabwe. A diamond rush of about 35,000 destitute citizens was followed by a savage government crackdown, as Zimbabwe’s military-political elite sought to gain control of the country’s newfound diamond wealth. More than 200 miners were killed by the military. Today, civilians are subject to forced labour, child labour, beatings, smuggling and corruption. Diamonds from Zimbabwe are smuggled through Mozambique and South Africa and laundered into international markets, says Global Witness. “The Kimberley Process has not fulfilled its potential as a vehicle for change, because too many member governments continue to prioritise political and economic interests rather than making serious efforts to end diamond-related abuses,” according to a Global Witness press release calling for “farreaching reforms of the KP and of the diamond industry”. While the Kimberley Process aims to stop trade by rebel groups, it does not address the problem of governments perpetrating abuses. “The war crimes trial of Charles Taylor, a former rebel warlord who became Liberian president by supplying weapons and military expertise to the Revolutionary United Front in return for uncut diamonds, shows it was a mistake for the Kimberley Process to only target rebel groups. It should sanction state actors to prevent exploited diamonds getting on to the market,” says Tom Porteous, London director of Human Rights Watch. In June, Martin Rapaport, a diamond industry price and information provider, staged a three day protest fast outside a Kimberley Process meeting in Tel Aviv. He is campaigning for ethical business practice, which both goes beyond the letter of the law and leads to profit. “Business must not go on as usual. The Kimberley Process cannot be relied upon to verify that diamonds are free of human rights abuses,” says Mr Rapaport. “The situation is a dream for branding companies. I’d like to see ethical brand warfare. We’re trying to get Sierra Leone to create ethical fair trade diamonds and sell them at a premium price.” In July in St Petersburg, Kimberley Process participants decided to allow two supervised exports of rough diamonds from Marange, mined after May 28 in compliance with minimum KP standards. According to Eli Izhakoff, president of the World Diamond Council, further exports are conditional on measurable progress in demilitarising mine sites, ending human rights abuses and introducing proper controls on smuggling. “Zimbabwe, a sovereign government, has agreed to make the certification of diamond shipments subject to the signature of the Kimberley Process external monitor, Abbey Chikane, who reports to the EU. Our monitoring process is continuous,” says Boaz Hirsch, this year’s chairman of the Kimber- ley Process. Mr Rapaport has vowed to expel any member of his trading network who trades gems from the two mines where labourers have been killed and children enslaved – Mbada and Canadile. He claims that while trading Marange diamonds may be legal in certain jurisdictions, two Zimbabwean companies are under sanctions by the US, UK and the EU: the Zimbabwe Mining Development Corporation which owns 50 per cent of Mbada and Canadile, and the Minerals Marketing Corporation of Zimbabwe, which controls the sales of the diamonds. Sanctions could make trading with these companies illegal by citizens of these countries, says Mr Rapaport. “It is not the responsibility of the Kimberley Process to validate or invalidate the Mugabe regime,” argues Mr Hirsch. “By encouraging commercial and lawful operations in Zimbabwe, the Kimberley Process will bring legitimate international investors, create prosperity and eradicate illegal miners.” An August review mission to Zimbabwe will report back to the annual KP meeting in November in Jerusalem. Mr Izhakoff at the World Diamond Council insists he is “pushing hard for meaningful reforms”, which he hopes to pass in November. “Is the Kimberley Process perfect? No. We are calling for majority votes to replace consensus, a professional team to run the Kimberley Process, and more transparency,” says Mr Izhakoff. Human rights groups advise consumers to ask for assurance that diamonds do not come from sources where human rights abuses are taking place. High security keeps Tel Aviv at cutting edge of the diamond world Israel Exchange Claire Adler gets inside the buildings where billions change hands Security is so tight at the Israel Diamond Exchange that some first-time visitors are required to e-mail copies of their passports in advance, while all have headshots and fingerprint scans taken on arrival. Round-the-clock security means thousands of closedcircuit television cameras line this enormous complex – four linked towers in Tel Aviv’s business district. It houses 15,000 workers, 1,200 diamond companies, cutting and polishing factories – including those owned by Israeli diamond investor Lev Leviev – a trading hall, grading laboratories, bank branches, a tax depot, post offices, a supermarket, doctors and dentists, a hairdresser and manicurist and multiple prayer and study rooms. Regular occupants of the complex and its 33,000 visitors each year are likely to be grateful for the security measures. The buildings are home to a 2,500 sq m trading floor, where, according to Avi Paz, the exchange’s president, “billions of dollars of diamonds are traded daily”. In a business where time is money and competition is fierce, diamond dealers and buyers routinely enter the building with wheelie suitcases packed with diamonds or up to several millions of dollars in cash, and sometimes both. With that kind of luggage, they are loath to jump into a cab or cross a road between business meetings. Mr Paz, a Belgian-born third generation diamantaire, is also president of the World Federation of Diamond Bourses. His own business specialises in unusually shaped diamonds, supplying the Swiss watch industry. Though only admitting it when probed, his regular clients include Laurence Graff. Mr Paz is glad to see Israel recovering from recession. Exports of polished diamonds fell from $3.8bn for the first half of 2008 to $1.6bn for the whole of 2009, before rising to $3bn in 2010. Half the value of all diamonds sold in the US are bought from Israel within the exchange’s walls. Israel Polished:stonesgettreatmentattheexchange Getty is the world’s third largest global diamond trading centre after Belgium and India, measured by overall turnover. Some of the world’s most exceptional diamonds have changed hands in Tel Aviv’s diamond trading hall, including the De Beers Millennium Star, cut and polished by Steinmetz and later the subject of a foiled robbery at London’s Millennium Dome in 2000. Focused on keeping Israel at the cutting edge, the bourse’s technology wing contains Sarin and OGI rough diamond scanning machines, costing hundreds of thousands of dollars a piece. “These machines are Traders come in with cases packed with diamonds or several millions of dollars in cash – sometimes both ultrasounds for diamonds, showing a rough stone’s optimum potential. While they can be found in the headquarters of the world’s most powerful diamond companies, we make them available to all 3,000 of our members to help them do better business,” says Assaf Levin, the exchange’s spokesman. The exchange offers subsidised courses to its members, taught by industry specialists, covering gemmology, negotiation, arbitration between different bourses, selling internationally, travelling with diamonds, insurance issues and using the internet to enhance business. New members attend twice a week for several hours over six months. “Bourses round the world benefit from the expertise of the Israel Diamond Bourse when it comes to security and accommodating key elements of the diamond industry under one roof,” says Mr Paz, pointing to the fact the Israel bourse has advised diamond exchanges on all five continents as well as Manhattan’s planned International Gem Tower. It has local offices in New York and Hong Kong. Almost a third of Israel’s polished diamonds were bought by China in 2009, and 71 Israeli companies are exhibiting at this month’s Hong Kong Jewellery and Gem Fair. The exchange unites Israeli companies at international fairs, arranging a central pavilion and supporting companies with security and translating. Mr Paz plays down the significance of Israeli trade with Dubai, which in 2004 became a member of the World Federation of Diamond Bourses. But insiders acknowledge Dubai is circumventing the regional political conflict in favour of the large high quality gems in which the Israeli industry specialises. “There are no official figures, but we estimate at least $250m to $300m worth of stones from Israel are sold to Dubai each year, via third parties,” says Doron Peskin, head of research at Middle East business analysts Info-prod, whose clients include the World Bank and the FT. “Because of the growing business activities of Iran in Dubai, part of this total is being sold to Iranians, so Israeli diamonds are finding their way to Iran. Dubai is the main channel Iran uses to by-pass international sanctions. Syria and Lebanon implement strict rules regarding Israeli products but this is not the case in the Gulf states.” Mr Levin says: “If war breaks out in the Middle East, the Israel Diamond Exchange is the safest place to be.”
FINANCIALTIMES SATURDAYSEPTEMBER 11 2010 ★ 11 Bid to revive Manhattan’s diamond district International Gem Tower High hopes have been placed on a brand new building, says Claire Adler A34-floor, 750,000 sq ft tower being built in Manhattan is intended to put New York back at the heart of the international diamond trade. Slated for a late 2012 opening in the heart of the city’s diamond district – 47th Street – the developer and former diamond dealer Gary Barnett, of Extell Development, believes “companies buying space are building equity”. The International Gem Tower will be the only place on 47th Street with secure underground truck delivery. Plans include a vault complex, offices with 360 degree views of Manhattan, cutting edge security systems, a concierge service, a luxury shopping centre on ground level, parking, restaurants and a health club. “The deterioration of New York’s diamond district has been a real shame. The Tower will revitalise the streetscape,” says Mr Barnett. “Because of it, others on 47th Street are finally beginning to do things to improve the district. The overall benefits will reverberate for decades.” The tower’s status as a foreign trade zone means businesses located in it will be able to defer, reduce or eliminate Customs duties on imported goods, potentially saving hundreds of thousands of dollars every year, according to Mr Barnett. As an inducement, New York state has made $100m in mortgages available and is providing Extell with up to $49.6m in tax breaks if the company fills 85 per cent of the tower with new Going for tens of millions of dollars, but not just yet Biggest diamond Nicola Copping visits a rarefied world of wealth In September 2008, one of the largest rough diamonds in the world, measuring 478 carats, was recovered from the Letseng mine in Lesotho. Laurence Graff, the British jeweller famed for high worth diamond trading and nicknamed “the King of Diamonds”, predicted the rough could yield a record breaking stone and purchased it at auction in Antwerp. One year and numerous cutting hours later, Graff has produced the world’s largest D colour internally flawless round diamond, measuring 102.79 carats, called the Constellation. “A round diamond is one of the rarest and most difficult of shapes to get because it’s so large,” says Mr Graff, describing the process. “We get an hour with the [rough diamond] seller when the only tools of the trade we have are our eyes and our loupe. Then we go and put down our $20m or $30m or whatever to buy that stone. “We could go as long as six months planning the stone until we have the confidence to attack it. The idea is to get the purest, near to flawless or flawless stone in the largest yield possible. It’s quite a gamble. The risk is enormous.” The gamble has paid off, and as Peter Buckie, an independent jewellery and diamond appraiser working for Jems (Jewellery Evaluation & Mediation Services), says: “A D/IF diamond of any shape over 100 carats is rare.” So rare that it is 11 years since the previous largest or expanding jewellery businesses. Mr Barnett and his investors have contributed more than $175m of their own money to the project. “Mortgage financing will help the city in the short term by putting people to work,” says Milton Pedraza, chief executive of the New York based Luxury Institute. “The state needs jobs and the government is willing to subsidise that,” he says. In 2006, Robert Zarnegin, a Beverley Hills-based property developer, began promoting a similar project in Las Vegas, the 50-storey, 1m sq ft World Jewelry Center. It was put on hold last year before construction began because of the economic crisis. However, as a result of an intense globe-trotting campaign promoting the New York building, 45 per cent of the units on the market are either sold, under contract or have letters of intent. The Gemological Institute of America, inventor of the Four Cs of diamond quality and grader of famous diamonds, including the Hope and Wittelsbach-Graff diamonds, has bought an entire floor. Other buyers include Israel-headquartered diamond company Dalumi, which has 13 offices on four continents; Sarin Technologies, a leader in technological equipment and software for the diamond and jewellery industry; and jewellery liquidation and asset recovery specialists Simplex- Diam. Sushil Goyal, chief executive of gem and jewellery manufacturer Liberty Gems, is considering buying office and retail space in the building. “The state-of -the-art building, the free trade zone and its location near Times Square and the Rockefeller Center will be an asset for New Yorkbased jewellery importers and dealers,” Mr Goyal says. Big industry operators such as Lev- D flawless round diamond, the Icon, was discovered, also by Mr Graff, measuring 90.97 carats. Given there may never be a larger one of its kind found again, how does he plan to dispose of such a rare gem? And in times of economic fragility, are there really collectors ready and willing to invest? “If we speak about the Constellation, there’s always more than one customer,” says Mr Graff, confident of the market. “Usually, people who are prepared to buy diamonds of this size have some idea of what something’s worth – from previous sales, talks, or rumour. We never buy with anyone in mind; we’re just hungry to find the rough stone and give birth to a polished diamond of extreme beauty. The person will always come; they might come from America, Italy, Russia – but that client TheConstellation: theworld’slargest Dcolourrounddiamond will always come, because we believe that anyone who is truly rich, anyone with disposable money to buy such a gem, finds us before we find them.” Mr Graff chose to launch the Constellation at the annual exhibition of rare Graff gems in Monte Carlo in August and admits that, “there were people dabbling with offers immediately”. He has not yet, however, sold the stone. Not that that concerns him: “We’re ‘We are dealing with people who make money from the masses and spend it with us’ not in any rush to sell it; there’s a price we’ve set on it that can only go higher. There’s more and more wealth in the world than ever before, and yet fewer diamonds to feed that wealth.” Mr Graff admits the venue has been important in attracting a wealthy clientele. “The yachts come in and they visit Graff and go off again,” he says. “In the summer, we focus on Monte Carlo because that is where most of the wealthy people are.” Mr Buckie believes the diamond’s sale will not have a huge impact on the iev, Graff and The Rapaport Group are absent from the list of the building’s future occupants. Many companies are reluctant to comment on the project, possibly because they are tied into long-term leases in the neighbourhood and are waiting for prices to drop. Estate jewellery specialist Paul Lubetsky, president of Windsor Jewelers, who reported his best year ever after 30 years in business, is planning to expand his office space 250 per cent. “I told them I’d buy a quarter of diamond market, because “the likely client will either be a wealthy industrialist, entrepreneur or a celebrity – and most probably it will not be used in a piece of jewellery”. He does predict, however, that when it is sold, “the stone is likely to achieve tens of millions of US dollars”. In line with the expected sale price, Mr Graff believes the recession has had little to no effect on the collecting market. “Somehow, because [the diamond business] is international, there’s always money in the hands of a few somewhere in the world,” he says. “At the top end of that business, we are not dealing with the masses – we are dealing with people who make their money from the masses and spend it with us. We deal with royal families, or very wealthy collectors – it’s almost like a world club of billionaires that buy these stones from us.” Alongside the round cut Constellation, the largest fancy vivid yellow square emerald-cut diamond in the world was launched by Graff in Monte Carlo, measuring 221.81 carats, reasserting Mr Graff’s desire that, “the important stones have to be in our hands. “At the moment we have five stones which are 100 carat each or more, in stock. Each one is the largest of its kind, and I don’t think that’s ever happened in history”. Selling, he says, is secondary to the thrill of achieving such large yields. “This is an accumulation over a 10- year period and we haven’t been in a rush to sell. It enhances our reputation and skill, and certainly our exhibitions, to be able to show these diamonds.” a floor if they buy me out of my current lease,” he says. When speaking to clients, Mr Lubetsky is at present careful to point out he is located on 48th Street between Madison and Fifth Avenue, rather than on the more run-down 47th Street. “The diamond industry is dissipated between 44th and 50th Street. The International Gem Tower will centralise everything and help clean up the area which needs to move away from the image of a souk, with high end Watches&Jewellery Heartofdiamonds:thetowerisexpectedto‘centraliseeverythingandhelpcleanuptheareawhichneedstomoveawayfromtheimageofasouk’ Bloomberg shops next to shops selling low quality goods, into a higher class area more like Madison Avenue,” he says. “Other buildings are likely to be hit hard. But diamond prices are stable now and people are starting to look ahead and are negotiating hard for the best deal in the Tower.” The Luxury Institute’s Milton Pedraza remains sceptical. He says: “The economic timing is unfortunate. Growth is coming from Asia now, not the US.” Mr Pedraza’s recent lunch meetings have included frank conver- sations with heads of global diamond jewellery retailers, now focusing on customer-centric strategies, rather than on more prestigious headquarters. “We’ve seen results from several top jewellery brands plus public companies such as Zales, who are all suffering. If this was a building in Shanghai, I’d say OK, but in the US, the International Gem Tower is now a challenging proposition. If it uses up capacity, it will have to be at low prices,” he predicts.
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Bright shine that may be short lived - Financial Times

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