MarketWatch: In-depth global business coverage What's at stake could be the first-ever futures market for diamond trading. It's impossible, say some industry experts. Others just say it's nearly impossible. But after more than 20 years, Martin Rapaport, publisher of the Rapaport Diamond Report - a primary source of diamond prices for the trade, plans to make his second attempt at creating one. "Not only is it possible to create a futures market, but we are going to do it," he said. Back in 1982, Rapaport submitted a contract proposal to the New York Commodities Exchange for the creation of a futures market for diamonds. It was rejected, he said, because the "diamond industry didn't want price transparency." Now he's writing up a new proposal, one that he expects will be ready in another year or two, though he won't specify where he'll submit it. Rapaport's biggest setback, however, may be that he has to first convince the diamond industry that diamonds are, in fact, a commodity. Diamonds are "definitely a commodity. You buy and sell them for cash," he said. "They're a natural resource with limited supply; they're well defined; they're certified; they're analyzed, graded, tradable around the world." But De Beers, which produces about 40 percent of the world's supply of rough diamonds, argues: "The plain fact is that diamonds are not a commodity; they are unique." "If you need to create a commodity market, you need products that are consistently the same," said Rosalind Kainyah, director of public affairs USA for De Beers. "You need to be fully aware of the price - something that is known as price discovery in the commodities market - and the general consensus is that you can't say that about diamonds," she said. Rapaport, who also operates Rap.Net, an electronic physical market for diamonds on the Internet with listings of over $2.8 billion worth of diamonds every day, insists that a futures market would "provide an opportunity for investors and help assure consumers of realistic and transparent pricing of diamonds." Commodity or not So what really is a diamond and a commodity and can they be considered one in the same? A diamond is a "nearly pure, brilliant, crystalline carbon - the hardest mineral known," while a commodity is "any useful thing; anything bought and sold," according to the Webster's New World dictionary. It sounds like a diamond is all these things, but it's nothing like other commodities. Diamonds are seen as symbols of enduring love, so they rarely find their way onto the resale market, according to HardRockAnalyst.com. "This means that unlike any other commodity, the market does not have to absorb both new and past production - once sold, diamonds tend to stay off market," said David Coffin, co-editor of the site, which offers publications focused on resource stocks. "The entire marketing push for diamond has always been predicated on making it an emotional gift people will not want to part with," said Eric Coffin, David's brother, who's also co-editor of the Web site. "For that reason it was always pushed as jewelry, not as raw stones." Still, diamonds will return to the market "if need be," given that they are, at times, "being bought as investments and safe-haven hedges," David Coffin said. Even so, the precious stone "cannot be a commodity, nor can a futures market be made in it," said Julian Phillips, an analyst at GoldForecaster.com who's been following diamonds for more than two decades because "all items that will be alternatives to paper money interest" him. "Each one is different, so each one has to be priced separately," he said. Kainyah insists that "they are, by definition, not freely interchangeable." De Beers Group has developed a "sophisticated rough-diamond grading mechanism that has over 12,000 categories of rough diamonds to recognize how highly variable diamonds can be in their size, shape, color and clarity," she said. Indeed, Rapaport agreed that "no two diamonds are alike," so his biggest obstacle in creating a futures market for diamonds will be: "standardization, standardization, standardization." In January 1988, the Wall Street Journal reported that the proposed diamond-futures contract at the time would consist of 10 round brilliant-cut diamonds of certain color and clarity, each a minimum of 1.01 carat. The New York Mercantile Exchange, which conducts metals-futures trading on its Comex division, was unable to confirm - in time for this story's deadline - that there was ever a proposal for a diamond-futures contract. It "would really be fairly tough to standardize diamond enough to make it a viable product," said Eric Coffin. "Most commodities have fairly simple standards in terms of purity, origin and value by weight," he said, and "that makes it relatively simple to set a specific contract definition for a trading unit." Diamonds have a "definable" valuation, but only to a point," said David Coffin. Learning and keeping track of pricing for the smaller and more typical stones is "doable with a bit of work," but the "rare end of diamonds, large and unusually colored, trade on the whim of buyers and are more like art in that sense." The difficulty to determine valuation was probably part of the reason Comex rejected Rapaport's 1980s proposal for a diamond-futures contract, Eric Coffin said. Potential Still, Rapaport hopes to submit a new proposal. "Our target is to do it by 2008," he said. "Commoditized diamond markets will promote transparency as they identify and make clear the cost of various added-value scenarios." Current retail prices for diamonds reflect a broad selection of added-value benefits to consumers, he explained. "We don't expect commoditization of diamonds to deny retailers an opportunity to add value to their diamonds, just as the commoditization of gold has not inhibited the ability of jewelers to sell gold jewelry," he said. And "we do expect a surge in consumer confidence as some of the mystery of diamond pricing is eliminated due to transparent markets." Overall, the jewelry industry appears to be against the idea, experts said. Some would even say that Rapaport has rankled others in the industry with his diamond-commoditizing plans and diamond-pricing list, which was established in 1978. The large-diamond producers, especially the jewelry industry, "would be very resistant to the idea of a futures contract due to its implication that diamond is a commodity," said Eric Coffin. "Traders buy things they are thinking of selling, the minute they own them. That's the sort of diamond owner that would give Oppenheimer nightmares," he said, referring to Nicky Oppenheimer, chairman of the De Beers Group. At the same time, "in the absence of either a spot-pricing mechanism or of a universally agreed grading system, it is difficult to see how meaningful quantities of diamonds can be exchanged remotely between non-expert strangers in real time," said Kainyah. So what makes Rapaport so sure it'll work this time around? "The challenge is to define them, standardize them. That's what we're going to do," he said. Rapaport's diamond futures market will consist of "independently certified, polished diamonds." "There will be standards. Once they fit that standard, they can be traded," and the "concept of standardization is possible," he said. He admits that he'll use the grading system for diamonds as a way to standardize them, but declined to provide further details on exactly how that would be done. "There's a tremendous amount of investors interested in creating efficient markets," he said. "There are derivative markets for almost everything." "An efficient market is a trend of this decade. That's where we're going." MarketWatch: In-depth global business coverage

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