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Rapaport : TRADE ALERT: 03/19/99

Mar 18, 1999 9:10 PM   By Martin Rapaport
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Rapaport: TRADE ALERT: 03/19/99



Rapaport: TRADE ALERT: 03/19/99



Additional information and a special

Treated Diamond Forum

is available at www.diamonds.net



Trade Alert: Lazare Kaplan (LKI) has concluded a ten year exclusive worldwide marketing

agreement with General Electric Corporation (GE) and will begin marketing diamonds treated

by a new secret General Electric process in April. The irreversible permanent process can

significantly enhance the color and brilliance of select types of rough and polished

diamonds. Amazingly, LKI says the treatment is undetectable and will remain undetectable.



LKI's CFO and Executive Vice President, Sheldon Ginsberg told RDR "We know the process is undetectable, and have strong

indemnification from GE on the processes' permanent and undetectable nature." Apparently,

LKI has sent hundreds if not thousands of stones through the major labs and the labs have

not detected the treatment. LKI plans to sell up to $200 million of the "processed"

diamonds over the next three years with only $30 million slated for the first year.

LKI's position is that the treatment is simply a new high-tech process that should be

considered part of the normal production process of diamonds.



A new subsidiary company in Antwerp, Pegasus Overseas Limited (POL) has been established

by LKI to be the exclusive seller of the treated stones. While LKI is ensuring full

disclosure of the treatment to all buyers due to the fact that POL will only sell treated

diamonds, it is not requiring its clients to sign agreements requiring disclosure upon

resale. It can be expected that these undetectable treated diamonds will be entering the

marketplace without disclosure within weeks.



In talks with RDR, LKI went out of its way to emphasize that the sale of its treated

diamonds will have very limited impact on the marketplace due to the relatively insignificant

amounts of diamonds to be sold. Apparently, only about 1 percent of all diamonds are of the type that

responds to the treatment process. This means that LKI will only be able to use the treatment

sparingly and that a very limited quantity of treated goods will be produced.



Reports from the Antwerp market indicate that LKI has been buying up large quantities of

select types of brownish color diamonds over the past year. For most of its production,

LKI plans on treating the rough before cutting. LKI will also apply the treatment to

polished diamonds that lend themselves to treatment but will limit the treatment to diamonds

it owns and sells. The treatment will not be available to the trade. Almost all (99 percent) of

the treated diamonds to be sold will be polished, only a few rough stones will be

treated and sold.



While diamond treatments have been around for some time, the shocking aspect of the new GE

process is that according to the GIA, there is currently no way to detect this treatment.

LKI has indicated that a large number of GE treated stones were sent through the major labs

over the past few months and all obtained grading reports without any comment on the reports

regarding treatment. Furthermore, LKI one of the most respectable and prestigious firms in

the diamond industry, has taken the position that this treatment process is and will forever

be undetectable and therefore should not require disclosure. According to some reports LKI's

subsidiary may actually sell the treated diamonds with GIA grading reports that do not

indicate that the stones have been treated.



The fact that the stones were submitted to GIA and other labs without disclosure of the

treatment is a very sore point. Obviously, GIA takes the position that the treatment should

be disclosed on its reports. It appears likely that a showdown between GIA and LKI on this

matter will take place in the very near future.



The crux of the issue is LKI's argument that the treatment will remain forever undetectable

and therefore should not require disclosure. In the opinion of this writer over the years the

same technology that made the treatment possible will probably provide a method of detecting

the treatment. Pray tell, what will happen to the industry when at some time in the future,

thousands of consumers find out that the stones they bought without any disclosure have in

fact been treated to enhance color? While GE's indemnification to LKI is very interesting, what

guarantee does the industry have that at some time in the future the treatment will not be

detectable?



GIA's position is that LKI should not sell their treated diamonds with GIA grading reports

that do not have a treatment comment. Furthermore, GIA is expected to call on LKI to

immediately cooperate with their research department and provide GIA with information that

will help in the detection of the treatments. LKI believes that even with its help GIA will

not be able to detect the treatment and has resisted providing complete information to protect

the special secret process. It should be noted that while GE has several related patents, the

new process has not been patented. GE and LKI are relying on secrecy to protect the

exclusivity of the new process.



The stalemate between GIA and LKI could have strong ramifications for the trade. It is

possible that GIA may be forced to recall grading reports for the types of stones that are

treatable. Then reports may have to include a comment on all stones where the color is undeterminable due to

the possibility of treatment. In short GIA has to do something about the fact that for a

certain select group of diamonds (1 percent) it simply does not know what the color is or was.

Standard operating procedures would require GIA to clearly state that they do not know if

they do not know. This would require an indeterminate color grade or special comment on the

report that there is uncertainty about whether or not the stone has been treated.



Interestingly, if LKI is correct and the treatment process remains forever undetectable, then

a class of diamonds will enter a grey-area of uncertainty. LKI will argue that the diamonds should be

priced and sold by their apparent color and that the treatment is irrelevant since it can never

be detected. GIA will argue that if they do not know if a stone is color treated or not, they

must say so on the report. The issue is this. If a treatment is undetectable is it a

treatment? GIA will say yes because at some time in the future it may be detectable and

therefore needs to be differentiated from the general population of stones. LKI will argue

that since no one can tell that the stone has been treated, for all intents and purposes

it is not treated.



While LKI is probably correct in saying that the very small number of treated stones they sell

will not have a direct impact on market prices, the uncertainty and insecurity that the

treatment process introduces into the diamond market will undoubtedly have impact. It can be

expected that prices for the particular types of treatable stones will fall as questions

about their color come rise. The trade and consumers want to buy a sure thing. They will pay a

premium price for a stone if they know that the stone is definitely untreated. Therefore, it

can be expected that prices for the treatable diamonds will fall slightly. It should be

emphasized that GIA cannot detect the treatment, but they can detect the type of stones

that are suitable for treatment and thereby flag suspect stones with a comment on the

grading report.



Interestingly, the general value of treatable stones may not suffer greatly. On the

one hand their demand and prices might be diminished because their colors are not 100 percent

verifiable as being untreated, on the other hand demand for those stones by Lazare Kaplan may very

well increase their prices. It is likely that prices for low color treatable stones will go

up and prices for high color treatable stones will go down - perhaps significantly.



It is interesting to note that the LKI treatment story plays right into the hands of the

De Beers branding effort. We can expect a subtle and continuous shift in trading market and

consumer psychology. In the old days, having a treatment disclosure policy was enough.

One could assume that a normal diamond was untreated. No more. From now on, the only way you

can know that a diamond is untreated is if you have a positive affirmative statement ensuring

that the diamond is a natural, untreated stone. The benefit of a De Beers brand is that it

removes uncertainty in a market where there is increasing uncertainty. These days people need

to know where their diamonds are coming from to make sure the stones are kosher.



Given the fact that the new GE treatment only affects about 1 percent of the diamonds, it is a

pretty good idea for the trade to calm down and see things in the proper perspective.

While we do not yet have a good definition of the 1 percent of treatable goods and there is concern

that the 1 percent may be concentrated in better quality stones, the numbers are not large enough to

have significant market impact. Furthermore, as LKI buys diamonds for its treatment programs

and GIA settles down on some form of disclosure policy, it is likely that information

about treatable rough and polished will become known. We certainly intend to publish this

information as soon as possible.



In the meantime, we hope LKI will work together with the GIA to help identify GE treated stones

and to withhold sales of grading reports that do not have a treatment comment. LKI must

recognize that GIA would never have issued reports without a treatment comment if they knew

that the stones were treated. Therefore, it is unfair that LKI should sell reports when the

grading was obtained with less than full disclosure to the lab. Ultimately, the issue is not

whether a customer or a lab can detect a treatment. Sellers must accept responsibility for

disclosure whether or not the customer can detect it. Just because you can't tell a stone is

treated doesn't mean it isn't treated.



The GIA for their part needs to make sure that they are on top of new technology. This time

we are all very lucky, only 1 percent of diamonds are treatable. But what would happen if 99 percent of

diamonds were treatable by the GE process? Let us never forget that diamond prices,

especially prices for high grade diamonds are highly dependent on their scarcity. If new

technology can turn H into E's then it is high time for us to better prepare for the future.

Undoubtedly, there needs to be more basic research on diamonds.



The industry, De Beers, the GIA and LKI must find new ways to work together to ensure the

future of the industry. The new GE process is but a warning. We must find new technology to

authenticate diamonds. Otherwise, the value of diamonds will be destabalized every time a new

undetectable treatment process appears. If we do not master new technology it will master us.



If you have opinions regarding these issues, please post them in our

Treated Diamond Forum

at www.diamonds.net.





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Tags: Consumers, De Beers, GIA, Labs, Lazare kaplan, Production
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