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Free Markets

Sep 4, 2003 1:55 PM   By Martin Rapaport
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Free markets are open markets that provide legitimate buyers and sellers fair and equal access to goods and services. Free markets are not controlled markets that provide preferential pricing and product availability to select participants while restricting access to all other participants. Free markets provide a fair, level playing field that encourages competition among new ideas, products, processes and participants. Free procompetitive markets are the only way to ensure the long-term sustainable growth and development of the diamond industry.

The Diamond Trading Company (DTC) has created a situation whereby unregulated application of its Supplier of Choice (SOC) initiative has the potential to seriously damage existing free rough and polished diamond markets. The absence of reasonable restrictions on DTC activities is a clear and present danger to the free diamond markets. The role played by the European Commission (EC) as a regulator of DTC activities is woefully inadequate, misleading and wrong.

This writer calls upon the leadership of the diamond industry to thoroughly investigate the impact of unrestricted application of the DTC SOC initiative on the free diamond markets. And to immediately begin a proactive dialogue with the EC to ensure that all decisions taken by the EC take into full consideration the positions, perspectives and legitimate concerns of the nonsightholder diamond industry. And furthermore, to demand that the EC does not approve the $800 million-per-year rough supply contract between the DTC and Russia’s ALROSA until a formal study shows that the availability of similar non-DTC rough is sufficient to sustain viable free market activity.

Supplier of Choice

A lot of confusion surrounds the DTC SOC initiative. Let us make our position clear.

We fully support and call on the industry to support SOC if, and only if, proper restrictions and regulations are implemented to ensure that DTC activities do not damage the free markets. We support SOC only if DTC activities do not unfairly restrict supplies of non-DT rough to the free markets.

We oppose the unrestricted implementation of SOC and any other DTC activities that have the potential to damage free markets. Should the DTC and/or their sightholders take actions that damage the ability of the free markets to operate independent of the DTC, then we believe that a formal complaint should be filed against the DTC and their sightholders.

SOC is a very positive procompetitive initiative if, and only if, it coexists with a free market. If SOC absorbs so much goods and/or resources that the free markets cannot coexist with SOC, then SOC must be abandoned. As good and as positive as SOC is, free markets must come first.

The optimal solution is to have a strong SOC initiative and a strong free market. Competition between SOC and free market forces will optimize diamond industry growth and development. We hope that the DTC will agree to regulate SOC in a manner that ensures the continuing development of free markets for non-DTC rough.

Threats To The Free Market

A primary concern is that the EC has not limited or regulated SOC, DTC or Diamdel so as to restrict their ability to damage the free markets. Secret agreements between the EC and the DTC have been made. Such agreements may negatively impact the nonsightholder diamond trade.

For example, can 100 percent of the DTC’s 5-carat and largerbetter-quality rough be allocated to downstream SOC clients? Furthermore, can Diamdel be buying up 5-carat and larger rough from the open market at the same time? Absent regulatory or a written undertaking by the DTC, we believe the answers are yes. It is, therefore, obvious that the DTC can corner the market on larger, better-quality rough and at the same time its sightholder clients can corner the market on larger, better-quality polished.

If DTC clients have excess demand for large diamonds and operate without restraints to selectively distribute and purchase such diamonds, how is a nonsightholder supposed to get large rough? Will retailers who want to buy large polished be forced to buy only from sightholders? What happens when a sightholder tells a retailer calling him that he will sell him the larger polished only if he also buys the smaller carat sizes from him? What happens to the retailers who buy from nonsightholders? What happens to their suppliers? What happens to the free market? This is only one example of unfair DTC crowding out of other players and the expansion of DTC market power into the polished markets. We can provide dozens more.

It is not that the DTC or its sightholders are necessarily evil. Everyone is just playing a game with no rules, using their own rules. No one has bothered to establish proper rules limiting all the naturally evil things that

can happen given the fact that the DTC controls 60 percent of distribution and distributes to a narrow channel of 100 sightholders focusing on their own downstream distribution. SOC is a great idea, but, as the saying goes, the path to hell is paved with good intentions.

Sure, the folks at the DTC will say we should not be seeking to regulate the diamond industry. The new DTC is a firm believer in free market competition and wants no regulation. The problem is that the DTC is not just another competitor. It owns 60 percent of the distribution. It controls the market and its players by how and to whom it and its clients distribute their diamonds.

The newly adopted DTC competitive market mantra sounds good, but frankly, it and the market need a bit more work before the DTC can be considered a true, free, competitive-market advocate. This wolf does not yet look so good in sheep’s clothing. In a free competitive market such as the U.S., the DTC would not be regulated; it would be out of business.

Solutions

We firmly believe that the diamond industry needs to establish ground rules. We need red lines defining what the DTC can and cannot do. There must be a barrier between the DTC and the free markets. This barrier should be the sources of rough. The DTC should be able to do whatever they want with their rough — even if it is 50 to 60 percent of available world supply. On the other hand, it should keep its hands off rough that is not its own. Outside rough should belong to the free market and should be left alone by the DTC and their agents to ensure that nonsightholders have enough rough to stay in business and compete with SOC clients.

It is really very simple: what is yours is yours, and what is ours is ours. If the DTC seeks additional market share, then let them ask the EC. Before agreeing, the EC should do a proper public investigation to make sure that if the DTC gets the additional market share there will be enough rough left over to sustain the free markets. If the EC does not do its job, the diamond trade should file a formal complaint with the EC, thereby forcing the EC to do its job.

To be absolutely clear, we are demanding that the DTC shut down Diamdel. Rough markets are tight. Small manufacturers are going out of business because they can’t find enough goods. Finally, a few large rough diamonds show up in Israel, and Diamdel snatches them out of the hands of the small cutters. Friends, that is just plain wrong. Shame on the DTC and shame on Diamdel.

The DTC will make the point that Diamdel is the savior of the industry. Diamdel will supply diamonds to the small manufacturers who are not sightholders. Recently, the DTC has promised that Diamdel will provide $500 million to small cutters to help in the transition to SOC.

While the intentions of the DTC are good — we don’t buy them. The diamond industry needs to get its free market competitive act together. The trade must do this all by itself. The last thing we need is the DTC “saving” us. In a best-case scenario, the DTC’s Diamdel provides us with a severe development problem. People that are not efficient should go out of business so that other, more efficient people can get the rough they need to create growth and development. Cutters should not be “saved” by Diamdel for all kinds of nonmarket efficient motives.

In the worst-case scenario, Diamdel is simply a way for the DTC to control small players, bribe big ones and spy on the free market. The DTC’s intention may be good, but we see the $500 million Diamdel offer as nothing more than a bribe to keep the industry quiet. The idea that Diamdel is some kind of nongovernmental organization (NGO) designed to help the industry is laughable. The DTC would do well to not kill us and then save us. Why can’t the DTC leave us alone? Haven’t they given up their role of “guardians of the industry?”

By the way, all sightholders must compete for rough through the objective SOC system. Why has the EC exempted Diamdel? Has Diamdel been exempted? Who knows? If the open market needs rough why doesn’t the DTC sell through their rough dealers? What is the DTC doing with a polished division? Has this polished division qualified under SOC? How large is the polished division? Who does it compete with? Does anyone know? Does anyone care? The DTC already has 50 percent to 60 percent of the rough market. Does it really need every little crumb? How much money can Diamdel make for the DTC? Something stinks here.

It is now time for the DTC and the industry to get their acts together. It is time for the DTC to use SOC to compete fairly and to stop trying to manipulate what is left of the free market. The free market and the DTC should be competitors. By working against each other, we can grow the market. The DTC does itself, and the trade, a great disservice by continuing to operate Diamdel and the polished division. They should be shut down now — before the litigation starts.

The European Commission

Prior to EC approval of SOC, we filed a brief with the EC. In this brief, we presented a number of concerns related to the role of the Commission, DTC implementation of SOC and potential abuse of DTC market power. While a detailed listing of our concerns is beyond the scope of this article, the document can be viewed at www.diamonds.net/EC.

The EC and the DTC leave the misleading impression that the EC is carefully monitoring all DTC activities to make sure that everything that the DTC does is correct and legal. In fact, this is absolutely untrue. The role of the EC is highly regulated, their investigations are extremely limited and they do not take a proactive public-policy posture, as do regulatory bodies in the U.S.

For example, the EC investigation of SOC was limited to the impact of SOC on sightholders. No serious consideration was given to the impact of SOC on nonsightholders. The EC did not consider the impact of SOC on the polished markets. Diamonds were defined as one category without due consideration of how subcategories of rough or polished could be monopolized.

The position of the EC is completely reactive. Someone in the trade will have to file a formal complaint and only then will the EC consider the issues. It is not that the people working at the EC are negligent. Their hands are tied by very poor internal regulations governing EC antitrust investigations.

Adding insult to injury, EC regulations require absolute secrecy. DTC lawyers and the EC make secret deals. Other than a brief 19(3) notice, all of the documents, including nonconfidential versions of EC and DTC notifications, have been withheld. Not only have no public hearings been held during the process of decision making, even after the approval process, no one knows the details of exactly what the EC and the DTC have agreed to. It appears that the only way to find out what is going on is to file a formal complaint against the DTC.

We firmly believe that there must be a dialogue between the trade and the EC. Yet, many think this is a waste of time. They believe that the EC game is a set up for big guys with expensive lawyers and that there is no way that the small guys can win. Furthermore, going to the EC is dangerous and people are scared. If you were a leader of a major trade organization and a sightholder, would you go to the EC and attempt to limit DTC market power? If you were getting goods from Russia, would you dare go to the EC and speak out against the Russian deal? Even if you had the courage, would you have the money for lawyers?

The bottom line is that the interests of the diamond industry must be represented at the EC. The DTC should voluntarily submit or comply with EC regulations that ensure DTC activities do not crowd out free markets. Perhaps it is not the EC’s fault, but the fact is that what is going on is wrong. There is inadequate disclosure of serious matters that materially impact the diamond trade. The DTC is not being restrained from using its market power to damage free trade. The EC is forcing the diamond industry to file a formal complaint even though it is ill equipped to do so.

At this critical juncture let us encourage the EC, DTC and the trade to establish a positive dialogue to resolve these important issues. If such a dialogue does not develop, then let those of us that are advocates of the free market come together and make our case with the EC. Perhaps, the time has come to establish a “Free Diamond Trade” NGO that will represent the interests of the nonsightholders in important public policy forums.
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Tags: Alrosa, Diamdel, DTC, Israel, NGO, Regulation, Russia, Sightholders
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