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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