< THURSDAY, MARCH 1ST, 2007, ISSUE NUMBER 203 >
Dubai At the Industry’s Crossroads

By Chaim Even-Zohar

 

If a country – any country –decides that it wants to become a major player in the diamond business, there is ample historical precedence and “models” about how to achieve such objective within a relatively short time. Success generally depends on a combination of solid infrastructure, a supportive host government, strong banking systems and excellent import/export services (not to mention attractive hotels and, a tourist-friendly atmosphere), and most importantly, the import of know-how. 

When the Netherlands entered the diamond industry, at the end of the 16th century, the sills were provided by Belgium cutters who fled Antwerp after the invasion of the Spanish in 1585. The U.S. diamond industry was founded in the 19th century by mostly Dutch diamantaires. When diamond resource rich South Africa first thought about diamond cutting, in the early days of the 20th century, it drew on Belgian know-how. In modern history, India and Thailand are two cutting centers that emerged respectively in the 1970s and 1980s – all very quickly. In the late 1980s, China’s first diamond cutters were trained by the Australian Argyle mine, which taught thousands of workers – who then became the foremen and the nucleus of factories spread out throughout China.

 

Dubai is absolutely determined to become a major diamond center and has established a “fast track” method to accomplish this goal by securing the professional support of the world’s best and brightest diamond industry players.  Dubai’s attractiveness comes from its ability to solve the industry’s “Achilles heel” dilemma: the worldwide players want to become more transparent, want better corporate governance, need to become compliant on various social responsibility issues on the one hand – but, frankly, do not want to pay taxes on the other. As the industry was traditionally cartel-controlled – and the controls were regulated on the supply side – the level of profits to be earned in the downstream were mostly determined by the producer pricing policies. The diamond industry and trade margins were always “squeezed” (they still are) and if an opaque industry avoided tax payments, at the end of the day, the producers would charge more for rough. Any diamantaire will tell you, “You must never admit that business is good; the producer will take away your profits.”

 

Anyone visiting Dubai cannot help but be impressed by the speed and size of development projects there, whether hotels, universities, skyscrapers, or shopping malls. Visitors quickly understand that when a decision has been made to do something, it gets done. With the diamond manufacturing markets moving eastward to India, China, and the rest of Asia, Dubai really finds itself at the proverbial crossroads. The country is conveniently accessible and represents a gateway to a huge hinterland of demand for high-priced polished and diamond jewelry.

 

 

Building the Diamond Dream

Dubai is the 21st century answer to some, but not all, of the more pressing current challenges facing the industry. It realizes that what is needed most is infrastructure and skills. The Dubai Multi Commodity Center (DMCC: a quasi-governmental organization charged with issuing Kimberly Process (KP) certificates in the UAE. It employs four individuals on a full-time basis to administer the KP program) is erecting a number of infrastructure buildings – some 60 floors just for diamonds, another for gold, another for other commodities. It has established a well-functioning Dubai Diamond Exchange (DDE) and it has developed one of the most efficient Kimberley Process Certification mechanisms. It has achieved a “monopoly” on diamond imports that must be cleared through its facilities – and, in the case of rough, that monopoly applies to the entire United Arab Emirates.

 

But the vision by the DMCC leadership – Dr. David Rutledge, CEO, and Ahmed bin Sulayem, COO – is all encompassing and goes beyond the physical infrastructure. Dubai wants to learn from Belgium. The best way to do so is to put the previous managing director of the Diamond High Council, Peter Meeus, in charge. As this is a colossal task, also hire his long-term devoted deputy, Youri Steverlynck. But it is more than that. Top priority is getting diamond banking facilities. According to market reports, ex-ABN AMRO diamond and jewelry division head Peter Gross has now joined the team as an adviser. It wants diamond players, especially DTC Sightholders. What is more logical than recruiting ex-DTC sales manager Ian White, who knows every important diamond player on the globe? Early on, they borrowed Tawfic Farah from the GIA – and the GIA is already making an inroad in Dubai. We could go on.

 

WDC Chairman Eli Izhakoff was an early Dubai goodwill ambassador. He brought De Beers Chairman Nicky Oppenheimer to a WDC meeting in Dubai and had him express warm support for the great role of Dubai in having become an important financing center for the diamond business. That may have been slightly hasty – but Nicky certainly is a visionary; his statement was correct, albeit premature. We can easily cite additional examples. Dubai got the “A-team” to make the “Mission Impossible” a very realistic prospect. No, it is not a “piece of cake” – but it can be done and if the present team cannot do it, no other can.

 

The primary objective of the DMCC is to work first on infrastructure. The DMCC believes, first and foremost, in state of the art facilities, the establishment of which is only beginning. Its next objective is attracting, or establishing, major diamond banks to the center and entering into supply and marketing agreements with producing countries, so that Dubai will become the “venue of choice” for the distribution of rough.

 

Dubai’s legal tax system – zero percent tax for 50 years – is also one of the most attractive in place in the world right now and is proving to be an enticing incentive. To “fight” the Dubai objectives, the Belgian government has combined a massive tax amnesty (which brought in $2.5 to $3 billion of declared capital, technically an “inventory revaluation”) to a future tax holiday on the repatriation of (some) of the profits made in other places. Essentially the government is saying, bring the tax-free profits from Dubai back to Belgium and, under certain circumstances, you will not have to pay here on that income. It shows that Dubai is already having an effect on the other cutting centers and their governments.

 

Some of the world’s largest diamond companies have purchased offices in the Diamond tower, which is expected to open in 2008. Despite the multi-billion dollar turnover made in rough and polished, however, there are no added value creating facilities in Dubai, and active diamond trading is just beginning. In the summer of 2006, the world’s second largest rough producer, Alrosa, marketed approximately 30,000 carats of rough diamonds worth $2.3 million though Dubai. Subsequently, Alrosa announced its intentions to conduct regular, monthly diamond sales in the Emirates. With the speed at which the DMCC is going, there is little doubt, however, that proactive efforts to bolster the foundation of Dubai’s diamond infrastructure-in-the-making will be a matter of months rather than years.

 

For a country that can purchase all the ports in the U.S. – and then some – the sky is truly the limit. If Dubai needed to purchase diamond mines to secure a steady rough supply, there would be little hesitation to do so, provided that it made commercial sense. That, in essence, is the bottom line of everything that has been unfolding in Dubai. It is not a matter of financial resources; rather, the main criterion is the economic justification of the allocation of funds. 


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