Without either a history in diamond or diamond-jewellery processing and no local source of raw material, Dubai is methodically carving a space for itself in the global diamond pipeline by offering itself as the gateway to the fast-growing Middle Eastern market along with a 50-year tax holiday for anyone who sets up base there, reports Sandra Merchant.
Tax has been the key to controlling the diamond business historically. The classic story of Amsterdam losing its diamond business overnight to Antwerp due to heavy taxes and strict laws may well be replicated as Dubai now takes business away from Antwerp. While everyone keeps saying Mumbai should watch out, there really is no comparison between Dubai and Mumbai as the former has no manufacturing base the way India does and does not have a global network the way the Indian diamantaires’ families do. It is as a rough and polished trading centre, that Dubai sees itself in the future. And the one centre that occupies that position today is Antwerp.
There are hundreds of Indians, including some 25 sightholders, who have set up shop in Dubai. These firms all have bases in India and use Dubai to facilitate flexible rough sourcing and polished trading – much in the way they have done in Antwerp (and many still do today despite having set up in Dubai) all these years. They still need that base in India because that’s where the manufacturing is. The risk for India is that its future plans to grow as a trading centre as well may not come to fruition if nearby Dubai offers first class infrastructure and a freewheeling environment to trade in.
But Dubai knows that a tax holiday alone is not enough to build a future for itself in the diamond business. Which is why it has made extraordinary efforts to set up a huge diamond and jewellery business complex including a state-of-the-art diamond testing and grading laboratory and establish the Dubai Diamond Exchange (DDE) under the aegis of the WFDB’s global rules. The advantage is that despite implementing these rules, Dubai still offers a much more relaxed and hands-off environment than Antwerp, which is implementing strict European Union guidelines.
The 64-storey Almas tower is almost complete.
A Centre Emerges
Just five years ago diamond trading in the Gulf was non-existent. Then, the Dubai Multi Commodities Centre (DMCC) came on the scene. An organisation with connections to one of the region’s biggest business conglomerates, it clearly has the funds, facilities and the political will to make things happen. The DMCC is a free trade authority which has a 200 hectare swathe of prime land situated in the Jumeirah Lake Towers development, a fast emerging area of new Dubai. This is where the trade will be located eventually.
Although DMCC is developing other business areas such as energy, petrochemicals and metals, a prime focus is clearly on diamonds. It has moved fast to establish its presence in the global community and currently has 1,000 licensed members (65 per cent of them diamond and gold companies). Under its umbrella so far are the WFDB-accredited DDE, the three-building jewellery-manufacturing Gemplex, the diamond trading Almas-, gold trading Au- and silver trading Ag towers, the IDL certification lab and the promise of unprecedented ease in doing business in the booming Gulf region. The Almas Tower is slated for completion this year.
“Diamonds are historically a difficult area to enter. But it is our vision to become a leading centre. We will achieve this by closing the gaps related to existing inefficiencies and facilitate the business. In five years I hope to see the industry here more organised with Dubai as a vibrant hub,” says Ahmed bin Sulayem, executive chairman of the DMCC and deputy chairman of the DDE.
"In five years I hope to see the industry here more organised with Dubai as a vibrant hub. " Ahmed Bin Sulayem Executive chairman, DMCC
According to bin Sulayem, Dubai’s initiatives to develop its diamond trade have had a positive impact for the diamond sector globally – he points out that subsequent to Dubai’s emergence, India has abolished customs duties on diamonds and in Antwerp, pressures have eased on the diamond community.
But a few cautious operators fear that Dubai’s freewheeling and flexible environment may rebound on the companies that sought to take advantage of it. They feel that they may be subjected to unilateral changes in policy, as seen in a recent development concerning the Gemplex complex (see box, page 50).
Rajesh Mehta
Another concern is the rising cost of doing business in Dubai with real estate and living expenses going sharply up. According to Rajesh Mehta of the Supergems group which has its headquarters in Dubai, “It is now more expensive to operate in Dubai than in Antwerp. Not only are property prices escalating, but other costs are also high - from salaries and Kimberley certificates ($350) to the service charges imposed by developers. Several companies bought sizeable space in the Al mas tower with the intention of setting up large operations, with plans to bring in teams of assorters and other support staff. They have since shelved these plans. Furthermore, a correction to the under-valued dirham (which is pegged to the dollar) is expected, as is the introduction of VAT.
Among the 60 or so free zone authorities in the emirates, the DMCC is unique. With its links to real estate, it is the only authority offering freehold business premises as well as commercial free zone benefits. Under the mandate of the government, it actually governs its enclaves and thus has much more power and flexibility than trade bodies in other centres.
And although some operators are uneasy about the lack of judicial recourse, Peter Meeus, executive director of DMCC’s diamond division, is quick to emphasis, “This is not cowboy country… we have set up a judicial system based on the rules of the international chambers of commerce and the exchange is governed by the WFDB’s arbitration laws.”
There continues to be considerable interest in setting up a presence in Dubai. Eric Charles of AMC in Antwerp, a DTC sightholder, says, “We opened a Dubai office in 2001 and since then, at least 15 Antwerp diamond companies have contacted me to help them set up operations there. Dubai is perfectly placed geographically.” Almost 50 per cent of Angola’s rough diamonds are now traded here, and Youri Steverlynck, CEO of the Dubai Diamond Exchange, says that several African producers have shown interest in marketing their output in Dubai.
This is not cowboy country… we have set up a judicial system based on the rules of the international chambers of commerce. Peter Meeus Executive director -diamonds, DMCC
The trade figures are robust: in 2006 UAE rough diamond imports were $1.56 billion and exports amounted to $2.36 billion. According to figures released by the DDE, the third quarter of 2007 saw total trade in rough diamonds reach $1.08 billion, of which imports were $477.6 million (32 per cent growth over the same period last year) and exports were $640.2 million, up 30 per cent.
However, amid the upbeat spirit surrounding the DMCC’s initiatives, there is an impression that the diamond community is no longer re-investing in its business. Remarked an industry analyst, “If the earnings from this business are 7-8 per cent as they are today, there are other avenues which are delivering far better returns – the most obvious being infrastructure and real estate. And all the large companies are diversifying into these areas.”
Diamond Exchange poised to take off
"Our members include Indian companies dealing in polished, Antwerp companies selling rough and even many local companies, although being a free trade zone, local sales can be made only to those holding import licenses." Youri Steverlynck, CEO, DDE.
That Dubai is a magnet for the diamond trade is evident from the fact that space in the DMCC’s Almas Tower sold out in 48 hours in January 2005 to 300 companies. The 64-storey tower is now nearing completion and offices were handed over to 100 members occupying levels 3-20 on January 8, 2008. The Dubai Diamond Exchange (DDE) will also be housed in this iconic tower.
According to Ahmed bin Sulayem, DMCC chairman, “With the completion of this project, we are setting new and higher targets for the diamond trade in the UAE, and this will be accomplished in a cost efficient manner,”
“Our members include Indian companies dealing in polished, Antwerp companies selling rough and even many local companies, although being a free trade zone, local sales can be made only to those holding import licenses,” said Youri Steverlynck, CEO of the DDE. “The DDE’s efforts to enhance the diamond trade through value-added initiatives are clearly paying off,” he continues. “Today, Dubai has grown from being a transit point for rough diamonds to a centre that provides a comprehensive range of services. As per our mandate, the DDE continues to focus on new opportunities and bringing international standards and best practices to Dubai’s diamond trade.” Although at present most of the diamond trade is in rough, he estimates that eventually there would be a 60:40 break-up between rough and polished.
Gemplex may be redeveloped
DMCC has recently informed the occupants of Gemplex of its intention to redevelop the project. The Jewellery and Gemplex is a three-building complex set up in 2003 in DMCC’s free zone near the Almas Tower, to facilitate the value chain of commodities trade in the UAE, and give a significant boost to its manufacturing component. It houses worker accommodation, commercial offices and light manufacturing units.
The complex is not even half full, with the major space still with DMCC – a sign that manufacturing in Dubai is seen to be expensive and therefore unviable. Adding to the occupants’ costs are the developer’s service and maintenance charges, which they feel are very high. The occupants are uneasy that they will be asked to move out to an alternate location which is away from DMCC’s gems and jewellery free zone, thus affecting their business.
The DMCC authority says that it has “met with the occupants to canvass options to meet the ongoing requirements of owners and occupants… and is awaiting further feedback from them before determining the proposed next steps.”
Dubai’s Vibrant Jewellery Centre
In the Gulf, as in India, the festive season covering Ramadan and Diwali was disappointing, according to several retailers. But this is seen as just a blip in an otherwise booming sector. Astha Kohli, marketing manager of the World Gold Council - UAE, states that gold jewellery sales have been recording double digit growth over the past few years. In the third quarter of 2007, jewellery consumption in the Gulf region was up 13 per cent with Dubai and Saudi Arabia showing the biggest growth of 26.3 per cent and 19 per cent respectively.
Astha Kohli
While there are some 80 to 90 jewellery brands in Dubai, non-branded products comprise 84 per cent of jewellery sales. Of the total 1,200 retailers, 850 sell diamond jewellery. It is estimated that jewellery sales in the Gulf region are approximately $17.5 billion of which around 80 per cent is gold. The actual figures are probably much higher as sales to ‘the elite’ are not included in these figures.
Traditional 22 kt jewellery has long been the largest category of jewellery sold in the Gulf. Of late there has been a surge in the 18 kt variety which today comprises 42 per cent of the market, a trend which is prompting the WGC to undertake special promotions to reinvigorate the 22kt segment.
Swapna Nair
By some estimates, the growing number of tourists flocking to Dubai accounts for 55 per cent of jewellery sales, with the rest sold to residents, 75 per cent of whom are expatriates. Says Swapna Nair, general manager of Dubai Gold & Jewellery Group, “Any piece of jewellery can be up to 40 per cent cheaper than the equivalent item sold in Europe. With the success of the annual Dubai Shopping Festival and with UAE tourists expected to reach 12 million visitors by 2014, we expect the visitors to contribute significantly to the development of this sector.”
Dubai is the hub from which jewellery is supplied to other countries in the region. Around two-thirds of the imports are re-exported. Italy has emerged as the largest source, supplying $2.87 billion in the first eight months of 2007, which is a 48 per cent increase over the same period last year. India ranks second with jewellery worth $ 2.19 billion reaching the emirate. Tawhid Abdullah of the Damas group estimates that the Middle East region will account for 10 per cent of the world luxury market by 2010.
Anan Fakhreddin
Upbeat About Diamonds
Much of this will be fuelled by the diamond jewellery market, backed by five years of aggressive promotion by the De Beers Diamond Trading Company’s (DTC) Diamond Promotion Service (DPS). As Anan Fakhreddin, DPS director for the Gulf region puts it, “The diamond market has grown 14 per cent in the first half of 2007. This should be even higher for the full year.” By some estimates the local Gulf diamond jewellery market is worth over $ 2.6 billion, with an equal amount in sales to tourists and expatriates. This is the fourth largest market, ranking after the US, Japan and India.
The DPS has pumped in around $18 million since it identified the potential of this market five years ago, and the results, says Fakhreddin, are apparent – consumers are moving from gold to diamonds and the acquisition rate has gone from 25 per cent in 1999 to 40 per cent currently. Trade spend too is up between 30- and 40 per cent in the last few years as the retailers are getting a good return on their investment. Today, ownership in the Gulf is 40 per cent and it is the hottest luxury item – ranked No. 1 as a gift by women.
Lab with a difference
“We set out to provide certification services which are different”, said Peter Meeus, executive director, diamonds of the DMCC, pointing out that the International Diamond Laboratories (IDL) offers a unique sales proposition to differentiate itself from the proliferation of labs being set up recently.
The IDL, which launched in Dubai, Antwerp and Mumbai in October last year, is focusing on the third ‘C’ – colour grading – as a differentiator. “We have found that inconsistencies in this grade can be up to 25 per cent. The IDL Satbar™, is a unique and accurate, scientifically based process which hopes to overcome such ambiguity,” stated Meeus.
“As we all know, the colour of the diamond plays a significant role in determining its value,” commented Russell Mehta of Rosy Blue. “We have also seen that laboratories are not consistent because they use the human eye and there is subjectivity in the process. The IDL colour meter will provide the much needed consistency in standardization. I feel we can all use this tool to establish the lowest colour grade in small diamonds which we sell in volumes. Discussions and arguments on colour grading will be a thing of past,” he added.
IDL offers other innovative services too – it is the first diamond lab to achieve a full definition of the SI3 clarity grade which allows a close-up view of inclusions on its digital certificates. These so-called Digicerts, according to Meeus, are an important sales tool as they can be sent to downstream customers with ease and speed. The certificates are available in Arabic, keeping in mind IDL’s home market – the Gulf region.
The lab has the facility of working around the clock and certificates are issued in 48 hours from the time the diamond arrives. Its services are being promoted not only to diamond companies but jewellery retailers in the region are also being persuaded to sign up.
The IDL is an initiative the DMCC sees as a step towards consolidating Dubai’s position as a leading diamond centre. Around $ 2 million has been invested in equipment and machinery.
While IDL is currently grading loose diamonds, it is planning to introduce certification for jewellery set with diamonds and coloured gemstones. “We want to introduce services for smaller stones too – the challenge is to keep the cost down,” remarked Meeus. The prices for issuing a certificate for a carat stone is $75 with an additional $75 for colour grading.
