In a presentation to buyers in Antwerp, BHP Billiton introduced its new rough diamond selling mechanisms, to be fully implemented in February 2009. The miner intends to relinquish the current system where it sets the price of goods in advance, for a bidders set price instead.

 

BHP is proposing three channels: a Spot Market, a Term Market and an auction of bigger goods (+7 carats), with some of these sales made via an online tool.

 

For the spot market, a key component of the new system, BHP will let prospective bidders view a representative sample of the goods for three days, accepting bids until 5 pm on the third day. However, the goods will not be necessarily sold to the highest bidder.

 

Each bidder will also state the amount of goods to purchase for each bid, or the number of Splits - a certain amount of goods of a certain type - an equivalent of what many refer to in the market as a Box.

 

BHP builds a demand curve from the bids, starting from the highest price, until it meets supply. This means that the highest bidder will be allocated goods according to his bid, the next bidder will get goods, and so forth - until all the offered goods of that particular type are allocated. The final price of these goods will be the lowest bid that actually won an allocation.

 

For example, if three top bidders requested together the full carat amount offered of a certain type of goods, the final price will be the price offered by the third bidder. This price is called a Clearing Price.

 

In this channel there is no starting or minimum price.

 

BHP said it will use this channel to find out the true market prices of the goods. Some goods are already sold via this channel since last November. Eventually, as much as 40 percent of the Ekati production is expected to be offered via this channel.

 

About 60 percent of the Ekati production will be offered in the second channel, the Term Market. Where in the Spot Market purchases are one-offs, in the Term Market goods will be available for longer periods to traders, as a way to ensure long term supply. Initially, these are contracts for five cycles, or six months. In the future the contracts will be extended to two years.

 

Here the goods will be offered online, at a price based on the Clearing Price set by Spot Market, in an ascending clock auction. The auction starts at a discount price to the Clearing Price set by the Spot Market in that sales cycle. As participants bid on the goods, the price rises in successive auction rounds until demand matches supply. The expectation is that in the beginning of the auction demand will exceed supply, decreasing as the price rises.

 

The final price is translated into a percentage of the Clearing Price and that will be the price of goods in the awarded contract. For example, if the final auction price is 102 percent of the Clearing Price, the winning bidder will pay 102 percent of the Clearing Price in the next four cycles of the contract. The same goes for the quantity - the wining bid represents a percentage of Ekati’s production of those goods in that cycle. Winning bidders will receive the same percentage throughout the contract period.

 

The term market will include a capping mechanism to protect from extreme outcomes in the spot market - about 10-15 percent jump from one cycle to the next. Bidders will see the other bids but not who is making them.

 

The company stressed that all contracts are binding and those that will drop out will be penalized.

 

There are many more details to how this will work, and BHP Billiton may still have a number of decisions to make. Nevertheless, the term market will start operating in September with melee goods, and by February 2009 the rest of BHP’s assortments will be added.

 

The specials auction is a straight forward tender, conducted online in an ascending clock auction.

 

BHP is introducing the system as an evolution in the way rough diamonds are sold, saying that it should be sold in a manner similar to how other commodities are sold.

 

The change in sales is viewed with hesitance by some traders that spoke with IDEX Online. “The speculative element is now fully in the realm of [rough] diamond buying,” a large diamond manufacturer said. To be able to sell polished diamonds, they will need to be offered at a premium in order to meet the speculative prices, he added.

 

All three tender channels are open only to BHP clients, although the company plans to add more clients in the future.

 

The next spot market sale will be held on May 26.