DUBAI (Reuters) - The United Arab Emirates, the world's fourth-largest oil exporter and home to gold trading hub Dubai, is rapidly becoming a force in trade of another highly valuable commodity: diamonds.
Dubai, the UAE's center for gem trade, handled $35 billion worth of rough and polished diamonds in 2010, a leap from an annual figure of just $3 million a decade ago, according to Malcolm Wall Morris, chief executive of the Dubai Multi Commodities Center (DMCC).
In the first half of this year Dubai traded $25.3 billion, a 55 percent increase from the same period a year earlier. Much or most of the rise was due to surging diamond prices rather than growing volumes -- but the increase nevertheless underlined Dubai's success in competing with other trading centers.
"Part of the UAE's policy is to diversify its income and gradually move away from one or a few sources of income," UAE Economy Minister Sultan bin Saeed al-Mansouri told Reuters on the sidelines of a diamond exhibition in Dubai. "So there must be manufacturing and other sources of income we can depend on and that are also sustainable."
The DMCC, which provides the infrastructure for commodities trade in Dubai, now ranks the emirate as the world's fourth largest diamond trading hub, behind Antwerp, New York and Mumbai. Antwerp, through which more than half of the world's diamond production passes, saw $48 billion of trade in the first ten months of 2010, according to data from the Antwerp World Diamond Center.
The UAE has competed with traditional diamond centers by keeping customs duties for diamond jewelry as low as 1 percent, a tiny fee compared to major diamond producer Russia's 23 percent duty and 18 percent value added tax, according to Maximilian Artsinovich, founder of London-based retailer Maximilian Jewelry.
"Because of these duties, jewelry and imported watches in the Ukraine, Russia and Khazakhistan cost double their price in Dubai, or are at least 50 percent more expensive," Artsinovich said after opening a boutique in Dubai.
The UAE also tightly regulates the quality of diamonds coming in and out of the country to increase investor confidence, says the DMCC.
But some traders still question Dubai's ability to rival more established centers. A major obstacle keeping Dubai from becoming one of the world's top three hubs, according to Mitesh Surti of Antwerp-based diamond seller Beyroha, is local banks' lack of expertise in the diamond industry. Diamond traders have had difficulty setting up accounts with services catering to the industry, such as overdraft facilities, he said.
Another problem is the UAE's inability to attract Israeli jewelers, who play a prominent role in the industry; for political reasons, Israeli nationals are generally not allowed into the country.
"A lot of Israelis cannot come here, and that's a major problem because they are (one of) the industry's main pillars. In Antwerp that is not a problem," said Surti.
And while much of Dubai's diamond trade comes from shipping the precious gem abroad, traders say the emirate's reliance on tourists rather than the local market for most of its retail sales is a weakness.
Saurabh Shah, a seller at Antwerp-based diamond manufacturer Rosy Blue's Dubai arm, said that if tourism in the UAE falls, diamond sales also drop because Arab locals and the large Arab and Indian expatriate communities traditionally prefer to buy gold.
"For Dubai, sales are mostly from the tourists. Indians (living here) buy only gold jewelry, and locals don't buy diamonds very often," said Shah.
Demand for diamonds in the Gulf is rising, however, and today stands at $15 billion annually compared to around $2 billion a decade ago, Shah said. By 2015, China, India and the Gulf could overtake the United States as top diamond consumers, analysts believe, creating more opportunities for Dubai, which is located between diamond producers in Africa and processors and buyers in Asia.
"Dubai is not rivaling Antwerp -- Dubai is taking a new spot," said Victor van der Kwast, chief executive of ABN AMRO Bank's international diamond and jewelry group. Commodities flowing from Africa to China naturally tend to move through Dubai for geographical reasons rather than Antwerp, he said.
While Mumbai has a long tradition of diamond cutting and polishing, Dubai hopes to control more of the industry's supply chain by processing rough diamonds domestically rather than sending them to Mumbai and then re-importing the finished product into the UAE for retail sale.
"Eventually, that's one of the aims. Dubai will try to do as much of the diamond processing as possible," said DMCC business director James Bernard.
The DMCC has a diamond boiling center, which removes dirt and trace materials from the gemstones, and a light jewelry manufacturing center. But some traders think bypassing Mumbai, which processes seven in every 10 of the world's diamonds, will not be possible on a mass scale because of labor costs.
"Manufacturing diamonds needs different skills and a labor force, and the labor which is in India is more economical," said Amit Dhamani, chief executive of Dubai-based jeweller Dhamani.
But he acknowledged Dubai's potential in processing high-end products at lower volumes. "More processing in terms of high-end cutting of diamonds can be an interesting point -- that is more quality-oriented, in that labor is not a major factor."
Economy Minister Mansouri was adamant that Dubai could incorporate manufacturing into its diamond industry.
"We are confident that Dubai can be number one in a variety of sectors, including attracting investors and in areas like polishing diamonds and manufacturing diamonds," Mansouri said. "Dubai does not know the impossible."
Editing by Andrew Torchia