Antwerp Facets Special Report

Less than three years after the onset of the worst financial crisis to hit the world economy in several generations, recovery appears to be well underway. The crisis had a fundamental effect on the world economy, but the diamond industry was largely spared catastrophe because of stringent policies adopted by its stakeholders at the start of the downturn. But has the industry learned the lessons that the near financial meltdown cruelly taught?

 

To the surprise of many in the global diamond trade, the diamond and jewellery industries have recovered surprisingly quickly. Given the depth of the recession, many had made dire predictions in late 2008 about how long it might take for diamond and jewellery sales to bounce back.

 

Following the onset of the crisis, the collapse in confidence among members of both the diamond industry and the jewellery-buying public was almost instantaneous. Indeed, so sharp was the fall in demand that producers, such as De Beers, moved quickly to persuade its shareholders that output would have to be slashed and sales reduced to levels not seen in many years, in order to shore up the market. This kept the pipeline in relative balance.

 

The second critical element was the decision by the major banks financing the industry that, despite the massive they them were under, they would continue providing string support to their clients. At the same time, however, they stressed that the industry needed to curb some its more risky practices, and in particular memo sales and the provision of extraordinarily generous payment terms.

 

Prior to the crisis credit terms offered by the industry to commercial polished diamond buyers had become absurdly lengthy, with 90, 180 and even 270 days being granted for payment. In addition, the dispatch of memo goods had reached dangerous levels. Companies were sending out diamonds and jewellery to wholesalers and retailers who were happy to have them in their possession in the knowledge that suppliers were financing the deal and if the goods were not sold, they could simply be returned.

 

Already by mid-2009, less than a year following the collapse of Lehman Brothers, the seminal event that is popularly credited with precipitating the onset of the global crisis, there already was evidence of rising demand for rough diamonds. The price of goods began an ascent that became even sharper in 2010, and it is still in place in 2011, albeit at a somewhat reduced pace.

 

Polished prices have risen as well, but at a significantly slower rate. This may be due to the somewhat fragile recovery in the United States, and the inability at present for the growing markets such as China and India unable to make up fully or the loss in demand from the U.S. market. 

 

So where is the demand for rough diamonds coming from? Is a bubble growing as diamantaires speculate that a forthcoming rough shortage will serve to push prices higher? Has the diamond trade quickly forgotten the lessons of the crisis?

 

The opinion among bankers and industry officials is mixed. While they agree that there are warning signs out there, they also feel that the industry is in a relatively healthy position. "Who would have believed that just two years after the worst crisis any of us has seen, the industry would have recovered so strongly," said Arvind Verma, manager of the Bank of India branch in Antwerp.

 

Meanwhile, Stephane Fischler, a partner at Fischler Diamonds, suggested that the rise in rough diamond prices was at least in part due a perception  that rough is difficult to obtain and likely to become more expensive in the coming years. But, he said, there is also a reasonably healthy market for polished goods. "Polished goods are being sold quite well. So there is a degree of balance in the market."

 

Fischler acknowledged an element of speculation in the market. "There has always been some speculation in our industry. Rough has gone up very fast and very quickly, and that is a concern. The data that we are shown, and have to rely on, shows that there will be a shortage of diamonds in the coming years because no new large mines have come on stream and demand is growing very fast in India, China, and elsewhere in Asia. It is important to note that access to independent and reliable data is an important issue."

 

Verma also sees speculation in the market, however he is encouraged by customers moving rough goods through plants quickly to create polished. The manufactured goods are being put up for sale just two to three months after being bought as rough which, he said, clearly indicates that manufacturers are not simply sitting on the diamonds in the hope of receiving better prices later on.

 

"As one diamond company manager said: "With rough goods at such high prices, it is difficult to believe that there are people who are able to simply put the diamonds in the safe while waiting for prices to rise. However, it all depends on the financial power of the company, where they are sourcing the diamonds and how much they are paying,” Verma said.

 

Pierre De Bosscher, managing director of Antwerp Diamond Bank, is encouraged by the situation in Antwerp, though less by what is happening abroad. "When I look at outstandings on a global basis, especially in India, they are far too high. They do not reflect reality. In Antwerp, however, it is a different story. We are back to pre-crisis levels of outstandings, and rotation on accounts is very fast. The biggest difference with before the crisis is that customers are selling for cash or almost cash and with very short credit terms," he said.

 

Fischler also sees a much different situation in India. "The banks in India do not seem to be worried and there is an easy availability of credit. Other countries see things differently, though. In Antwerp, the situation is healthy," he said.

 

The pressure on manufacturers to produce is continuous, and may lack logic, said Fischler. "There is an over-capacity in manufacturing because factories need to keep being fed with goods which means a constant demand for rough which, in turn, is pushing prices up. But how long can manufacturers keep producing goods when margins are so low or even negative? Manufacturers rely on future rises in prices for their margins. That is a cause for concern."

 

As for the lengthy credit terms and the issue of memo goods that caused damage to diamond firms, there is little doubt that the situation has improved enormously, Fischler said, "Credit terms have been cut and there are fewer memo goods being sent out," he commented.

 

That is also the view from the Antwerp Diamond Bank, said De Bosscher. "There is a bit of a bubble forming. I think some customers may be speculating but most are trying to keep inventory levels low because they learned the lessons of the crisis and rotation is at a very high level. A lot of companies have changed their business model, and payment terms are shorter."

 

As for debt levels, that were estimated to have risen to around $12 billion globally before the financial crisis in 2008, they have fallen back strongly since and remain at a reasonable level, said P.N. Prasad, manager of the State Bank of India branch in Antwerp.

 

"After the crisis, the diamond industry went in the right direction and cut back debt levels. They have picked up since and we have seen increasing use of credit, but levels are reasonable. There is sufficient finance available for the Antwerp diamond sector," Prasad stated.

 

Although banks involved with the diamond trade have criticised diamond companies for running up debts and using too much credit, some bankers believe that the banks themselves were equally to blame. "There are bankers that need to accept some of the blame for providing too much financing," said one. "The banks were trying to grab a large part of the business and in their eagerness they were being too generous.

 

"I know of instances where levels of financing were provided that were beyond what the firms could reasonably have expected to receive given the size of their operations. Not only that, but they used the money to invest in other areas, not in diamonds," he added.

 

A further ramification of the crisis is likely to be increasing transparency in the way companies structure themselves and do business. "Given the overwhelmingly family business nature of the diamond trade, it has traditionally been difficult for the banks to access information about some companies," said one diamantaire.

 

"That is changing now because the banks are less willing to supply credit without a deep understanding of our business model, as well as sales information and our expenditure plans. I don't know if this was entirely due to the financial crisis bit it certainly had an impact because it shook up the system. The banks, themselves, are under more scrutiny from their management as a result of the crisis so they need to be certain they are lending amounts they can justify."

 

The future for the diamond industry is inevitably to open up their operations in order to maintain good relations with their bankers and to secure credit, which is regarded as the oxygen that keeps the diamond trade running, said De Bosscher. Although some companies have been cramped by the backlash against long credit terms and memo goods, they will have little choice but to adapt this change to their business models.

 

"The most important thing is for the diamond industry to work towards decreasing its risk profile, with companies becoming more transparent in their working operations,” De Bosscher stated. “Bankers now want to see openness and cash sales. It's also important to see goods moving through the pipeline quickly: being bought, manufactured and sold."