During the last diamond industry crisis—four years ago—many lamented that a “perfect storm” of factors had converged to knock the industry on its back.
Perfect storms are, by definition, rare. At least, they should be.
And yet, the natural diamond industry is once again being drenchedby a ceaseless downpour of negative news. There’s the sagging world economy. The perpetual problem of bank financing. Continued issues with midstream profitability. And competition from lab-grown diamonds.
All of which has led to an insecure market and pipeline that looks dangerously overstuffed. De Beers’ sales are now at their lowest level since 2015, the year of the last crisis.
Analyst Paul Zimniskybelieves the current funk was in part sparked by the Modi-Choksi bank scandals in early 2018. Lenders, who were already viewing the industry skeptically, cracked down even harder.
“The creditors changed their lending requirements to reflect increased risk in the market,” Zimnisky says. “Since then, financing has been decreasing on a steady basis. You have, in some cases, forced liquidation of inventory that the market cannot afford to hold.”
He believes that billions in gems were dumped onto the market at low prices. At the same time, demand was weak in key markets such as India and China, putting further pressure on polished prices.
Diamond miners have been traditionally reluctant to lower rough prices, because they don’t want to diminish value for their product. And naturally, they prefer large allocations.
Diamond manufacturers, meanwhile, have been traditionally reluctant to turn down those allocations, even when they’re too large or too expensive. They want to keep their factories humming and stay on the producers’ good side.
But now, the manufacturers have reached the breaking point, and they’ve decided they can’t keep losing money. There’s no sense buying when they are already clogged with inventory.
There was a lot of hand-wringing over ABN Amro’s letterrestricting financing to buy rough. Still, it was built around logical, even basic, advice for any business: Don’t lose money! Or, at least: Don’t lose ours.
Erik Jens, who formerly ran the ABN diamond desk and is now developing the LuxuryFintech platform, thinks that the diamond business is still stuck in the old supply-side mentality, which dictates rough prices should never go down. He notes that other industries, like oil, deal with fluctuating prices all the time.