The Never Never

| October 23rd, 2014

The Never Never
"The Never Never"

The last time I put pen to paper or fingers to keyboard, I was surprised about the response I got.

Usually, I get none, but in my piece, ‘polishedprices relaunch’, I had touched upon the fact that liquidity in the market was a problem, which seems to have caused a ripple of ‘surprise’.

Since then there has been confirmation that the ADB is being closed down, the only diamond dedicated bank.

As I have been quoted in one or two other outlets, this cannot be good news. Equally it was hardly surprising, I had known about this likely outcome quite some time ago, so it cannot have been a secret, though it obviously ran counter to the hopes of some.

I recall a presentation in 2008 given by Lamon Rutten, the then CEO of MCX, in Gaborone talking about financial instruments for the diamond industry when he stated that the impact of Basel III would have a serious impact on the availability and cost of finance to the diamond industry because of the way it chose to conduct its affairs.

Looking at a graph in De Beers’ ‘Diamond Insight Report’, which was launched with much brouhaha in Hong Kong last month, on page 32 entitled ‘Diamantaires borrowing costs over vs Libor Rates’ made interesting reading.

The disconnect between the two, Libor and average interest rates paid by diamantaires, from 2009 is striking in the extreme, where the gap as I read the graph, has swollen from around 1.5% to about a whopping 5.5%.

Emphasis must be placed on the word ‘average’, as some of the percentages that I have been hearing about are way above this ‘average’.

Whatever the actual numbers quoted, it is the trend that is disturbing.

Indeed, if lending by banks has got more expensive that is nothing in comparison to the inter trade lending, which makes borrowing on a credit card look absurdly cheap.

Reassurances that there is sufficient liquidity available is of course pleasing to hear, but does beg a question, sufficient for whom?

At the same time, I have been reading reports about life in the Swiss watch industry and also for other luxury companies.

Tag Heuer cuts jobs as demand for luxury watches slows’, so screeches the BBC in an article published yesterday.

Apparently, sales growth at 2.7% has fallen below the anticipated 4% to 6%.

In the same article, a financial analyst has cut the growth assumptions for the industry from 5.5% to 3.5%.

Having growth of around 3%, I would not have thought was not that bad, just think of all the countries of the EU, and, the reaction to the numbers, for me is a little surprising and actually makes me think that there just might be a touch of over exuberant hope, the same exuberance that some fostered about the future of ADB.

What did surprise me was that the article claimed that Hong Kong represented 20% of the luxury watch industry. That strikes me as a huge number, and reading about the political unrest in Hong Kong is hardly comforting.

It was in April of this year that Prada reported a sharp fall in profits for 2013, citing a moribund Europe and ‘slowdown’ in China, which is described as the ‘maturing China luxury market’.

‘Maturing’, what a frightening word to use.

Nowhere else have I read China as being described as ‘maturing’, slowing down, yes, which given recent history of the markets is not surprising; but slowing down hints at a pick up at some point, maturing is implying some level of saturation or perhaps a ‘topping out’.

I cannot believe that China is anywhere near ‘saturated’, but I can believe that the easiest of miles may have already been covered.

What I have heard from the Hong Kong fair is that overall it was pretty flat, some did well others not, but it certainly was not a disaster.

The combination of difficult markets, bar the all important American market, which seems to be moving from a walking pace into a steady trot, and tighter and or more expensive financing cannot be simply brushed under the carpet.

Whilst it cannot and should not be brushed under the carpet, it equally should not be exaggerated. Markets go up and down in their own inexplicable ways, despite all the pundits applying their knowhow… and getting it wrong.

The fact is that the most important market for diamonds, America, is not doing badly, though it would help if the Americans realized that they have to pay for their diamonds and not buy them on the ‘never never’.

As to financing costs and availability, that is simply a choice for the industry, keep hiding behind ‘dark glasses’, ignore the consequences of greater financial regulation, and pay more, if you can get it.

Source Polished Prices

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