The diamond market is slowly becoming more disciplined. It needs to. With high rough prices, declining polished, less available credit and lower retail inventory levels, it has become increasingly difficult for diamantaires to turn a profit. Therefore, they need to carefully navigate the significant changes taking place to improve their position in the market.
Three changes are shaping 2015 into a watershed year for the diamond market as they will have a lasting impact on how the trade operates. The banks are reducing their available credit to the industry, businesses are being forced to adopt more corporate structures and the trade is realigning to lower, more efficient inventory levels.
While these are ultimately positive developments for the industry, it will likely take time for businesses to acclimate. There will inevitably be some consolidation in the interim.
The most significant change is in the lending environment. In truth, the banks made their big moves in 2013-14. ABN Amro announced its decision to reduce its financing of rough purchases from 100 percent to 70 percent, which took effect on January 1, 2014. And, KBC Group last year decided to close its Antwerp Diamond Bank (ADB) subsidiary, effectively phasing out $1.4 billion of industry financing.
Simply put, the banks – or their regulators – view the diamond industry as “increased risk”, as Erik Jens, CEO of ABN Amro’s Diamond and Jewellery Clients, stressed in a recent interview with Rapaport News, and such a classification makes the loan more expensive for both the lender and the recipient. Much of that risk relates to reputational issues and the way the trade conducts its business.
“The banks are reducing their available credit to the industry, businesses are being forced to adopt more corporate structures and the trade is realigning to lower, more efficient inventory levels.”
It’s not a good thing that banks are leaving the diamond industry. But it is good that they’re being more frugal. For too long, the easy supply of money fueled irrational rough diamond buying, which enabled rough price hikes. In the past six months or so, as diamantaires have had to foot more of the rough bill themselves, they have refused to take non-profitable rough forcing a price correction in the process.
Whether they’ve done so because they ran out of money or have adopted a more disciplined approach is anyone’s guess. Probably a bit of both, although one hopes that it is the latter. Either way, the responsible banks want their clients to focus on profitability rather than turnover and diamantaires seem to have gotten the message so far in 2015.
The question is if all the banks are responsible. There are certainly still concerns about the environment in India where some 60 banks are lending to the trade. It seems that the larger Indian banks are tightening their lending requirements as the regulators there have expressed concerns about the high number of non-performing assets in the industry. However, diamond businesses still have easier access to credit in India than in other centers.