There is an increasing unease in the diamond trade that the banks are reducing their exposure to the industry. For a trade so heavily reliant on credit, the concern is justified. The banks are taking a more cautious approach to lending, not only to the diamond sector, but as a result of changes affecting their own operations.
With Basel III being implemented, banks are operating in a more regulated environment. The accord requires the banks to insist on greater capital adequacy, stress testing and market liquidity from their clients. The various divisions within any given bank are competing for scarce funds and are required to procure those funds by pitching less risk. Contrary to some perception, greater scrutiny is being witnessed across the board, including in Belgium, New York and Israel as well as in India, albeit at varying degrees.
For diamantaires, the development is bitter-sweet, even if most fail to see the positive side to it. Ultimately, one important section of the diamond pipeline, the financing arm, is getting its house in order, providing painful but necessary checks and balances in the trade.
These developments should reduce the overall risk exposure of the diamond industry and result in a more efficient market. The extent to which previous price bubbles have been influenced by access to easy credit has been a cloud over the industry and the banks. Today, the banking community is less likely to be party to such practice than before. As one sightholder explained to Rapaport News, “In the old days, the banks were big, and even if they had limited resources, money was getting into the wrong hands. Today, the new system will ensure that although there is less money, it will go to the right types of businesses.”
That should be encouraging given current market trends. After rough prices rose in February, and polished prices firmed during the recent Hong Kong show, concerns have grown about dealers buying goods based on the speculative expectation that prices will rise further. Facing greater bank scrutiny, diamantaires will be less willing to pay any high price for their rough, even if the competition for the reduced rough production coming to market is strong.
As a result, 2013 may well be characterized by the dynamic of lower supply from the mining companies being offset by reduced financing from the banks. Ultimately, that equilibrium is healthy for the diamond market.
Diamantaires are naturally frustrated. After all, bank credit is their lifeline without which they cannot operate, or grow. Manufacturers need funds to pay cash for rough that they can only sell as polished three months later. They are discouraged by the fact that since the market crashed in 2008-09, the price increases and growth in the level of trade have far outpaced the rise in their credit lines. They argue that their responsibility to streamline their businesses should at least be matched by a sense of responsibility by the banks to help grow the industry.
Diamantaires also bemoan a changing, less personable, relationship with a new generation of bankers, one that is governed by an icy system of crossing the i’s and dotting the t’s when assessing a credit line, rather than being a partnership to grow the business. Banks argue to the contrary. If anything, they note that market conditions and the new regulations have influenced them to improve their relationships with diamantaires who increasingly require guidance to navigate the changing banking landscape.
However, the fact is that the banks have had to rethink their credit lines and financing models after 2012, which was a particularly challenging year for the industry. Even if turnover increased during the year, businesses battled to turn a profit. It is therefore natural for a lender to cut back on its exposure to losses or risk in such an environment. Add to that, new regulations governed by the Basel accords have forced banks to reassess the type of business they finance and to raise their capital requirements.
From the banks’ point of view there are yet additional risks at play pertaining specifically to the diamond industry, which itself is undergoing some noteworthy changes. The industry structure is evolving and the banks are looking on with interest – and some caution – as BHP Billiton bows out, Harry Winston raises its stake in the market and Rio Tinto reassess its involvement in diamonds, while Zimbabwe emerges as a major rough producer. Those may affect how, where and to whom diamonds are sold,and therefore the manner in which banks view the market.
Furthermore, De Beers relocation of its sights to Botswana will likely tilt the volume of business away from the traditional centers toward emerging centers such as Botswana and Dubai. Next week’s Dubai Diamond Conference focused on diamond financing is therefore timely and significant.
Global bank credit to the diamond industry is estimated at between $13.5 billion to $15 billion, spread mainly between the major manufacturing and trading centers including India, Belgium, the U.S., and Israel – in that order. But the likes of Dubai, Botswana and Hong Kong will continue to gain in importance, particularly as they aggressively seek to gain market share from the more traditional centers. Then again, the increased diversity in the trade should eventually be viewed as a positive by the banks once the uncertainty of change passes.
For now, however, the diamond industry is viewed as risky. And cry wolf as it may, the trade has no choice but to dance to the bankers’ tune. Ultimately, there is a new reality affecting all business sectors, which in the long run should encourage a more efficient and streamlined market. In the new post-2008 reality of market volatility, caution and prudence is required by all. As painful as it seems, the banks are being forced to lead the way.