According to reports coming out of the American wholesale and retail market, goods have been flying off the shelves in recent months. The reports were corroborated by Bain & Co., which in May updated its earlier predictions about the diamond and diamond jewelry market recovery with a much more optimistic scenario: the market is already swinging back into full recovery, meaning that we don’t need to wait until 2022 for our industry to recover to pre-2019 levels!
While there is a surge in polished sales, especially of larger sizes, many retailers – small and large – still seem hesitant to put out substantial cash to purchase diamonds and replenish their stocks. Requests for memo goods are on the rise. Frankly, this again puts manufacturers, importers, and wholesalers in a bind. Once again, just like before the arrival of the “Next Normal,” the midstream is left holding the bag.
What does this mean?
Manufacturers who buy rough – no matter if they are sightholders, core clients of sorts, or ‘winners’ of tenders and auctions – are required to pay cash on delivery.
During the Covid-19 pandemic, global rough diamond mining and production slowed down significantly and caused the rough market to contract. Consequently, rough diamond prices are rising, as there is less rough to go around and demand for polished is rising. Hence, the increasing demand for polished in the US and China is pushing polished prices up.
All good, you would say, right? Things are looking up, and the market is normalizing again.
To the innocent onlooker, it indeed may seem so. But when we take a closer look, we can see the significant internal changes in the diamond supply chain. These changes have made the position of diamond manufacturers more precarious. Here’s why:
- The rough market continues to operate on a ‘cash only’ basis;
- During the past years, one bank after another has exited the diamond industry. The lack of financing options has become an obstacle to many manufacturers’ potential for growth and expansion.
- Manufacturers, traders, and wholesalers are expected to continue carrying on as they did before and ease their suppliers’ and clients’ cash flow, i.e., by paying cash for rough and giving goods on memo, and offering special credit terms.
In today’s Next Normal, these business models are no longer sustainable! Here’s why:
- The rough suppliers must come around and take the responsibility they have been professing to, especially during the pandemic. They need to put their money where their mouth is and offer manufacturers appropriate payment terms for the rough they buy.
- Analysts have been raving about the industry’s debt reduction and the manufacturers’ and traders’ ability to ‘self-finance. But, while the compliments are appreciated, as a result, the financial risk levels of individual companies have risen to unprecedented heights.
But none of the other players in the supply pipeline have agreed to share in the risk-taking.
This needs to change.