Industry News
Is the crisis over? A banker's perspective
20/09/2009
Is there a real recovery in the diamond market, and have diamantaires learned the tough lessons from the sharp fall in demand as a result of the financial meltdown which struck a year ago? Unfortunately, I do not feel able to give a positive answer to either question yet.
Firstly, I do not believe there is a recovery taking place despite the strong rises in rough diamonds that have taken place since May-June. In my opinion, this is nothing more than a stabilization process or what you might call a pre-recovery stage. I see a lot of companies in the industry trading with each other, but I do not see much new money coming in.
In the same way, I do not believe that the rises in stock markets since March can last long because they are not built on any real changes in the fundamental economic situation. Stocks have risen on low volumes, and many players are pushing stocks to help improve their dismal performance over the past year as indexes have sunk. Another reason for the rise in stock prices is the very low interest rates which make bank deposits highly unattractive. My fear is that in many countries the real economy will not be able to provide the demand needed to push growth after the various stimulus packages have run their course.
In the United States, diamond companies and retailers are buying small amounts of goods, and they have only survived by cutting back their costs and their inventories. Demand from consumers is still low because when your house price has dropped, your pension has lost a great deal of value, your stocks portfolio has been hit hard, and you are worried about losing your job then you will not want to spend money on diamond jewellery. Many people are paying off debt and only buying what they need. Where there were consumers who bought four or five items of jewelry products every year, they are now questioning whether they should buy even one piece.
For the diamond industry, it is time to get back to basics and to embrace the new reality. That means cash is king, and watch your inventory, your debt levels and your costs. Cash on delivery is returning to the business, and credit terms are becoming much shorter, and that is the right way to go.
I would say that many diamantaires have managed their way through this crisis very well. They have cut costs, run down inventory, and sold goods rather than bought new stock. However, the supply of goods to the market is again becoming too large which can be seen in the $1 billion of diamonds sold by the various miners (De Beers, Rio Tinto, Alrosa, BHP, etc.) in the last sights. Firms just need to say 'no' and stop buying due to an out-of-date loyalty to the diamond business, as this is not profitable and can even be risky.
There is one good outcome from the financial slowdown, however, and that is the fall in debt levels, which is down 20-30 percent. This is a positive development and has created a more healthy environment. Credit terms are shrinking and that is helping to put more flow into the market, but we need the true money from end-investors, the retail clients.
What led to the expansion of credit that eventually created the financial crisis? Firstly, interest rates were too low for too long, and many companies over-extended themselves. Secondly, if a bank rejected an application for credit, then the client would just turn elsewhere and receive the money. As this is a flow business that must be controlled and monitored sometimes a compromise is feasible, but flexibility is limited now.
We have always tried to be cautious, and advise our clients to act in the same way. The price of rough diamonds has risen too fast in recent months, but it can also fall again. Unfortunately, people have short memories. I have told a lot of clients not to be so eager to buy diamonds because they are creating a new bubble. In addition, polished prices are not rising in line with the rises in rough because demand is still very low in the United States, and China and India can not compensate for that as yet.
As far as credit is concerned, some banks are letting their diamond clients go because they have to make a calculation as to whether it is a sector that they can afford to be in. The diamond industry is relatively small and suffers from low(er) transparency. It is difficult to get information about companies and they do not help their chances of being retained by doing business this way. As a result, some banks are deciding to exit the diamond sector. This limits the remaining players that are providing credit, especially in the USA.
However, I would not say that credit is frozen. Banks are not withdrawing their lines of credit, but simply not being as lenient as before. Moreover, fewer sales create fewer receivables and hence lower borrowing base principles. Furthermore, some receivables are still long overdue. We are trying to help clients in a structured way, and I think that is healthy for all concerned. In Belgium, we are working together with ADB to start the use of bankers' drafts or letters of credit to create more certainty for all parties.
As for the future, I believe that American consumers will return to their spending habits. They may be saving more now than in the past due to employment fears and the need to pay off debt, but they will return to their former behaviour patterns. Of course, it will have an effect on diamond jewellery sales and limit them, meaning it will be some time before we see purchase levels rising again. I should point out that the bridal market is still strong, proving that traditional buying is still good. However, I don't believe we will see a quick recovery, but a modest one; it could take two or three years to really come back in full.
I have been in the banking business for more than 25 years, but dealing with the diamond and jewellery trade for just two years. I must say I enjoy it because it is so different from other sectors. One of the disadvantages is that there is less transparency since it is a much more closed circuit business. Where bankers meet clients in other sectors every 3-6 months, in the diamond trade it has to be more often. Unfortunately, this is a business which suffers from many rumours, and because it is a relatively small sector those rumours can cause damage.
There are many positives too. One can influence the industry. You can bring stakeholders together and discuss problems and try to work out solutions. That is also the fun of it for me.
Victor van der Kwast is CEO of the International Diamond and Jewelry Group at ABN AMRO Bank N.V., a major financier of the global diamond business. The unit, whose head office is split between Amsterdam and Antwerp, is active in countries including the United States, China, the United Arab Emirates, Switzerland, South Africa, Hong Kong, Japan and shortly also in Botswana.
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