Banks Are the New Market Custodians

Sometimes the banks are the diamond traders’ best friend. Often there is a sense among diamond traders that the banks are not being generous enough with them, but in at least one instance, they are not just a friend, they are also lifesavers. The banks responded to the high rough prices, to which many diamond manufacturers succumbed ,against their better judgment, and decided to fight the good fight on their behalf by reducing the financing of rough goods.

Since the beginning of this year, rough diamond prices have risen to outrageous heights. De Beers increased prices by 6 percent with many of the other diamond miners also increasing rough diamond prices in this period.

At the same time, polished diamond prices remain largely flat, rising by about 1.5% from January to June. In a market where manufacturing’s margins are in the low single digits, (3%-4% at best), the difference between the quickly rising rough diamond prices and the almost flat polished diamond prices is the difference between low profitability to no profitability.

De Beers’ CEO Philippe Mellier, according to multiple accounts, feels that as long as Sightholders are willing to pay the price, complaints that prices are too high are idle chatter – after all, Sightholders keep buying. According to one account, Mellier told a Sightholder who complained about high prices that he should leave goods on the table - because there are always 2-3 others who want them.

If the De Beers CEO feels that in such a situation – goods left on the table because they are currently too high – a Sight should be taken away from a seasoned and carefully selected client, then there is a fundamental breakdown in the long-term relationship between the industry’s largest supplier by value and its clients.

This needs some explanation: Sightholders are usually concerned that they’ll lose their Sight and therefore, may buy goods even if the purchase is not economically sound – just to avoid the chance that it will have a negative impact on their supply down the line. Others buy non-economic goods to try to receive them in the future, hoping they will be more economical down the road. For them it is an investment – not a vote of confidence in the price!

The New Custodians? Banks Take Action on Manufacturers’ Behalf
Just a little bit more history. In October 2008, at the outbreak of the global economic meltdown and the dramatic uncertainties that came with it, Indian manufacturers did not want to harm their position and tell the DTC, as individuals, that they could not buy their allocations. So they enlisted their export council, the GJEPC, which acted as a representative of the Indian industry, and declared a ban on rough diamond imports in November of that year. In this way, no single company stood out as a naysayer.

That scenario, of clients of the large miners who want to say “No,” but feel that they cannot, has returned. This time around, the price imbalance between rough and polished prices is the issue.

Enter the banks. The banks, already worried about their clients’ low profitability, decided to take action, limiting their clients’ access to rough diamonds by reducing collateral base financing for rough diamond purchases, that is, providing less money to buy rough.

ABN AMRO, the industry’s leading financing bank, informed at least some of its clients, that they are reducing purchase financing to 70%–80% and might even tighten other terms and conditions going forward. Antwerp Diamond Bank (ADB), another important bank serving the industry, is also interested in reducing collateral base financing for rough diamond purchases. The State Bank of India (SBI) announced on August 21 that it stopped financing purchases.

A banker recently wrote in an email, “As a bank, our biggest concern is indeed the lack of profitability of the midstream companies that we are financing. And it is not our goal to finance our future NPA’s [Non-Performing Assets].” Banks are now being picky not only about who gets loans, but also want to know if there is a clear reason for such an expense, and thus seek to decrease their exposure.

Are the banks the new custodians of the diamond market? It certainly is not De Beers any more, as Mellier keeps stating. The banks are doing the industry a big favor by “forcing” the manufacturers’ hand to limit purchases. This is also a vote of no confidence in the miners’ approach to price-hiking policies.

Price Reductions Ahead?
The message was received on Charterhouse Street. At De Beers’ Sight this week, the prices of about two-thirds of the boxes were reduced, some by as much as 5 percent, but overall the decline is a very low 1-2 percent, less than what manufacturers need to get back to business, especially that prices of some of the goods were still hiked. This is a step in the right direction, but still too little.

It remains to be seen if prices are further reduced, how long this lasts, and if Alrosa follows DeBeers’ lead. For now, the industry should count its blessings; thank the banks for being the responsible adults in the current situation, and take advantage of the window of opportunity to cool down rough purchases.

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