On Diamond Finance, Liquidity, Price Imbalances and Solutions

Finance and Trade
15/09/2016 11:19

Hong Kong Jewellery Magazine takes an in-depth look at the adjustments the diamond industry is, or should be, implementing in order to accommodate the changing economy and consumption habits in an environment where the diamond industry "at large is under the gloom of the stagnant economy that impedes buying sentiments in end consumers." With the assistance of three industry insiders - Erik Jens, head of the diamond and jewelry division at ABN AMRO Bank, Nissan Perla, founder of Olympic Diamond and the Diamond Registry, and Lawrence Ma, chairman of the Diamond Federation of Hong Kong, China - the magazine address a couple of the most pressing issues facing the diamond industry and, fortunately, offers some tangible solutions. Top of the list are financing and the imbalance of prices between rough and polished diamonds.

Availability and flow of funds

The consensus among the participants is that, despite the prevalent discourse on this theme, there is in fact no critical shortage of liquidity for the diamond industry. It is just that the money is somewhat more difficult to obtain than it used to be. Speaking about the situation in Antwerp, Erik Jens said the overall amount of funding available for diamond polishers is not an issue: “As the funding from KBC Bank (formerly Antwerp Diamond Bank which closed in 2014) and Standard Chartered Bank will not leave the market overnight, there is time for polishers to adjust and look for alternatives. Not only for funding alternatives, but also to reconsider the way business is conducted including the long credit terms.” Furthermore, Jens believes Antwerp will continue to play a key role in the diamond industry. “Antwerp has been an important location for the diamond industry for over 500 years, and the quality and knowledge gained over such a period is a key differentiator,”  noting that new banks are considering enering the market in the U.S. as well as Antwerp. 

Lawrence Ma agrees with Jens: The real issue is therefore not the availability of credit, as the banking system is not short of liquidity, but the sound business practices of the debtors. Moreso than in the past, and as a result of more stringent regulatory requirements of financial institutions in view of anti-money laundering, anti-terrorist and anti-corruption measures, the fundamentals of the debtor will be critical in the eyes of the creditor. This has led to the process of obtaining credit becoming lengthier and more tedious - an issue crucial to the midstream - and emphasizes the need for developing a sound relationship with banks. Jens observes that the combination of these issues has led to more consolidation with a focus on increasing cash flow. In his opinion, the diamond market is opening up and becoming more transparent. If this trend continues, more banks and investors will develop an interest in the industry.

The imbalance between rough and polished prices

According to Nissan Perla, this is most pressing problem in the industry. In his view it is extremely important to keep an open dialogue with downstream retailers to upstream miners, because only in this way the whole diamond industry could be nourished back to health. “The solutions are either a variety of market forces work together to get rough diamond price costs down, or polished diamond price must go up to match the market equilibrium,” he said. The issue for Ma is finding a way to better align the diamond pipeline to ease the burden on manufacturers that get caught in the middle: the price of rough supply determined by a handful of miners and the prices obtained by retailers determined by market forces. The problem is that manufacturers must pay suppliers cash up front, or on short credit terms, and then sell to retailers on longer term credit after a one or two month processing term. 

Concluding, HKJM describes the solution as follows: "The world economy, and hence the diamond industry, has enjoyed decent growth from 2003 till 2014 despite a brief difficult period between 2008 and 2010. The correction or consolidation phase which began two years ago will continue. Stakeholders at all segments of the diamond pipeline should and are looking at the longer term collaboration and value creation aspects. Within the industry, credit can be created or optimised by the provision of longer credit from the rough suppliers and/or shorter credit terms extended to retailers while the financial institutions in different countries reshuffle their own level of participation." Ma adds that it would also be beneficial if the very resourceful entities at the tip of the upstream segment (miners) would add their efforts to the Diamond Producers Association initiative to enhance future demand.