The announcement by Belgian financial institution KBC in September that it planned to wind down the Antwerp Diamond Bank (ADB) served to put the spotlight firmly on the issue of industry financing. Although the closure of the ADB, which has been serving the diamond industry in Belgium and elsewhere for 80 years, had been widely expected, the announcement nonetheless inevitably caused ripples of deep concern through the diamond industry globally. ADB's exposure to the diamond industry is around $1.5 billion, according to industry estimates, with a further $400 million owed by companies in the rest of the world which are likely to be dealt with over a period of a year.
And those fears were compounded by media reports in India in late September that Standard Chartered Bank aimed to reduce its lending levels to the industry and to require the injection of higher levels of equity by company owners. In addition, the new requirements issued by De Beers for firms to become Sightholders for the 2015-2018 Sight period demand a far more stringent level of financial governance than has ever been seen before in the trade.
There can be no doubt that diamantaires are having to show a very much higher level of financial transparency. That has long been a concern for many members of the trade which are family owned businesses. Banks in the past did not demand to look deep into clients' books, and as long as loans were serviced or paid off on time, banks were content to carry on lending.
However, with the level of global diamond industry credit now estimated at around $14 billion, and fears of a slowdown in the previously expanding Chinese market as well as turgid European and Japanese markets, banks are starting to take a different approach. That was already seen earlier this year when one of Israel's two largest financial groups – Bank Leumi – decided to withdraw from the diamond trade in Israel following the closure of its New York branch.
Shkadov: Banking Summit Needed
How realistic is it to expect banks to want to enter financing of the diamond industry given their complaints about a lack of transparency? International Diamond Manufacturers Association (IDMA) President Maxim Shkadov says: "This is obviously a very serious problem. Banks are leaving the sector and we are not seeing any new blood infused into the system. That is why we at the IDMA are pushing hard for an international diamond industry banking summit that will bring the industry, the current banks in the sector and hopefully other interested banks to the table to discuss the prospects for our industry. This event is planned toward the end of the calendar year. We hope that banks from all the diamond centers will participate."
He adds that rising rough prices "which are mostly unpredictable and unmanageable" lead to speculative bubbles and destroy manufacturers’ margins "while also complicating the availability of financing by the banks".
Shkadov believes the large diamond manufacturers can play a role in alleviating the financing problems the diamond industry is facing by being more circumspect in raising prices which would help the long-term growth and stability of the diamond supply pipeline. "Our market, which trades in rough and polished diamonds, also trades in dreams. For dreams to be sustained, people need to be in an optimistic frame of mind to respond to the marketing of feel-good products, such as diamonds and diamond jewelry. However, the feel-good factor has to emanate first and foremost from the direct clients of the mining companies.
It seems to me that the mining companies should be thinking about – and listening to – their clients."
WFDB's Blom: Relationship With Bankers Is Critical
Meanwhile, World Federation of Diamond Bourses (WFDB) President Ernie Blom stresses that "banking institutions remain our 'partners' for without them this industry will grind to a halt. Our relationship with the banking industry is of paramount importance and it is the aim of the WFDB to build this relationship. We need to work together to find long-term solutions to the financial model and it is my sincere wish to develop this and I would hope that at some point in the near future we can jointly host a summit to develop mutually beneficial structures for future growth.
"We, as the diamond industry, must also ensure that we create a sustainable, profitable industry as this would go a long way in securing our growth and the relationship with the financial markets. The lack of profitability in the industry can also be ascribed to the way trade is conducted, namely consignment stock (Memo). When buying rough we pay in hard currency with no credit terms available – it then takes between four to six weeks during the polishing and grading phase before we can put diamonds in the market.
"At this stage we have already committed capital funds for six weeks and this process is now extended when diamond dealers have to act as 'banking institutions' when providing stock to our customers on consignment with payment only due when stock is sold. With this incredibly long extended credit line set against the very tight margins under which we operate, it is no wonder that we, as an industry, lack profitability."
Writing in the quarterly magazine of the SBD, the Belgian Diamond Manufacturers Association, the organization's President, Edward Denckens, said: "The access to diamond financing, the industry’s lifeblood, is diminishing rapidly. That is not just the case in Antwerp … but also from a global perspective, access to financing is becoming increasingly difficult, right at a time when adequate financing could provide the industry with some much needed oxygen.
The so-called credit crunch regrettably also seems to affect the banks’ willingness to lend capital to diamond professionals in a private context. Polished prices have plummeted, especially in the larger categories, high rough prices are reducing profit margins to virtually zero, the credit crunch is hitting the industry hard and buyers seem to wait-and-see, causing confidence in the street to be rather low."
Basel III And Rising Interest Rates
Further complications are caused by the latest international banking governance regulations – Basel III – and the likelihood that interest rates in the United States, and thus globally, are likely to rise, if not this year then next as the U.S. economic recovery gathers pace.
Basel III is a set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector. The measures gained further impetus following the 2008 financial collapse when banks were seen to have been too loosely regulated and provided loans and credit without sufficient collateral. Basel III aims to improve the banking sector's ability to absorb shocks caused by financial and economic stress and to strengthen banks' transparency and disclosures.
The meaning for the diamond industry is very clear: credit terms will become much tougher and they will be required to bring in a greater proportion of their own money in order to finance transactions.
As for interest rates, the average paid by diamantaires has swollen in recent years, and the rates paid in borrowing by companies from other businesses in the trade which are unable to secure bank financing are even more severe. And with the U.S. economy expanding, the Federal Reserve is likely to start raising interest rates from historic lows. The central bank has kept rates close to zero since late 2008 in a bid to stimulate economic activity. The Fed has said that it will increase rates in the calendar year in which inflation rises to a level at or below 2.0 percent and the unemployment rate falls below 5.75 percent.
With that point apparently approaching, U.S. interest rates will start to climb. For the diamond industry, as for many others, the period of, relatively, cheap money will start to end. Although the results of that cannot currently be known, it seems reasonable to assume that life will become even harder for diamantaires unless the various industry bodies can come together to find long-term solutions to industry financing.