New Year, Old Challenges

After one of the toughest years ever for many diamond industry members in 2014, it's hard to know what 2015 is going to bring. What is certain is that it is probably not going to be easy. There's no doubt that the apparent gridlock in diamond trading is going to continue. Rough is too expensive to buy for many diamantaires because it cannot be manufactured profitably. Polished is also too expensive because demand at the retail end of the pipeline is not strong enough to create higher prices. There is increasing demand for lower-quality and smaller goods, but they are cheaper items with a low profit margin.

The industry spent much of 2014 worrying about the issue of undisclosed lab-grown diamonds being mixed in with mined natural stones, which, it turned out, although undoubtedly a concern, is not exactly a life-threatening condition. The amount of these diamonds produced volume-wise and their financial value remains but a fraction of the overall polished market.

While some industry commentators estimated the value of lab-grown stones at hundreds of millions of dollars and raised widespread industry fears, the vast majority of diamantaires said they were not coming across them at all. And all the time, the main issue that should have been of concern to the trade was, if not exactly ignored, then on the back-burner until the final months of the year.

This, of course, is industry financing, which is by far the most pressing concern for the diamond manufacturing part of the pipeline. The issue of financing worsened during the year with the announcement that the Antwerp Diamond Bank was to be closed down, and that other banks, such as Standard Chartered in India, would be reducing their exposure to the industry.

This situation actually started in late 2013 when ABN Amro Bank, a major financier to the industry, announced it was reducing the proportion of rough purchases that it was willing to fund to 70 percent.

Despite notable efforts in some centers to persuade local and international banks to play a larger role in providing finance, those amounts, even if secured, are fairly small when set against global industry debt of about $16 billion.

The banks are looking for an increasingly corporate approach to business from diamond firms. They are also looking for better reporting standards and inventory control. Companies with millions of dollars’ worth of stock in their safes or on consignment are unlikely to find willing financiers.

Stories of family-owned companies, now in their third and fourth generations, established in the aftermath of the Second World War, built up from scratch are heart-warming but, alas, of little interest to bankers. They are looking for complete transparency and for profitable firms who don't keep running to them for large-scale financing and who are willing to risk a substantial amount of their own cash.

So, what can we expect to see in 2015?

•           It would appear that consolidation is on the cards. Manufacturers, many of whom have been living on the edge for at least the past year, if not for the past several, will face decisions about whether to carry on or to cut their losses. The Bain & Co report for 2014 released at the start of December reiterates that smaller firms could go out of business if they don’t have enough financing. Even if new banks enter the business, they are likely to charge high interest rates because they don't know the trade well and therefore will add in a hefty risk factor. With the manufacturing sector estimated to have an average profitability in the low single digits at best, such firms may not be regarded by bank executives as the most attractive prospects in town.

•           Small players, such as brokers and independent manufacturers and traders, who pay a critical role in trading diamonds that the larger players have no use for, are likely to increasingly leave the industry in a trend that has been going on since the global financial crisis of 2008 and the deep recession that followed in 2009, which slashed diamond demand.

•           Producers will, inevitably, continue to play a critical role, but their influence will remain largely negative. De Beers and the other producers won't be exactly volunteering to reduce their rough prices. At best, they may, at occasional Sights, accept that some goods will remain on the table and from time to time keep their price rises in the low single digits. The formerly patriarchal De Beers, which invited Sightholders and industry leaders from the various diamond hubs to London to discuss the state of the industry and took their views into account, has long gone. The firm's overriding aim is keeping the shareholders of parent company Anglo American happy by increasing its value. CEO Philippe Mellier understands that his aim is simply to continuously raise profit.

•           This year is also likely to see the US Federal Reserve Bank begin to increase interest rates from the historically low levels of the past six years as the American economy continues to improve. That will have a knock-on effect on global interest rates, which, while making the dollar stronger, will also make rough and polished diamonds more expensive.

•           This year could also see something of a shake up among diamond grading labs in the light of developments in the EGL chain in 2014. Meanwhile, diamantaires in the diamond centers continue to complain that the cost and waiting time for diamond certificates from the major labs is too high and too long. Manufacturers have to hold on to diamonds for half a year or more from the time they purchase the rough to the eventual sale of the polished – assuming that they can find a buyer, of course.

•           As for the diamond consumer markets, the American economy is finally bounding forward, which is good news for retailers and the rest of the supply chain. However, the question remains as to whether the diamond jewelry industry will benefit in light of the fact that generic diamond promotion has been dead for half a decade or more. Are specific instances of industry branding enough to carry sales forward overall? The World Diamond Mark Foundation will also be hoping to make further progress this year by signing up partners as it aims to strengthen the cause of generic diamond promotion.

•           As for the Asian markets, India appears to be slowly reawakening under the leadership of its pro-business prime minister, Narendra Modi. The long-term sales agreements signed by 12 leading Indian manufacturers with Russian mining giant Alrosa in December will also help. China, meanwhile, is likely to remain subdued as the government puts in long-term changes to the economy with the aim of creating stronger domestic consumption and making the country less dependent on exports.

A Happy and prosperous New Year to all, and may the inevitable changes that will take place this year go into effect in a steady way to ensure we are in a stronger position heading into 2016.