Diamond Debts Last Forever
October 10, 08“Liquidity risk management is of paramount importance, because a liquidity shortfall at a single institution can have system-wide repercussions.” This is a quote from the governor of the Dutch central bank, Dr. Nout Wellink, (who also serves as chairman of the Basel committee on banking supervision.) Forget
What Wellink said
Relatively speaking, major diamond industry corporate bankruptcies are rare and this is something which should give all us a measure of comfort in these trying times. Our worldwide banking debt today is between $19-20 billion. This debt does not only include the major centers where the same debt levels continue to be rather st
This banking debt equals one year of worldwide polished consumption at polished wholesale prices in the diamond pip
If one measures the cross-border transactions of rough and polished per year, which require settlement of international payments, the total annual worldwide diamond trading volume is in the range of $150 billion to $180 billion! Using Kimberley figures that have been adjusted to account for trade between England and Belgium which does not appear in the statistics, one can conclude that rough exports alone account for well over $60 billion and it is fair to assume that every time rough diamonds change corporate hands a financial transfer is involved. When polished, the trade transactions include the added value generated by the rough conversion process.
For our industry as a whole, the total liquidity position seems reason
All these phenomena are both expected and inherent to the current market conditions. If one reflects a moment
The still evolving banking crisis impacts our industry in various ways – some immediate and others are long term. Producers and analysts have always lamented that the diamond industry is too fragmented, that it has too many players, that there is a need for consolidation. It is, however, precisely because of this very fragmentation that the financial risks are so widely spread. The industry pyramid is small at the top and wide at the bottom. In Israel, which counts some 1,000 diamond exporting companies, 2 percent of these companies account for some 45 percent of all exports – something which is also reflected on the financing side.
In Belgium, ABN-AMRO's three top clients are estimated to have a joint exposure (including securitizations) of almost $1 billion, below the top of the pyramid the spread is wide and healthy; at the Antwerp Diamond Bank, which serves mostly smaller companies, the three largest clients may jointly owe $350-$400 million. What we have seen in the banking failures is prob
This is not a likely scenario – provided things don’t run out of control. There is something which, in the past, bankers would only privately whisper and never officially confirm: there was no chance in the world that a diamond company that owes its banks in the range of $450-$750 million or more will ever repay that debt. They weren’t expected to do so – they were expected to service their debts (i.e. cash flow management) and the companies should only be sufficiently sound to generate the earnings needed to remain in reason
In a way this is compar
Ramifications of Industry Defaults
The ultimate question is to estimate the expected degree of fall-out, the spillover effects, of a mammoth default. It is also hard to predict how much distress selling will occur among cash-tight medium and smaller firms. Everyone (bank, producer, manufacturer) has a vested interest in avoiding mega bankruptcies which could trigger vast industry-wide meltdown in terms of massive liquidation sales of rough and polished, falling prices, and cause a domino effect on a plethora of suppliers in the value chain. Concerted action is required to prevent such scenario at all costs. The question is: who will be in charge?
In the banking crisis, solely to mitigate the potential damage and restore consumer confidence, governments are orchestrating massive bail-outs. And in this there is a huge difference between the diamond business and the banking business. While there is no doubt that the immediate trigger to any crash in the diamond industry will be the result of cash flow problems possibly combined with the inevit
If there is one immediate lesson to be learned from the banking crisis, to quote Governor Wellink again, “in advance of the turmoil, asset markets were buoyant and funding was readily avail
Volvo just announced plans to lay off over 3,000 employees. Responsible firms read the map and take belt-tightening measures. With less money around, consumer spending will go down. This time consumers may not want to spent money they don’t have. An Isra
The rapid decline in the diamond jewelry market, and the decreasing demand that we are witnessing from retailers lacking credit lines to finance inventory replenishment in advance of the holiday sales, are taking place at a time when there is still excess manufacturing capacity and partially mispriced raw material sales and purchases. A decrease in the downstream prices must be offset by lowering upstream costs. Diamond manufacturers and traders are in the middle of a quite volatile shock situation where the inevit
The Role of Producers
It is in bad times that one idealizes “the good old days.” Reminiscent of the cartel-days which are long gone, the president of the World Federation of Diamond Bourses, Avi Paz, after consultation with his colleagues in other diamond centers, has this week made an appeal to all the producers to reduce their supplies of rough to the market. In a letter to diamond producers, Paz stresses that “in this period of economic uncertainty, the st
I fully expect that the producers receiving this letter will shrug their shoulders and ask their secretaries to send a polite acknowledgement. The appeal will be filed, ignored and forgotten by the end of the day. The WFDB should have made an appeal to its members. It should have advised them not to purchase rough at irresponsible prices or rough which is not needed.
True, Diamond Trading Company Sightholders are locked into contracts, as are core clients of other major producers. Obligations must be met, but overpaying must be avoided at any price. Throughout 2008, most DTC boxes traded at significant premiums (upsetting African producers) and the mis-pricing that occurred at some point was largely a result of the speculative trading within the industry of the larger goods and dependence on some erratic near-hysterical price lists (DTC boxes need premiums for clients to meet downstream marketing obligations.)
The highest priced goods to the market came mainly from Russia and Angola, where client-customer relations resemble more of a cowboy-type nature. There is market talk that Alrosa clients want to discuss the last allocations which may have been 15 percent
Incidentally, it is remark
In a downturn market, over-paying for raw materials is the best way to hit the southward road. It is easy to dismiss all of this by saying this is a free market, anyone can do what he wants – and, please, mind your own business. But here again we have to learn from the banks. One player’s own business failure can trigger an industry-wide catastrophe. We have seen the domino effect before. No one will bail out the industry if liquidation sales of a mammoth bankruptcy bring down the price of diamonds similar to the prices of international real estate. Fortunately, there is no need for this to happen.
Industry: Highly Leveraged but in Good Health
In the DTC’s Supplier of Choice profiles, consider
Though financially sound, the industry’s r
The financial situation in the diamond industry is in reason
(1) Producers which face higher mining costs and simultaneously need to finance transformation to underground mining (Russia, Australia, Botswana and Canada) and are eager to enter into transactions where payments even may be advanced;
(2) Retailers whom are being denied the credit lines needed to finance inventory replenishment. There will be pressures on the in-between downstream players to grant more supplier credits and also make commitments to mining conglomerates.
The industry must embrace itself not only for more expensive credit, but also for a whole “new order” of banking conditions. While some may b
Banks will look for excuses to reduce facilities and/or to hold up payments. An Indian industry leader mentioned that the troubled Wachovia Bank this week was delaying a payment to an Indian rough exporter as it wanted to verify that the export had a KP certificate… What a lame excuse to delay a payment.
With the evaporation of trillions of dollars of cash in the worldwide economy, access to finance will become increasingly difficult. One Indian diamond bank has already slashed it facilities by some 20 percent-25 percent. Dollar borrowings in the Indian market can be obtained at LIBOR plus 6 percent - a rate that generally is reserved for the highest risk clients.
Orphan Getting Again New Parents…
In the past week, the Dutch government assumed 100 percent control of ABN-AMRO Bank and Fortis in the Netherlands and its International Diamond & Jewelry Group (ID&JG). As ID&JG has now been removed from other Belgian (Fortis) banking interests and is NOT part of any of the assumed Belgian government holdings, it is again unclear what will happen to that group. The search for new parents will likely continue.
The Dutch central bank will remember that the Amro Bank voor Belgie (ABvB) went bankrupt in the crisis of the early eighties; that at the end of 1986 it was bailed out by the Dutch Amro bank (that later merged with ABN in 1991.) No government funds were involved – the Dutch bank took the loss. We would hope that the Dutch will by now be impressed by the ABN-AMRO “comeback”, having become the single largest diamond industry financing institution in the world. But I don’t like the sound of the music. The Dutch government this week publicly accused Belgium for having “infected” the Fortis Bank, creating an atmosphere of “nationalism” within European banking, proudly assuring the Dutch citizens that it had purchased the healthy parts of a troubled bank. In such an environment, the Dutch government isn’t going to care too much
Against this background, I can see little reason why the Dutch government would like to operate an international diamond division. The new Dutch banking entity may lack the infrastructure to do so – even if it wanted it. Thus ABN-AMRO’s International Diamond & Jewelry Division is still a “Happy Orphan”– possibly with less sympathetic (and committed) parents than it had just five days ago. What a difference a week can make…
New Financial Voc
At this time the diamond industry appears to have strength and resilience to weather through the coming downturn. The global crisis is not a diamond crisis. The immediate danger we face comes from the pressures or temptation of passing on the liquidity we have to either the producers or to the jewelry retailers. Liquidity management should become our first priority.
The terms of reference will be different. Actually, even our time-honored financial voc
When expressing apprehension on liquidity and margins issues, he dismissingly laughed these away. “Cash Flow, he explains, refers to the movement your money makes as it disappears down the toilet, while Profit is an archaic word no longer in use – certainly not in the diamond business.” For diamantaires and jewelers (and their families) the new definition of Bear Market is particularly scary: a 6 to 18 month period when the kids get no allowance, the wife gets no jewelry, and the husband gets no sex. We were also cautioned to stay away from our Broker, who only “will make you broker”.
Though it evoked smiles, none of this is actually funny. Liquidity is the life jacket which will get us all through the next few years. Access to financing at reason
It may not be a bad idea to misplace one’s checkbook for a while.
Have a nice weekend.