RAPAPORT... Not only is Antwerp not being spared from the global economic crisis, but it’s at the very heart of the storm. Diamantaires are particularly concerned by the problems large Belgian banks are facing.
The dilemma for Antwerp is that behind two of the major lenders to the diamond industry — the Antwerp Diamond Bank and ABN AMRO — are KBC and Fortis, respectively, both of which have their own problems. KBC just announced a loss of some $1.1 billion for the third quarter, which was immediately reflected in its share price.
As far as Fortis is concerned, it appears that, following its purchase of ABN AMRO in 2007 and in light of the current market situation, the purchase price turned out to be too expensive. As a result, Fortis was first nationalized to save it from bankruptcy and then sold, partly to the Netherlands and partly to Belgium, which subsequently sold its share to Paribas, a leading French bank.
Credit Lines
The biggest fear for the Antwerp diamond industry is that banks will be more likely to cut credit lines. In any case, it is expected that banks will be drastically more demanding in lending money and structuring loan repayments. Indeed, for the time being and in light of the environment, it is expected that banks will be highly focused on their liquidity and watchful of hazardous refinancing on the interbanking markets. One can hardly imagine a banker extending credit going forward without borrowers making a solid case as to how they are going to generate added value with the money.
Moreover, in the depressed mood of the fourth quarter of 2008 — which will include Christmas, Diwali and the New Year’s holiday — it is feared that the industry has lost at least one full year. It is believed it will take that long to move from the stabilization of the situation to the resumption of consumption at a normal level.
Loet Kniphorst of ABN AMRO insisted that “Rumors that ABN AMRO is cutting its credit lines in various countries by some 35 percent is totally unfounded. And I don’t know what it’s based on because that’s not the case. On the contrary, although we continue to be selective, we’ve actually increased our exposure to the diamond sector during the past couple of months.” Furthermore, it seems that more than $30 billion — resulting from the sale of its branches to other banks — is still reflected on the ABN AMRO balance sheet.
The Antwerp Diamond Bank is confident because its shareholder, the KBC bank, is a deposit bank and appears not to have a liquidity problem at all. As for ICICI, another favorite lender for diamantaires, although it is rumored to have invested $81 million in Lehman Brothers — 50 percent of which should be covered by the end of 2008 — liquidity shouldn’t be an issue.
In any case, it is pretty obvious that no banker should ever admit a liquidity problem. One worst-case scenario was Belgian Ethias Bank’s announcement that they wanted almost $2 billion in “preventive refinancing” to protect their liquidity. A prudent move, perhaps, except that the bank’s customers reacted by rushing in and withdrawing their deposits.
Avi Paz, president of the World Federation of Diamond Bourses (WFDB), was wise to urge the producers to reduce their sights and some in the industry are even suggesting that it might be a good idea to cancel entirely the next three or four sights. It doesn’t appear as if the industry will get relief from either the producers or retailers.
No ReliefThe diamond industry cannot expect help from the Belgian government, either. The government doesn’t want to recapitalize weakened companies because the diamond industry, even though of a strategic importance, is not of systemic importance. In other words, should the diamond industry ever collapse, the overall impact on the country would be much smaller than the domino effect caused by the bankruptcy of a major bank.
Paul Goris of the Antwerp Diamond Bank explained: “Diamond companies will hopefully not want to buy what they don’t need and they will have the courage to refrain from doing so. They may have to reduce manufacturing capacities or adjust capacities to the circumstances. It won’t be easy, but the way it is now is no longer economically viable. Layoffs are taking place as we speak in many other sectors as well.”
The bankers’ message is that everybody should be enormously careful and assume responsibility. “Producers should only sell what is needed by applicants and be reasonable with prices,” added Goris. The bankers know the industry and they suggest that, if people fail to act reasonably, the bankers will eventually become the new custodians of the market because by lending money, they will determine who has the money to buy and when.
The Marketplace• Generally speaking, it’s time to get back to the basics of the business.
• Pointers from 0.50 to 0.90 have not slowed down completely. Pressure on prices can be felt, giving way to 3 to 5 percent discounts.
• 4-grainers are doing a little better than pointers. Pressure on prices has led to discounts of 1 to 3 percent.
• No real sales are going on in 3 carats+. Industry is adopting a wait-and-see attitude.
Article from the Rapaport Magazine - November 2008. To subscribe click here.