With the current financial and business crisis reaching out to every little corner of diamantaires’ lives, the diamond centers are faced with recession on an unprecedented scale. It is not yet clear who is going to survive and how long it will take to see the storm through. All diamantaires know is that it probably will be a few years before things sort out and businesses are able to resume normal operations.
Industry players are well aware that critical markets are not performing; the retail trade in the U.S., for example, is running at 50 percent of 2008 numbers. Companies are balancing their need to reduce overhead by laying off employees against their need to retain the most skilled people — and their expertise — at all stages of production for the long term.
BailoutIn India and Israel, diamond industry representatives have been lobbying the financial industry and government agencies for measures aimed at alleviating the crisis for diamantaires, and Antwerp is doing likewise. In December 2008, a group of major industry representatives went to see the various bankers active in the Antwerp marketplace, asking them to help see the suffering industry through the dark times.
Later, a delegation of Antwerp World Diamond Centre (AWDC) representatives, led by AWDC Managing Director Freddy Hanard, went to the banks with a more structured appeal. Their requests to the financial institutions were twofold. First, they wanted to see whether there was any possibility the banks could consider all inventory of the major diamond firms as collateral to extend additional credit. Secondly, they were hoping banks would be more flexible in handling overdue loan payments and more lenient in imposing penalties.
Philip Claes, spokesperson of the AWDC, summarized “There have been contacts with banks on an informal basis to explore possible measures that could be taken to benefit the entire sector. And we trust this will end in our finding solutions for the current problems to support our industry.”
Hanard confirmed that all the banks concurred that they needed no additional guarantees and that they had no negative credit issues. If that is the case, what, then, is the problem with credit availability? diamantaires asked.
Collateral Damage
The problem is not about credit, according to Paul C. Goris of the Antwerp Diamond Bank. “Credit facilities are not missing; credit is still there! Furthermore, it seems fair to say that less than 60 percent of it is being used in Antwerp, which means that some 40 percent is still available — in theory. The problem is not about credit but about the overall lack of collateral to sustain even the existing credit.”
As a matter of fact, three factors have been blamed for creating an erosion of the value of the collateral that banks have been using to guarantee the diamond industry loans. First, since the end of 2007, buyers of rough have been outbidding each other at unrealistically high prices, a phenomenon that lasted until the current crisis and that resulted in a brutal collapse of prices.
Second, the crisis has led stocks of rough, polished and jewelry to start piling up, at the same time as their values were going down.
Third, the lack of clients has pushed retailers to delay making loan payments to such an extent that the value of those increasingly overdue receivables — receivables that are relied on by bankers as collateral for their loans — has been plummeting.
Blank Check?On another front, the Antwerp diamond industry has solicited the support of the governmental authorities to provide additional guarantees the banks might need to increase credit lines. But there are still many aspects of providing government support that are not yet clear. For example, how could the government sign a blank check and give a guarantee of an undetermined nature and extent? What incentives would be necessary to get the government to participate? And how would a Flemish or Belgian government go about structuring guarantees with one Dutch bank and three Indian banks?
Goris concluded by suggesting that the situation is similar to the U.S. car industry, where it isn’t the sector that benefits from a governmental guarantee, but individual firms. In that case, some in the industry are suggesting that maybe it’s time for those who feel they have a case to apply individually for governmental support, with the AWDC remaining in the background to provide them with technical and legislative support as needed.
The Marketplace• 4-grainers+ are moving at discounts close to two digits. Demand is picking up because, at this bargain price, people are willing to let their inventories grow a bit.
• No buyers are reported yet for big stones.
• 20- to 90-pointers were moving very, very slowly in February compared to the previous month because dealers have no interest in buying without clients lined up.
• Movement is better in stones belo 20 points because dealers need to keep some level of business going.
Article from the Rapaport Magazine - March 2009. To subscribe click here.