RAPAPORT... In the last portion of the race toward the 2006 finish line, it seems that the two major concerns of the diamond industry — business and banking — are currently moving in what could be construed as a promising direction.
Business ResumesAlthough not as clearly marked for everyone, the same positive information is coming from various sources. For unexplained reasons, business has been resuming for the past month. Gon Raz of Windiam is quite satisfied: “Across the board, it’s clear that business is resuming. The demand for some items has even gone up by 100 percent. We’re optimistic, but the uncertainty remains, as we need to see whether this resumption is temporary or of a long-term nature.”
Revaluation of Diamond Stocks
An issue in discussion for months and even years has been the possibility of allowing Antwerp diamond companies with historically undervalued stocks to revalue their inventory to adjust it to current prices. The current Revaluation Bill is designed to do just that. Although it is basically an accounting measure, the change could have a very important impact on companies’ futures. The general problem faced by most diamond companies is that their debt/equity ratios are very high, which prevents any further extension of bank credit. But, if a company’s equity was to increase, so could the debt. The Chamber of Representatives has approved the bill, which allows diamond traders to revalue existing historical diamond stocks in exchange for a 4.5 percent tax.
The principle is quite simple: If a company’s equity is too low to be eligible for a credit increase, the company’s stock can be revalued, which would automatically mean a comparable increase in equity. More equity means a lower debt/equity ratio, which in turn allows more room for credit.
Freddy Hanard, director-general of Antwerp World Diamond Centre (AWDC) — the new name of the former Diamond High Council (HRD) — said that “Thanks to this law, diamond traders will soon have a unique opportunity to strengthen the basis of their business strongly and further reinforce their position in respect to bankers. This is an essential step in anchoring the diamond business in Antwerp.”
Having said that, several obstacles seem to remain before full-scale implementation of the bill. First, while a recent AWDC press release said that “The approval of the Senate is expected before the end of November,” some people want to see passage completed before acting on the measure. The problem is that there is a real time constraint. Those who want to take advantage of the bill’s provision will have to complete the revaluation by December 18.
Others fear that, although the measure may seem appealing on its face, there might still be room in the legal texts to allow the fiscal authorities to look at the revaluation process with critical, if not suspicious, eyes. Even if such questions are legitimate, the AWDC wants to avoid all misunderstandings regarding the purpose of the bill, emphasizing “the fact that the bill only applies to existing carats in the diamond traders’ bookkeeping. In any case, there’s no question of so-called black carats in the diamond traders’ bookkeeping, which makes the term ‘fiscal amnesty’ [used in the press] misleading.”
Banks Organize
New banks are, at last, slowly coming into the diamond district. The opening of an ICICI branch a couple of months ago was already an important step in that direction, especially with the roughly $20 million to $30 million in loans they’ve already granted. The Bank of India is expected to open a branch in February 2007, and the Belgian Bank Van Breda started operations in the diamond sector in the past few months. Even though the Bank Van Breda is a small local bank compared to the others, which are international moguls, its importance is of the essence because this is the bank where those in need of $100,000 or $200,000 up to $1,000,000 will be able to go. This is the place where the small and medium companies — the former Dexia Bank clients — will be able to find financial shelter.
Jacky Roth, president of the AWDC, summarized the situation with an eye toward practicality. “If you’re about to start shopping, you’ll be better off in a street where you’ve got a choice between several addresses rather than a single one.”
Furthermore, more banks means, if not substantially more credit, at least a spread of the risk burden. That, in turn, is expected to result in a reduction of the risk premium that’s included in the interest rate, which could eventually translate itself into a 0.5 percent interest rate decrease.
Antwerp hopes that eventually, six or more big banks would come, from all diamond centers. If the rumors that Bank of America will purchase ABN prove true, Antwerp would inherit its first U.S. bank.
The Marketplace• Below 25 points, across the board,are the hottest items.
• 30 points: little pickup, especially in VVS goods, after a long quiet time. There is a possibility of slightly increased prices.
• 70 points: VS2 up, demand has suddenly increased for stones with certificates.
• 60-, 80- and 90-pointers: strong demand exists and more demand than supply.
• 1 and 1.5 carats are selling better in big volume across the board over the past three weeks, piqués included.
• 2 carats are depressed.
Article from the Rapaport Magazine - December 2006. To subscribe click here.