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Bank Pains


Mar 16, 2013 8:00 AM   By Avi Krawitz
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RAPAPORT... There is an increasing unease in the diamond trade that the banks are ‎reducing their exposure to the industry. For a trade so heavily reliant on credit, the ‎concern is justified. The banks are taking a more cautious approach to lending, not only ‎to the diamond sector, but as a result of changes affecting their own operations. ‎

With Basel III being implemented, banks are operating in a more regulated environment. ‎The accord requires the banks to insist on greater capital adequacy, stress testing and ‎market liquidity from their clients. The various divisions within any given bank are ‎competing for scarce funds and are required to procure those funds by pitching less risk. ‎Contrary to some perception, greater scrutiny is being witnessed across the board, ‎including in Belgium, New York and Israel as well as in India, albeit at varying degrees.‎

For diamantaires, the development is bitter-sweet, even if most fail to see the positive ‎side to it. Ultimately, one important section of the diamond pipeline, the financing arm, is ‎getting its house in order, providing painful but necessary checks and balances in the ‎trade.‎

These developments should reduce the overall risk exposure of the diamond industry and ‎result in a more efficient market. The extent to which previous price bubbles have been ‎influenced by access to easy credit has been a cloud over the industry and the banks. ‎Today, the banking community is less likely to be party to such practice than before. As ‎one sightholder explained to Rapaport News, “In the old days, the banks were big, and ‎even if they had limited resources, money was getting into the wrong hands. Today, the ‎new system will ensure that although there is less money, it will go to the right types of ‎businesses.”‎

That should be encouraging given current market trends. After rough prices rose in ‎February, and polished prices firmed during the recent Hong Kong show, concerns have ‎grown about dealers buying goods based on the speculative expectation that prices will ‎rise further. Facing greater bank scrutiny, diamantaires will be less willing to pay any high ‎price for their rough, even if the competition for the reduced rough production coming to ‎market is strong. ‎

As a result, 2013 may well be characterized by the dynamic of lower supply from the ‎mining companies being offset by reduced financing from the banks. Ultimately, that ‎equilibrium is healthy for the diamond market. ‎

Diamantaires are naturally frustrated. After all, bank credit is their lifeline without which ‎they cannot operate, or grow. Manufacturers need funds to pay cash for rough that they ‎can only sell as polished three months later. They are discouraged by the fact that since ‎the market crashed in 2008-09, the price increases and growth in the level of trade have ‎far outpaced the rise in their credit lines. They argue that their responsibility to streamline ‎their businesses should at least be matched by a sense of responsibility by the banks to ‎help grow the industry.‎

Diamantaires also bemoan a changing, less personable, relationship with a new ‎generation of bankers, one that is governed by an icy system of crossing the i’s and ‎dotting the t’s when assessing a credit line, rather than being a partnership to grow the ‎business. Banks argue to the contrary. If anything, they note that market conditions and ‎the new regulations have influenced them to improve their relationships with diamantaires ‎who increasingly require guidance to navigate the changing banking landscape.  ‎

However, the fact is that the banks have had to rethink their credit lines and financing ‎models after 2012, which was a particularly challenging year for the industry. Even if ‎turnover increased during the year, businesses battled to turn a profit. It is therefore ‎natural for a lender to cut back on its exposure to losses or risk in such an environment. ‎Add to that, new regulations governed by the Basel accords have forced banks to ‎reassess the type of business they finance and to raise their capital requirements. ‎

From the banks’ point of view there are yet additional risks at play pertaining specifically ‎to the diamond industry, which itself is undergoing some noteworthy changes. The ‎industry structure is evolving and the banks are looking on with interest – and some ‎caution – as BHP Billiton bows out, Harry Winston raises its stake in the market and Rio ‎Tinto reassess its involvement in diamonds, while Zimbabwe emerges as a major rough ‎producer. Those may affect how, where and to whom diamonds are sold, and therefore ‎the manner in which banks view the market. ‎

Furthermore, De Beers relocation of its sights to Botswana will likely tilt the volume of ‎business away from the traditional centers toward emerging centers such as Botswana ‎and Dubai. Next week’s Dubai Diamond Conference focused on diamond financing is ‎therefore timely and significant. ‎

Global bank credit to the diamond industry is estimated at between $13.5 billion to $15 ‎billion, spread mainly between the major manufacturing and trading centers including ‎India, Belgium, the U.S., and Israel – in that order. But the likes of Dubai, Botswana and ‎Hong Kong will continue to gain in importance, particularly as they aggressively seek to ‎gain market share from the more traditional centers. Then again, the increased diversity ‎in the trade should eventually be viewed as a positive by the banks once the uncertainty ‎of change passes. ‎

For now, however, the diamond industry is viewed as risky. And cry wolf as it may, the ‎trade has no choice but to dance to the bankers’ tune. Ultimately, there is a new reality ‎affecting all business sectors, which in the long run should encourage a more efficient ‎and streamlined market. In the new post-2008 reality of market volatility, caution and ‎prudence is required by all. As painful as it seems, the banks are being forced to lead the ‎way.  ‎

A full report on bank lending to the diamond industry will be published in the coming ‎weeks. ‎

The writer can be contacted at

Follow Avi on Twitter: @AviKrawitz

This article is an excerpt from a market report that is sent to Rapaport members on a weekly basis. To subscribe, go to or contact your local Rapaport office.

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Tags: Avi Krawitz, Banks, BHP Billiton, credit, De Beers, diamonds, Rapaport, Rio Tinto
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