Industry’s Biggest Challenge: Financing, Profitability

Sentiment improved in February with rising expectations for polished sales in the short term. However, a different focus is required to ensure a more bankable and sustainable industry in the long term.

By Avi Krawitz

Financing is the biggest challenge facing the diamond industry, stressed Ernie Blom, president of the World Federation of Diamond Bourses (WFDB). “If there is one subject our members bring to our attention repeatedly, it is not being able to secure enough credit,” he said in his opening address at the organization’s Diamond Financing Seminar in Mumbai.
The one-day workshop aimed at understanding the reasons for the lack of financing, exploring alternative financing platforms and engaging in a dialogue with the banking sector, Blom explained. Bankers attending the conference also urged greater cooperation with the trade. “Unless the industry understands the problems faced by lenders and vice versa, we can’t move forward,” added Karnam Sekar, deputy managing director and chief credit officer at the State Bank of India (SBI). “The lenders have an interest in the industry’s growth,” he added.

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Tighter Credit
The WFDB set up a special taskforce to further the industry’s interaction with the banks and, hopefully, enable greater lending to the industry. The level of bank credit to the trade has been steady at an estimated $11.5 billion to $12 billion in the past few years, of which about half is extended in India, reported Praveenshankar Pandya, chairman of India’s Gem & Jewellery Export Promotion Council (GJEPC). The level has dropped from around $15 billion in 2012, according to Rapaport estimates, as a series of industry defaults and increased compliance regulations influenced the banks to work with greater caution toward the diamond trade (see Bank Credit to the Diamond Trade chart in slideshow).
Israel’s Bank Leumi and Antwerp Diamond Bank left the industry, while Standard Chartered Bank continues to reduce its exposure. Meanwhile, there are approximately 40 banks lending to the diamond trade in India, of which only about five understand the industry, Sekar noted. Those banks were urged to concentrate on credit appraisal and developing relationships with their clients in the diamond industry. “You have to know your customer well,” stressed Russell Mehta, vice chairman of the GJEPC. “You can’t just lend off the balance sheet.”

Industry Contraction
For its part, the trade recognized a need to meet the banks’ governance requirements, even as the level of financial compliance and transparency improved in the past two years. The industry is determined to comply with antimoney-laundering regulations, and promote the know-your-customer/supplier concept, Blom stressed.
The seminar recognized the need to focus on small-to-medium size businesses, which have come under pressure due to tight profit margins and in the wake of India’s demonetization program abolishing high currency notes.
India’s diamond-manufacturing sector diminished by about 15 percent as a result of the downturn in the second half of 2015, Pandya estimated. An additional 6 percent of factories, mainly in the rural areas, remain closed since the Diwali break in November, as businesses and individuals get their respective houses in order post-demonetization — largely opening bank accounts to facilitate a shift to electronic payments.

Sentiment Improves
Dealers note the negative effect of demonetization on diamond trading is fading, with Indian jewelers filling orders again to replenish stock for the remainder of the wedding season. Trading was steady at the Signature India International Jewellery Show (IIJS) in February even as traffic was relatively light. “Buyers came to buy and not window shop,” exhibitors said.
Similarly, larger diamond manufacturers expect overseas orders to improve after the Christmas and Chinese New Year retail selling seasons, especially since trading has been below previous years through January and February.
The RapNet Diamond Index (RAPI™) for 1-carat polished diamonds fell .4 percent during the period February 1 to 21 (see RapNet Diamond Index [RAPI™] chart in slideshow). RAPI for .30-carat diamonds rose .3 percent, while RAPI for .50-carat diamonds declined 1 percent. RAPI for 3-carat diamonds dropped .4 percent during the period.
Sentiment improved with trade events in Mumbai, New York and Ramat Gan, lifting the mood among dealers. Expectations rose ahead of the Hong Kong Jewellery International Show that started after press time, as dealers expect jewelers to replenish stock sold during the various holiday seasons.
Manufacturers have raised their polished production following a spike in rough buying — and prices — in January. Rough trading and prices remained stable in February while manufacturers’ profit margins have subsequently been squeezed since the beginning of the year. This follows prices having fallen about 15 percent in 2016, enabling improved profits in the trade and the mining sector during last year.
De Beers reported underlying earnings more than doubled to $667 million in 2016, as rough sales rose 37 percent to $5.6 billion (see De Beers 2016 Results by Numbers charts in slideshow). The company projected production would rise to 31 million to 33 million carats in 2017, from 27.3 million carats last year, “because we see the market has recovered from where it was at the end of 2015,” noted Bruce Cleaver, CEO of De Beers.

Turnover versus Profit
The continued rise in supply influenced some caution among the trade, especially as profit margins were squeezed after the large January sight. Blom urged companies to focus on profitability rather than turnover when operating in the rough market. “Profitability is a problem because we tend to chase after sales; but to survive, one has to only buy rough that is profitable,” he stressed.
Doing so would improve overall profitability in the diamond trade and help reduce the increased risk perception with which the banks, and particularly the regulators, regard the industry, explained Erik Jens, head of Diamond & Jewellery Clients at ABN AMRO. As a result, he argued that financing is not the real challenge facing the industry, since there’s enough funding available for bankable companies, he said.
“None of our clients, and we are the market leaders, faces difficulties in obtaining finance,” Jens said. “The stress is more around profitability, margins, sourcing and manufacturing the right goods at the right time with the right margins.

Article from the Rapaport Magazine - March 2017. To subscribe click here.

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