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RAPAPORT... Antwerp World Diamond Centre's (AWDC) keynote speaker, Herman Van Rompuy, the former European president, told industry attendees at a financing seminar on March 27 that no one can bypass market rules anymore. And this advice applies to the diamond industry -- even more than other industries -- because with its $20 billion in bank credit, the diamond trade is too small of a player in the financial marketplace.
Des Kalilea, an equity research analyst for RCB Capital Markets put it bluntly: “Contrary to the farming industry, for example, the diamond industry is such as small business that it's easy for banks to just [ignore] it!” How does that attitude affect the industry? On one hand, there may be more money available than ever due to quantitative easing of major central banks, however credit is more difficult to secure. From now on, it's not the most profitable industries that benefit from banking largesse, but the most transparent ones. And at this stage, diamond companies, in general, are not transparent enough and their presence on a bank's balance sheet is even perceived to tarnish the institution's reputation.
Diamonataire’s Perspective
Anish Aggarwal of Gemdax, the moderator of the seminar, said, “If a decade ago, bank finance accounted for 50 percent of every dollar of every diamond handled, today we've reached a figure of 110 percent. Do we need even more credit? To answer that, we need to have a closer look at the relationship between liquidity and profitability.” Kishore Lal, of Standard Chartered Bank London, elaborated, “Bankers are business people. If we're hesitating as bankers to globally fund the diamond industry, there are underlying reasons worth analyzing that go beyond just the desire for more profitability.”
Sabine Smets, the head of ABN Amro's Belgium diamond and jewelry sector, added, “The essence of Erik Jens' message to the industry holds in four words: transparency, bankability, sustainability and profitability. If we don't all start working on it, we're going to face growing problems.” Lal added, “Furthermore, if you look into the market carefully, it seems that there's enough credit.” Having said that, he stressed two things: the concern that the Antwerp diamond industry can compete with other diamond centers, and that the city was to remain a leading center for bank financing provided that the Square Mile would continue its path toward transparency. Syndication, a Solution ? Smets explained that the industry has changed, for the better, over the past couple of years. “There should definitely be more banks involved in the industry. This is exactly the opposite, for instance, in the bakery business. More bakers on a block mean less turnover for each, individually. However more banks means less risk to banks. If the risk is spread, it means that more liquidity could be injected. We, at ABN Amro, are serious advocates of syndication and we're always willing to help any endeavor that will increase the number of banks involved in this industry. The principle is very simple: on our own we could have, say, a limit of one major $50 million client, whereas with the same amount, and more banks involved, together we could serve five times that figure. In that respect, we have a lot of know-how and experience and are willing to help set up — legally and formally — a dedicated consortium of banks.” First, however, to attract new banks, two kinds of issues must be addressed. An industry would have to be able to rely on a recognized price index in order to ensure accurate valuation -- both on receivables and for inventory. There seemed to be a consensus from seminar attendees for finding that index. But a second issue was more problematic: more than profit, banks guard themselves at all costs from reputational risks. “What is reported in the press is, by all means, negative,” stressed the bankers. More than ever, the diamond industry needs good publicity. It was also suggested that miners might consider offering credit to buyers. Still, their projects are expensive, especially at first, and take one or two decades to complete. They are also faced with offering some kind of return to investors by the time mining operations begin.
There was a general conclusion from the seminar that, yes, more money will be available and, yes, more businesses will qualify, if they are reputable and adopt transparency.
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