Antwerp Market Report

RAPAPORT... The overriding question for the times certainly must be: Is the worst behind us or still to come?

Moving Up
Despite the fact that the months of April and May are traditionally rather quiet in the diamond industry, there has been increased activity in recent weeks, impacting also polished goods, and that has been reassuring. While polished was selling at Rap minus 50 percent barely one month ago, the prices have been rising globally to reach an average of Rap minus 40 percent. Since Rap minus 35 percent to Rap minus 25 percent is considered by many in the industry as a decent wholesale level, where business can be profitable, that leaves room for the retail end to add its own margin before reaching full Rap price for the end user.

Alain Sternberg of Alain Sternberg confirmed, “The market seemed to be stabilizing in the past one to two months. Before, we really thought this crisis was bottomless, but it appears that the bottom may have been reached. Obviously, the lack of available rough is helping sustain activity, but everyone is monitoring rough movements carefully in an attempt to detect any return to speculative activity.”

Ali Mackie of Mackie Diamonds agreed. “Over the past three months, business has been gradually improving. I believe that we’ve seen the worst, but we’ve still got difficult times ahead of us. Today, you see more and more people who were on the sidelines coming back because they feel there are opportunities to buy.”

Generally speaking, diamantaires have reduced their tendency to sell goods at a loss, except for older inventory, and are refusing to sell if the offers are not at least decent. Asian buyers reportedly call regularly offering to pay Rap minus 45 percent for goods that the sellers are not willing to sell anymore below Rap minus 35 percent.

Raymond Cohen of Kristall Smolensk sees the situation improving as well. “The bottom of the ocean has been reached in the diamond business and it’s behind us,” Cohen said. “The industry has now become healthier at all levels. The unprofitable and inefficient companies are gone and layoffs have taken place almost everywhere, including at production levels. Bit by bit, people have begun to realize that, after selling polished at a sacrifice at unrealistic prices in order to generate cash, they now need new stock in order to be able to resume working... in a more realistic world.”

New Worries
Axel Beck of Beck Diamonds sees banks as a new source of concern. “As we speak, the fact that banks didn’t call their money back is a very bad sign for the industry,” he said. “It suggests that bankers are implicitly encouraging speculators to continue in the direction they were going in the past. When people were making a lot of money, speculating on diamonds, many of them took the money from their companies and invested it in other speculative sectors. But now that the industry is facing a severe downturn, bankers aren’t asking for their money back. As a matter of consequence, the diamantaires aren’t being obliged to pay for their mistakes. This means that the game is twisted: When they win, they can take the money away and invest it elsewhere, but when they lose, they’re allowed to leave the debt in the company. That’s unfair and unethical.”

Cohen suggested that the banks’ attitude is a smart move, and many in Antwerp agree. “No bankers would dare to do anything that would result in a diminishing of their assets. By causing major diamond firms to go bankrupt, they would lose all the money they lent to those companies. Moreover, causing any major company to go bankrupt would have a disastrous impact on the whole business network,” he said. “Should it ever happen, it would be a lose-lose deal, where everybody would end up poorer than he was before.”

Cautionary Tale
Even if people in the industry insist that trust is coming back slowly, it’s still too early to refer to it as real confidence. Far from it. What people know for sure now is that many people are far more broke than it appears, even with their massive credit lines and stockpiled diamond inventories.

Take, as an example, one major company that currently carries a bank debt of about $25 million, and an inventory valued eight months ago for some $40 million. One of the company’s suppliers discovered recently that only one-fifth of the bank debt has been repaid, and there’s no way they can repay the remaining $20 million when they sell their inventory at today’s prices.

“Even if they managed to sell their entire $40 million inventory right now,” said the company supplier, “they would collect less than half of $40 million at today’s prices, which means that the company is virtually bankrupt.” The motto nowadays is “What you see isn’t necessarily what you get!”

It is this kind of scenario — typical in the industry — that makes people expect a certain number of bankruptcies in the near future. Still, diamantaires are insisting that the worst of the crisis is behind them.

Marketplace
Polished:
• Demand is strong for H-I, cleanish 1 carat, due to lack of polished.
• Generally speaking, shortages are being seen from smaller goods to 1 or 1.5 carats, from clean down to better SI goods.
Credit:
• Credit facility in polished goods has declined from 180 days to 120 days.
• Credit facility in rough also has decreased, from 60 days to close to 30.

Article from the Rapaport Magazine - June 2009. To subscribe click here.