RAPAPORT... Riding the wave of a very strong Hong Kong Show in March, Israeli dealers and cutters were confident that the market was working in their favor as demand and prices continued to rise. However, many cautioned that the trading may be overly enthusiastic and not reflective of true market conditions.
“The market is boiling at the moment and the question we are facing as manufacturers is whether it reflects reality or if a bubble is forming,” said Abraham Fluk, chairman of Yoshfe Diamonds International (YDI), a manufacturer of small and medium-size, fine-make round diamonds. “The market went up too quickly, which has caused us to forget that we were in a real crisis only two years ago.”
Dealer Demand Drives Prices
Fluk claimed that while demand for diamonds has improved among end users, it was dealer demand, and therefore a speculative aspect, that was driving prices.The growth of consumer demand in the Far East and India doesn’t explain the increases of almost 100 percent in some stones, he added.
Similarly, Carmel Lustig, marketing and sales director at Lustig Brothers, a manufacturer of rounds and fancy cut diamonds, indicated that the market may have grown a bit too positive since the Hong Kong show and added that prices of both rough and polished are being supported by the trading centers of India, Belgium and Israel. “Dealers support the new prices but, outside the trading world, I don’t feel the same acceptance,” Lustig said. “There is improved demand in the consumer markets, but also some resistance to the new prices, especially in the U.S.”
Lustig noted that while U.S. demand is growing, customers in the U.S. have been less accepting of the new, higher prices than buyers in the Far East, while selling conditions to the U.S. remain tough.
Speculation
Fluk cautioned that the trade should better digest market conditions and diminish the speculation. “The real profits come when you buy and then sell by adding value but, at the moment, this is mixed with expectations about price increases,” he stressed. “That speculative portion of the profits ultimately doesn’t hold when the market corrects itself. Only the real diamond profit maintains its value.” Despite his caution, he noted that the market is positive and that YDI has maintained strong sales by selling to end-user clients.
Both Fluk and Lustig also expressed concern that current high rough prices were not supported by market trends. “If, theoretically, you could buy the rough, manufacture and sell the resulting polished on the same day, you would lose 20 percent at today’s prices,” Fluk said. “That is a tremendous risk and not healthy for the industry.”
Responsible Banks
Fluk noted that the Israeli trade was protected to an extent from speculative practices by the conservative lending policies of the country’s banks, particularly the fact that they do not finance inventory purchases.
Others in the trade countered that the banks need to ease their lending to enable the Israeli industry to grow and compete with other centers, such as India, where local companies have greater access to credit for buying. “We proved our financial strength during the crisis and I am very proud that we were among the best clients to the banks,” said Avraham Traub, owner of Avraham “Bumi” Traub (ABT) Diamond Manufacturers and honorary president of the Israel Diamond Manufacturers Association (IsDMA). “But the financial support we are getting is the same as it was 15 years ago and this is a big mistake.”
Bank credit to the Israeli diamond industry was cut from $2.6 billion in 2008 to $1.5 billion during the bottom of the downturn. As markets recovered, credit grew to $1.6 billion in 2010, even though Traub stressed that the industry’s turnover is back to precrisis levels.
Udi Sheintal, managing director of IsDMA, explained that Israeli banks reduced credit lines during the crisis and that businesses had to close out their old balances before qualifying for fresh money. Manufacturers were forced to sell their stock at prices that were not justified in order to be liquid after the bank demanded the repayment of its debt, he said.
Traub stressed that the banks’ lending practices need to reflect the industry’s needs and that to level the playing field, Israel needs to get financing for rough and polished purchases, which would help stimulate both cutting and dealer activity. “We cannot compete with this lower level of financing we are getting,” he said. “The world is changing and moving very quickly, so we all need to be very flexible.”
The Marketplace
• Polished is strong following the Hong Kong show.
• Dealers and cutters are optimistic as prices rise and polished shortages prevail.
• Demand is good for .30-carat to .90-carat, G-H, VS-SI stones, as well as for 1-carat and 1.5-carat, G-H, VS-SI stones.
• Demand is improving for large stones above 3.00 carats.
• There is concern that the rough market is overheated.
Article from the Rapaport Magazine - April 2011. To subscribe click here.