For a long time, liquidity was considered a serious issue in the diamond industry. Banks became the guardians of the industry’s health. They said who would live and who would die by their tight-fisted control of capital. But it appears that since the 2008 economic collapse, things have changed drastically. The one-year-and-more credit lines declined to such an extent during the crisis that today, people are paying mostly cash for the stones they want to buy.
“The prices of rough are getting super crazy and they keep going up by the day — and by the night,” remarked Kaushik K. Mehta of Eurostar Diamond Traders. “On the other hand, people are obviously more liquid than before. The polished that used to be sold on long-term credit is now paid spot, which has reduced the use of credit. Consequently, the market as a whole is more liquid and more money is now available. This liquidity increase in turn pushes prices up since more people want and can afford to buy a quantity of stones from a supply that is limited.”
“There’s no doubt that there’s more liquidity on the market, for sure!” said Raj Mehta of Rosy Blue. “Actually, I can see two different movements in purchasing behaviors. On the one hand, the good thing is that the polished is moving more downstream. The people who really need the polished are now getting the goods, instead of diamonds just circling around in the diamantaires’ little world.”
New Rough Traders
“On the other hand,” continued Raj Mehta, “the situation with rough is completely different. While rough is being bought by manufacturers based on both their manufacturing capacity and the level of demand, you also have many rough traders operating in the market now who have been ‘created’ during the past few months. The production capacity in the world was reduced during the recession and it’s been a very difficult task to bring it back up again. That’s why we are seeing a shortage of polished against the demand.”
Alain Benyacar of B.C.B. International agreed. “There’s much more cash available in the market,” he said. “Some of it is due to the fact that business is resuming and cash is being spent on diamonds. Consequently, turnover’s increasing, and profit margins are back. I think also that with the resumption of activity, banks are more keen to lend money because it’s more and more obvious that they’re financing real trade and not inventory anymore.”
The Indian Banks’ Influence
Another factor in the increased capital that seems to be available to the industry is the role of Indian banks. A major Indian businessman who insisted on remaining anonymous confirmed that Indian banks are playing a big role in the capital available because they are more flexible than many other banks in the trade. Indian banks have to comply with certain obligations stipulated by the Central Bank of India (CBI). One of those obligations is extending credit to export-oriented companies. This is why many Indian diamond-manufacturing clients have substantial liquidity.
“The tricky part of that policy is that these companies have an obligation to use their credit lines, under the penalty of losing them,” explained the businessman. “No doubt this is one of the elements that’s pushing prices up in the diamond market. If you absolutely must buy as much as you can and the quantity of goods available is limited, your only solution is to pay more, which in turn pushes prices up.”
Asked about the impact of this new breed of rough traders, the businessman added, “These people are basically speculating a lot more and they are, in effect, deregulating the whole rough distribution system. The thing is that together they’re powerful enough to be able to cause disturbances to the system. The only solution that I can see is that banks become more careful in their monitoring to be sure they understand better what their clients actually do with their money. People should not be encouraged to buy just for speculation and not to create anything — that’s likely to have negative repercussions on everyone in the industry, as well as all bank clients.”
Watching Tenders for Trends
The industry was wondering what kind of market signals would come out of the diamond tenders scheduled for late March. At press time, diamantaires said they expect the Diamdel, BHP Billiton, ALROSA and Rio Tinto tenders will give people a “feel” for the market and a sense of market trends for the next few months, what one diamond manufacturer termed “the reality of the market.”
But if there’s abundant cash currently available to the market and if there is pressure to spend that cash, are the tender prices really going to be a fair representation of the market? That is an even larger question when you take into account the fact that some of the purchase factors have clearly nothing to do with the state of supply or demand, or even with profit. The concern is that prices from the latest tenders will simply inflate prices further. That leads to the question of whether the consumer market is ready to absorb those higher prices. Nothing is less certain.
The Marketplace
Polished:
• The Hong Kong show beat all records, both in terms of prices reached and quantities sold.
• The market is definitely a seller’s market.
Rough:
• Prices are up by more than 5 percent across the board.
• Demand for rough is extremely hot, due to its scarcity.
• The most recent Diamond Trading Company (DTC) sight prices were reported to be 7 percent higher across the board.
Article from the Rapaport Magazine - April 2011. To subscribe click here.