Rapaport Magazine

Industry Challenges: Credit and Marketing

Liquidity Concerns Rising

By Avi Krawitz
The inaugural World Diamond Conference that took place in New Delhi, India, over two days in December outlined the most important challenges facing the industry at the end of 2014. In order for the diamond trade to be profitable and ensure sustainable growth, delegates urged the industry to improve its financial transparency and practices to become more creditworthy and to invest in marketing to boost consumers’ desire for diamonds.
   Organized by the World Diamond Mark Foundation (WDMF) and India’s Gem and Jewellery Export Promotion Council (GJEPC), the conference recognized that the manufacturing and trading sectors have struggled to maintain respectable profit margins throughout 2014.
   The conference message was driven home in December as polished diamond prices fell, further squeezing manufacturers’ already tight profit margins. The RapNet Diamond Index (RAPI™) for 1-carat laboratory-graded diamonds fell 1.3 percent during the period December 1 to 27. RAPI for .30-carat diamonds slid 3.3 percent, while RAPI for .50-carat diamonds declined by 1.7 percent. RAPI for 3-carat diamonds fell 2 percent during the period (see RapNet Diamond Index chart in slideshow).
   Polished prices were under pressure, with sellers reducing prices to raise cash as liquidity continued to dry up. The lack of cash in the market also came under scrutiny in New Delhi as delegates stressed that the trade needs to spread the debt burden of the industry beyond manufacturers and dealers to miners and retailers.
Looking for Credit
   Erik Jens, chief executive officer (CEO) of ABN AMRO Bank’s Diamond and Jewelry Group, questioned whether polished suppliers can request better payment terms from retailers, if goods sent on memo are still feasible in the long term and whether cash payment up front for rough is the only solution. He added that changing such practices would improve the “bankability” of the manufacturing segment of the market and its reputation with lenders, as well as its access to capital.
   While the banks reduced their exposure to the industry in 2014, Jens outlined a few steps the trade can take to raise its status in the eyes of the lending establishment. He explained that the trade needs to improve its asset controls, consolidate reporting and show clear corporate governance by providing audited and complete sets of accounts and independent stock evaluations. Reducing inventory and making sure that all business transactions add value will also be essential to prove the industry’s reliability and profitability to the banks, he added.
Howard Davies, head of commercial development at De Beers, added that the banks have no choice but to insist on these measures, given their own compliance requirements as outlined by new regulations such as the Basel Accords. Davies explained that De Beers is insisting on financial compliance from sightholders as it negotiates new long-term sight contracts that will take effect in 2015. He stressed that the diamond industry needs to “normalize” its reporting practices and move away from the unique trust afforded in an industry where deals are concluded with a handshake and the greeting Mazal U’Bracha — translated as “good luck and blessings.”

Weak Sentiment
   While few argued the point, manufacturers countered that they’re not only being squeezed by reduced bank credit, but by rough prices remaining high in a declining polished market.
   De Beers maintained relatively stable prices at the December sight, which closed with an estimated value of $600 million. Rapaport estimates that De Beers rough sales rose 14 percent to more than $6.5 billion in 2014, boosted by price appreciation and a stronger than usual second half of the year (see De Beers Rough Diamond Sales chart in slideshow). Anglo American reported that diamond prices rose about 7 percent during the year to November 28, based on De Beers rough price index.
   Prices on the secondary market were about flat for 2014, according to Rapaport estimates, after prices declined in the final months of the year, including in December. Overall rough trading on the secondary market was slow, even though almost all boxes were offered at a loss and on generous credit terms. Sentiment was consequently weak at the final sight of the year, with a large number of boxes deferred.

Trading Slow
   The mood in the trading centers was similarly down, particularly as polished trading slowed during the holiday season. While the U.S. continues to provide stability for the trade, Far East demand has been weak since the September Hong Kong Gem and Jewellery Fair.
   Back in the third quarter, Hong Kong’s polished diamond imports rose 9 percent year on year to $5.24 billion, while polished exports grew 20 percent to $3.7 million. Both polished imports and exports reached record levels for the quarter (see Hong Kong’s Polished Diamond Trade chart in Slideshow), indicating the large volume of goods on the market.
   Inventory levels remained high at year-end, with dealers hoping that good U.S. holiday sales depleted retailers’ inventory levels and would spur stronger demand within the trade in January. Those expectations rose as the U.S. government reported in December that the economy grew 5 percent in the third quarter, representing the strongest quarterly growth in 11 years.
   The economic numbers helped push the Dow Jones Industrial Average to a record high, with the index closing above 18,000 for the first time (see Dow Jones Industrial Average chart in slideshow). They also raised expectations for improved consumer demand in the retail sector in 2015.

Generic Marketing
   The diamond industry recognized in New Delhi that it needs to invest in marketing to capitalize on its growth potential. Alex Popov, chairman of the WDMF, stressed that diamonds have fallen behind leather goods, travel and elective health procedures, and will soon be surpassed by electronic goods, in the ranking of the most-desired luxury products.
   Stephen Lussier, CEO of De Beers Forevermark, added that the diamond industry is not investing as much as competing industries in marketing and as a result is losing market share. He noted, however, that overall industry-wide investment in marketing has actually not decreased when the dollars spent on De Beers shift to brand-focused marketing and on advertising by the major jewelers are taken into consideration.
   Popov explained that the goal of the World Diamond Mark (WDM), which was recently launched in Turkey and Dubai, is to restore diamonds to the top of the most-desired list of luxury products, an accomplishment that will hopefully benefit all segments of the pipeline. Through its generic marketing program, the WDM hopes to be the guardian of the idea that the diamond itself is a brand. As an initiative of the World Federation of    Diamond Bourses (WFDB), Popov noted that the campaign is being driven by the trade rather than the mining companies or retailers.
The hope is that the new approach will enable manufacturers and dealers to reap the benefits of the initiative and that it will ultimately translate to better profit margins. Certainly, if the message from the conference was received, the industry will renew its focus on raising consumer demand for diamonds and improving its own creditworthiness in 2015.

Article from the Rapaport Magazine - January 2015. To subscribe click here.

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Tags: Avi Krawitz