Rapaport Magazine

Banks Closing, Liquidity Issues Brewing

Tightening credit is one of several factors adding to market uncertainty as the industry hopes for continued stability in second-half 2016.

By Avi Krawitz
 News that the industry is about to lose an estimated $2 billion in bank credit is never easy to digest even if it was widely anticipated. Therefore, the decision by Standard Chartered to close its diamond and jewelry unit sent shock waves throughout the trade, especially as its reasoning hit the heart of recent industry concerns.
   “Continuing to provide financing to the mid-stream diamond and jewelry segment falls outside of the bank’s tightened risk tolerances,” explained a spokesperson for Standard Chartered. “We are working with clients to ensure a smooth exit.” Antwerp Diamond Bank (ADB) made a similar announcement in 2014 and is slowly winding down its $1.5 billion portfolio, of which an estimated $1 billion worth of loans is still outstanding.
   The Standard Chartered announcement came just a month after Ernie Blom, president of the World Federation of Diamond Bourses (WFDB), urged the trade to change the perception the banks have about the diamond business. His comments at the World Diamond Congress in Dubai echoed the message bankers had for the trade to get its house in order.
   Still, Davy Blommaert, a former ADB executive who is currently unit head for precious metals and diamonds at the Dubai-based National Bank of Fujairah (NBF), suggested these closures have not yet resulted in a liquidity shortage, as some of the lost credit is being compensated for by new entrants such as NBF. However, he cautioned, liquidity shortages may emerge once those outstanding credit lines run dry and are not replenished.
   Similarly, diamantaires exhibiting at the Las Vegas shows in early June were more concerned about the longer-term impact the bank exit might have on liquidity since they sensed there’s sufficient liquidity in the market at the moment. “There is money out there but people are waiting for the right opportunity to spend,” said one Antwerp-based diamond supplier who requested anonymity. “Our problem is there’s a lack of interest and that’s why goods aren’t moving the way they used to.”

Slow Markets, Slim Margins
   The Las Vegas shows demonstrated that demand is specific with buyers looking to fill orders rather than build inventory (see Vegas… Win, Lose or Draw in Cover Stories section). The shows failed to stimulate stronger demand as diamond markets remained slow and prices softened in June.
   The RapNet Diamond Index (RAPI™) for 1-carat diamonds slipped .2 percent from June 1 to 20. RAPI for .30-carat diamonds fell 1.2 percent and RAPI for .50-carat diamonds dropped .5 percent. RAPI for 3-carat diamonds declined by 1.7 percent during the period (see RapNet Diamond Index [RAPI™] in slideshow). Demand for larger sizes remained weak, particularly in the higher color and clarity ranges, while there was good demand for SI-clarity diamonds across all categories.
   Dealers noted that the summer months of May to August are traditionally a period when trading activity slows. Therefore, while profitability has improved in 2016 — as rough prices fell in 2015 and polished prices strengthened at the beginning of this year —profitability remains a challenge for manufacturers.
   Asian Star, an India-based manufacturer, reported that sales increased 29 percent in the fiscal quarter that ended March 31 but net profit fell 10 percent as margins continue to be tight for the company (see Asian Star Sales vs. Profit chart in slideshow).

Stable Rough Market
   Manufacturers therefore continue to refrain from raising polished production as maintaining efficient inventory levels has become difficult in the current slower period. Inventory levels are increasing as polished demand stagnated in the second quarter while rough trading remained robust.
   Rough trading was stable again in June with ALROSA goods selling at mid-single digit premiums on the dealer market. De Beers prices were reportedly steady during the June sight, its fifth of the year, which was ongoing at press time. The company’s sales in the first four sights increased by 16 percent year on year, according to Rapaport records.
   ALROSA, meanwhile, reported revenue soared 37 percent and profit more than doubled in the first three months of 2016 (see ALROSA Revenue vs. Profit in slideshow). The Russian miner’s performance was boosted partly by the strength of the dollar against the Russian ruble and as rough markets vastly improved this year. Strong first-quarter demand enabled ALROSA to reduce its stockpile by about 4 million carats to less than 18 million carats, after lower demand in 2015 led to an accumulation of inventory.

Uncertainties Persist
   In contrast, Dominion Diamond Corporation saw its sales slide 5 percent and its bottom line fall to a loss in its first quarter of fiscal 2017 despite the strong market conditions, as a result of a change in the mix of production at the Ekati mine to lower-quality rough (see Dominion Diamond Corporation Revenue vs. Profit chart in slideshow). Jim Pounds, Dominion’s executive vice president for diamonds, noted that rough prices improved significantly in the first quarter in all categories except the cheapest ranges of goods. Dominion’s prices were reduced in January but have rebounded and are up by an average 2.5 percent for the year to date, management told Rapaport Magazine.
   Des Kilalea, an analyst from RBC Capital Markets, said he expects prices to soften in the coming months. He downgraded his outlook for Dominion due to changes in the company’s mine plan and a cautious outlook for the rough market.
   Certainly, diamond suppliers expressed concerns about how the market will evolve in the second half of the year. Sluggish polished demand, lab-grown diamonds, marketing to Millennials and uncertainty about the U.S. elections were just some of the issues weighing on exhibitors in Las Vegas this year. And while news broke in Las Vegas that Standard Chartered is exiting the industry, the market recognized that uncertainties persist as it enters the second half of the year.
   As Kilalea concluded, “Regarding the rough market, our view is that prices will soften in the summer with, hopefully, slight firming later in the year. But with a leading bank looking to pull back further from mid-stream funding, risks remain.”

Article from the Rapaport Magazine - July 2016. To subscribe click here.

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Tags: Avi Krawitz