Rapaport Magazine


By Marc Goldstein
Changing Times

Times are changing, so are banks… and so is business. That assessment is being written as ABN AMRO and Arjav Diamonds
are submitting their respective claims in their legal dispute to the court. The dispute centers on an allegedly unpaid debt, the seizure of assets pledged as loan collateral and the difficult predicament when a debtor’s ability to make loan payments is restricted by the interruption of his business. The major parties in this case obviously are not commenting at this stage. But, to many in the diamond industry, the most interesting part of the story doesn’t lie in the case itself, but rather in the message it sends to the industry.

   We’re in a world today where the ethics are changing. This has nothing to do with morality actually. It’s more, as one diamantaire put it, the fact that “What was acceptable once just isn’t anymore.” There is increasing concern that the global diamond sector may be too highly indebted. And,
as is often the case with diamond issues, it’s in Antwerp — where the rules are most strictly applied — that the first signs of change usually appear.

   A diamond manufacturer who said he couldn’t afford to publicly criticize the system explained, “We’re heading toward a more transparent society, where the money flow should be used as intended in the diamond trade.” He was referring to the two most popular uses — or abuses, depending on whose side you’re on — of bank loans to diamantaires.
   The first example, the manufacturer went on to say, is “the money that’s used to corner the market in specific diamond categories. This technique enables the actors to take advantage of the market fragmentation. The diamond industry is actually quite small, and it doesn’t require relatively huge amounts of money to start buying a given category of goods and storing them — and to continue buying and storing goods in that category over a period of several weeks. When the dealer has sufficient goods stockpiled, he offers to buy goods in that same category, say, at an ALROSA tender, at prices 20 percent to 30 percent higher than the
market price.”

   In effect, that dealer, in making the higher-than-market-price offer, artificially increases the prevailing market price and creates a new benchmark price. He can then sell his stockpiled inventory on the market
at the higher price he created. Such practice, said the diamantaire, “is illegal in all other commodities trading, even though there was a time when it existed in those markets as well.”

   The second major suspect use of loans to the diamond industry is, of course, to use the proceeds to invest in real estate or currency speculation. Real estate loans carry higher interest rates than business loans made to
the diamond industry so it is tempting to use business loan proceeds
to invest in other asset categories, some of which have been very
profitable in recent years.

   Axel Beck of Beck Diamonds is quite optimistic that both types of abuses could be controlled. “If banks really start improving the way they monitor how the money gets used, such as in India where new rules are being applied, it would mean that price manipulation would be likely to diminish. Also, there’s going to be more room for standard business practices: you buy rough, you polish it, then you sell it and you get your profit. That’s what a healthy industry means today. When that happens, the diamond business would be healthier for those who are less reliant on bank credit.”
   Sources from within ABN AMRO, traditionally one of the industry’s largest lenders, confirmed that its commitment to the industry remains as strong as ever, regardless of any individual issue.

   On December 3, less than seven weeks after the official launch of the Antwerp Diamond Tender Facility (ADTF) by the Antwerp World Diamond Centre (AWDC), the facility had its first live test with a tender conducted by First Element Ltd. The rough diamonds offered for sale were retrieved from the Liqhobong Mine in Lesotho.
   In a press release, Johan Erikson, chief executive officer (CEO) of
First Element, reported the tender “had 82 viewings, which is a success. We found the offices to be convenient and functional and we received positive comments from our customers. The facility, by being totally independent, adds tremendous value and credibility to the diamonds being offered for sale.” The next tender at the new facility is scheduled to be held in February 2013.

   On the day following the tender, an official delegation led by
Tlali Khasu, minister of mines of the Kingdom of Lesotho, was welcomed by AWDC officers. In a press release, the AWDC said that “The visit of the high-level delegation to Antwerp’s diamond district marks the excellent relationships Lesotho and Antwerp have enjoyed as preferred partners in the rough diamond trade.”

Article from the Rapaport Magazine - January 2013. To subscribe click here.

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