RAPAPORT... Banks are leaving the diamond and jewelry business. In itself, this is not surprising,” stated Rob Broedelet, head of the Americas and Canada regions of ABN AMRO bank’s diamond and jewelry group, at the recent Rapaport International Diamond Conference (IDC). Broedelet, who has 25 years of experience in international banking, recognized that the industry is facing a “difficult environment” and many challenges.
Basel II regulations have named the diamond and jewelry industry as an increased-risk industry. “That means banks have to set aside more capital, they have to do more antimoney-laundering and more compliance procedures. That means it is a more costly industry for the banks to manage,” he explained.
Broedelet also noted that rough diamond prices have increased substantially. “We at ABN AMRO are certainly not financing it. We are concerned with that development,” he stressed.
The bank has spoken to some mining companies, Broedelet confirmed. “We have voiced our concerns about the supply of rough coming into the market and said that they also should be moderate, not be too greedy, and not upset the recovery.”
Though short-term interest rates are at an all-time low, the fiscal stimulus packages that have been provided by various governments create a situation where “all this money needs to be financed by investors buying Treasury bonds, etc.,” Broedelet warned. Urging the industry to plan carefully, he said, “We expect that short-term rates will not last and, within the next two to three years, rates will come up very, very quickly.”
Once interest rates start going up, Broedelet believes that some weaker companies will get into trouble. “It will probably then result in a restructuring or a part write-off. Inventories will be liquidated. Banks will take a hit. Clients will take a hit. And another party will be out of the market.”
But there was good news as well. “We have seen a number of companies that have moved to certain areas of Asia and seem to be successful. In Hong Kong, Singapore, certainly in China, all of a sudden, we see more activity, more sales taking place,” Broedelet noted. The news may indicate a change in behavior. “We have heard from a number of our clients that larger stones are being sold to people in Asia as sort of an inflation hedge or as an item of security.”
“The devaluation of the U.S. dollar is enormous,” Broedelet conceded, but this may not be all bad. “It is probably good for the country in many ways, because it will reduce imports or make them more expensive. I have no doubt the dollar will come back, the only question is when.”
Broedelet advised that companies “right-size” themselves. “I think a shift has taken place and things will not be the same.”
Stressing ABN AMRO’s commitment to the industry, Broedelet cited “the exciting step” the bank took in opening a Botswana location. Looking ahead, although he stated that ABN AMRO has been granting loans “consistently,” Broedelet cautioned, “We will be extremely selective, because we also realize there are some difficult times still on the horizon.”
Article from the Rapaport Magazine - October 2009. To subscribe click here.