At the end of 2014, Diamond Investing News published its outlook for the coming year, noting that a key issue the industry may face in the coming years is a lack of funding for diamond exploration companies. Ultimately, that shortage of money may lead to supply issues.
However, it’s important for market participants to note that a dearth of funding has become an issue for others in the diamond industry as well: manufacturers, or companies that trade, cut and polish diamonds.
As Bloomberg states in a Thursday article, KBC Groep’s decision to wind down its Antwerp Diamond Bank unit has led to a “lending drought” for such companies based in the city — not a surprise given that on its own it used to account for over 10 percent of the $15-billion diamond finance market. Similar companies elsewhere have faced issues on the back of other lenders reducing the proportion of gem purchases they’re willing to finance.
That might not sound like a serious problem for investors, but the news outlet points out that it certainly could be moving forward. Why? Because if diamond manufacturers aren’t able to borrow the money they need to buy rough stones, they’ll need to increase their sales of polished diamonds — that, of course, will push down prices for the gems.
As Ed Sterck, a Bank of Montreal analyst, explained, “[i]f you’re a cutter or polisher of rough whose available liquidity is being reduced you’ve got to adjust your inventory. Selling inventory to increase cash has the knock on effect of increasing the supply of polished diamonds.”
Already, the effects of the situation are being seen. Rapaport reported this week that in 2014 polished diamond prices slumped — specifically, its RapNet Diamond Index shows that the price of 1-carat, laboratory-graded diamonds fell 8.7 percent for the year, dropping 1.1 in December alone.
While Sterck seems relatively optimistic about the long-term effects of the lending policy changes, and told Bloomberg, “I suspect it will be relatively temporary blip. It could be a six-month time frame unless we see further reductions in liquidity,” others are less certain of a recovery. Indeed, Rapaport recently identified “bank credit” as the most important diamond industry story of 2014, noting that its absence weighed heavily on manufacturers throughout the year.
Unsurprisingly, the solution to manufacturers’ difficulties may be increased transparency, always a sticking point in the diamond industry. As Rapaport points out, banks are willing to lend to good clients, but being a good client means, among other things, having “improved asset controls, consolidated reporting and clear corporate governance” — many manufacturers will need do to some work to get to that point.
Moving forward, the news outlet hopes to see the industry “break the cycle of tight liquidity and low profitability” that has long been present. It will certainly be a trend for investors to keep an eye on as well.
Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.