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From Slump to Sparkle – Finance is the Saviour
The global downturn is showing signs of taking a slow U-turn, moving the diamond industry up from its worst economic slump, in the longest and most widespread recession since World War II.
By: Aasha Gulrajani Swarup
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Jul 22 2009 10:59AM
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Reference: 3969  

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The global downturn is showing signs of taking a slow U-turn, moving the diamond industry up from its worst economic slump, in the longest and most widespread recession since World War II.

While the global recession, hardly less than a war for a bravely battling diamond industry, has claimed many businesses, it has also made industry leaders worldwide, dwell inward on some exposed flaws in their business dealings.

Diamond associations, banks and governments globally, have rushed to the aid of this ailing industry with credit restructuring packages, fresh finance infusions, official guarantees etc. for bailing out the millions of people dependent on this luxury industry.

Marathon Rescue :

All these marathon efforts are having an impact. In fact, in an official survey, a panel of 45 top economists in US, the major diamond market, have predicted an end to the country’s deep recession by late 2009, when economic growth is expected to turn positive. Although signs of stability are in place, the speed of recovery is expected to be slower than after past downturns.

Confidence Restored :

A similar sentiment is echoed in major diamond centres of the world, from Africa, Australia, Asia and Canada, where diamonds are mined to Antwerp, Tel Aviv and India, where diamonds are cut, polished and traded. This indicates that the diamond industry is breathing easier. Profits may be down, but confidence is on the brink of recovery.

Looking ahead, diamantaires and the banks that finance them, believe that the recession has exposed some structural weaknesses in the industry. The most crucial outcome of the credit crisis will be the inevitable correction that has to brought into the financing patterns prevalent in the diamond industry. Internationally.

Banks Become Tight Fisted :

With the downturn of the US economy, that absorbs more than 60 per cent of all diamonds in the world, the industry received a severe blow. Most people did not have money to buy diamonds. Markets collapsed. Diamond manufacturers were left holding stocks that were worth less than the finance taken to procure the roughs. Banks were left high and dry, worried about their payments due from an industry facing a sudden loss of export orders.

Says UDi Sheintal, managing director, Israel Diamond Manufacturers Association (IsDMA), “Around October 2008, when customers in the US and Asia stopped buying diamonds at the retail level, demand collapsed.”

Agreeing, Mahendra Shah of Mumbai-based C. Mahendra Exports said, “The sub prime crisis of USA adversely affected the global market and resulted in delayed payments. Moreover, the firmness of the US dollar affected other currencies and led to foreign exchange losses. The delayed realisations resulted in an additional interest burden, impacting the liquidity position of the exporters.”

With export orders being cancelled and cash flows drying up, the capital intensive diamond business defaulted on payments. Banks everywhere, in Israel and in India, took some stern measures as the liquidity crunch snowballed into an explosive crisis. To protect themselves, banks tightened credit facilities, raised interest rates and re-evaluated the credit worthiness of the industry.

Admits Sarat Mishra, General Manager (RM) of State Bank of India, Diamond Branch, Mumbai, “These are difficult times for the diamond industry across the world. There are no buyers. The industry is facing a severe liquidity crunch and our payments too have become overdue. In such a market, we cannot divert dollars for diamonds.”

Even in Antwerp, the situation is somewhat similar. Kaushik Mehta, Chairman, Eurostar Diamond Traders, an international company headquartered in Antwerp observed, “Slowdown in consumer spending, exposed the over-capacity of the polished diamond pipeline. While credit agencies downgraded certain diamantaires, stringent risk management actions were undertaken by various specialised banks servicing the diamond industry.”

Meanwhile, credit rating agencies in India too downgraded the diamond industry. In February 2009, ICRA issued a statement that “diamond processing is a capital intensive business and therefore heavily dependent on bank financing. The industry has been adversely affected on account of tightening of available foreign currency credit facilities, and is especially vulnerable in a rising interest rate situation.”

The credit rating agency states that diamond companies are facing the dual pressure of low profitability and high working capital requirements. The current market conditions of volatility in diamond prices and foreign exchange rate movements, coupled with inventory pile-up, stretching of receivables periods due to customers’ liquidity problems and higher cost of capital, have weakened the credit worthiness of diamond companies.

Israel Faces Similar Woes :

Shmuel Schnitzer of M. Schnitzer & Company, and a former president of both the World Federation of Diamond Bourses and the Israel Diamond Exchange, says, “There has been a significant drop in the volume of the diamond trade in Israel. Prices also suffered, particularly in the big stones. Banks have made lending norms more stringent as they seemed to be losing confidence in the industry.”

Udi Sheintal adds that “banks in Israel have substantially reduced their total credit lines to the industry and raised the cost of credit.”

With business in the doldrums, the diamond industry opened its ‘third eye’ and looked inward to assess its flawed financial armour that failed to protect it against the crisis.

Introspection of Flaws :

On introspection, diamantaires have spotted serious flaws within their business policies like overstocking, lack of transparency, fund diversion and easy credit facilities for downstream players.

Overstocking :

In 2008, De Beers, the major diamond producer, sought to transform the process of controlled rough supply to the industry into a demand driven one. It thereby released its buffer stocks, accumulated over the 1990s, amounting to nearly US $50 billion, in the market, into the hands of rough and polished traders, polished manufacturers, jewellery manufacturers, distributors and retailers.

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