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Reflection and soul searching as we enter 2015

The recent holiday season provided us with a great opportunity to ponder the past year and assess the impact of 2014’s major developments, with a view to improving our overall performance in the year ahead.

First, an issue considered as the biggest threat to the sustainability of the diamond industry: banks and financing. Some of the banks decided to decrease their involvement in the industry and the Antwerp Diamond Bank, a bank set up to provide financing to the diamond industry, has recently announced its closure, undoubtedly a step with negative repercussions for the industry.

In my opinion, a lack of transparency in the diamond industry vis-a-vis the banks has led banks to play it safe. Are they? Banks tend not to finance rough purchases in tenders or outside of the De Beers and Alrosa allocations. They figure that it is too risky, while the allocation from the leading suppliers seems to be a minimal risk. Is it? By limiting the financing to those preferential rough allocations they force their clients to buy goods which are often much more expensive than goods they could have bought outside this closed circle. 

As in previous years, the past year has encountered behaviours that seem to go contrary to sound commercial logic. A notable one is paying cash for rough diamond purchases either because the buyer hopes to increase his market share or because he wishes to be recognized by the major rough suppliers or a combination of both.

The end of the year found rough and polished diamond sellers agreeing to delayed credit payments, followed by worrying when and even if they'll be paid. Delays in payment have been more common, leading to an overall concern by the end of the year that some of the smaller and medium diamond companies will not survive.

The increasing volumes of inventories, especially in the area of VS and better goods in higher colours, the low demand for larger diamonds sizes  of 3 carats or more and the extreme pickiness of the end users who are only after top polished grades have been adding to these worries. 

Moreover, the decrease in manufacturers’ profitability, the decline in polished prices as well as the discrepancy between the prices of rough and polished diamonds causes further confusion in the industry. If we add the lack of long-term clear and positive vision for the industry, we understand the "wait and see" attitude.

There are expectations for a price correction in rough diamonds, which weighs heavily on the value of the inventories held by manufacturers. It seems as though the production of rough diamonds is slightly increased which may further influence rough diamond prices.

These worries are accompanied by the additional crisis of the civil war in the Ukraine and the economic sanctions against Russia by the West, which may force Russia to stimulate sales of its rough and locally manufactured polished diamonds in order to fulfill its need for income.

In 2014 we also witnessed a slowdown in the economic growth of China and India, coupled with an anti-corruption campaign in China, riots and turmoil in Hong Kong, deflation in Europe and Japan, the sharp decrease of gold prices, the crash of the Russian Ruble and the fall in income of oil producing countries. All these issues cause further concern for the soundness of the global economy. 

However, it must be said that there is some good and even some very good news: 

There are positive forecasts for the growth of GDP in the USA which is the biggest diamond consuming market.

The constantly strengthening Chinese middle class continues to adopt the Western habit of buying diamond jewellery, mainly for wedding rings, fashion jewellery and even luxury items.

A steady growth in purchases of luxury products by expat Chinese is also good news. Many of the upper class Chinese who have left China to reside in other countries are now travelling around the world and buying.

New Year and Christmas sales in the US went well, which raises the expectations that jewellers will replenish their stocks soon.

Valentine’s Day and the Chinese New Year means retailers are gearing up for important sales opportunities and sales are expected to grow. 

Record prices of high end, special diamonds have been broken at auction this year.

Rare diamonds have been sold as value items, often exceeding prices of $10 million by several factors to high eight digit values. We are faced with an interesting trend in which instead of stating the per carat price of these items, their total value is noted, a phenomenon which may affect the significance of diamonds as a potential asset to consider for wealth preservation.

The S&P and Dow Jones indices reached record levels this past year.

The 50% drop in oil prices has allowed a reduction of costs across the value chain, which may allow increased margins at the squeezed midstream of the diamond sector, if a healthy dialogue develops between diamond miners, manufacturers and retailers, the three main sections operating the diamond pipeline. 

A strong dollar and the expectations for an increase in interest rates by the US Federal Reserve will probably ensure a stronger dollar in the long-term. A strengthening of the American economy may lead to even stronger demand for diamonds in the US, the most important market in the world for polished diamonds.

Continued changes in the global economy are creating an interest among investors to invest in physical and mobile assets.

Finally, diamond companies are increasingly showing a willingness to adjust to new rulings and adhere to new standards of transparency, a trend that will most likely augment the trust of both banks and consumers in our industry.

Emerging initiatives and opinions about diamond as a store of value might open the gate and consciousness for diamonds as a tool for wealth preservation. These voices are reviving the potential value of reclaimed, sometimes called recycled, diamonds. All diamonds worn as jewellery, kept in safe deposit boxes or simply lying around in drawers can regain their value.

The past year with its positive and negative results have passed with it. What remains with us are new insights on how to make 2015 a better year. 

 

The views expressed here are solely those of the author in his private capacity. No one should act upon any opinion or information on this website without consulting a professional qualified advisor.

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