Diamond in the rough
They say diamonds are forever. True enough, the value of diamonds isn't prone to depreciation. But what if the economy surrounding the diamond market collapses? Nothing is as strong as diamond. So, could something as sturdy as the diamond industry suffer? Could Antwerp's world famous diamond district take a hit? It could. And it has.
How the financial crisis managed to punish even the world’s safest haven for diamonds
On the surface, not much appears to have changed. Storefronts in the biggest cluster of diamond businesses in the world don't look different, nor has the ground split open to reveal the inferno that most other businesses seem to be hurtling towards. Inviting display cases still flaunt diamonds and 24-carat gold behind glass thicker than most walls. And the cobblestones and tiles don't appear any more porous or warm than before.
Don't be fooled. Things are not well here. Once the venue where 80% of the world's uncut diamonds and 50% of the polished diamonds were traded, Antwerp has seen the export of untreated gemstones cut in half as a consequence of the crisis.
"The diamond market in Antwerp has most definitely taken a hit as a result of the credit crunch," concedes Philip Claes, spokesman Antwerp World Diamond Center, a regulatory body. "That's not surprising, considering the nature of our product, it's the first thing that gets struck off the list. Diamonds are the embodiment of the luxury product. I wouldn't be surprised if we're one of the last industries to rebound to where we were before the crisis."
Rebounding would require quite the bound indeed. In the period from January until May 2009, export of polished diamonds was down 27% compared to the same period in 2008. Import of polished diamonds was down 31%. The export of uncut diamonds did even worse, dropping precipitously by 50%, while imports of the uncut variety were down 39%.
"The numbers speak volumes," says Claes. "But we are doing better than other hubs such as Tel Aviv and Mumbai. Dubai used to count [as a hub] too, but the party's over, there as well. We're seeing the first bankruptcies in Israel and hundreds of thousands of workers who are now unemployed in India, where lots of diamonds are cut." Whereas India counted 800,000 diamond cutters before the crisis, they have 500,000 now and many of the small cutting factories have had to shut down for at least a few months.
De Beers noted a drop-off of 60% in demand for uncut diamonds and 30% in that of cut diamonds when compared to the 2008 high-water mark.
The lamentable sales can be traced back to the very origin of the financial turmoil: the United States. America purchases 50% of the world's diamonds, mostly between Thanksgiving and Valentine's Day, with a marked peak around Christmas. During that period, demand for the sparkly little status symbols was off by as much as a quarter. This caused a ripple effect throughout the market.
When nobody is buying retail diamonds, sellers start to worry and reduce their intake from wholesalers, preferring to diminish stock. The ratio tends to be 2:1. That is to say, for every cut diamond the consumer doesn't buy, the retailer reduces his order from the wholesaler by two diamonds, choosing not to replace the diamond he sold and to dip into his stock instead, and probably not replacing the next diamond he sells either. By the time this ripple - now an economic tidal wave with destructive powers - makes it to a hub of uncut diamonds traded by wholesalers, such as Antwerp, a fall in demand for uncut diamonds of 50% is easily achieved - the way it did in Antwerp.
"We have tightened our inventory position," confirmed a spokeswoman for Antwerp's Rosy Blue, one of the world's most prominent diamond companies which has a turnover of $1.8 billion annually. "We admit not having anticipated the tide turning quite so abruptly in the third quarter."
Be that as it may, "the impact on individual enterprises in Antwerp has been very limited so far," says Claes. "I have no knowledge of any bankruptcies, although there have been redundancies among diamond sellers." Estimating job losses is tricky, considering no tally has been made and there are 1,800 registered diamond sellers in Antwerp who employ 8,000 people full-time and indirectly create jobs for another 26,000 people as insurers, bankers, security guards and drivers, according to the Catholic University of Leuven (KUL). But the market has lost 25,000 jobs, directly and indirectly, since the 1970s, according to Claes, with the exodus of cutters and polishers to markets like Mumbai, Tel Aviv and Dubai.
Diamonds may be a non-essential item, but for Belgium's economy to recover they are paramount. Diamonds represent 8% of the overall value of Flanders' exports and 5% of Belgium's. It is comfortably the single most common and valuable export to countries outside the EU. What's more, diamonds represent up to 70% of Belgium's trade surplus in some years. In 2007, that surplus was worth €3.2 billion, of which €1.6 came from diamonds.
On the mend
Any economic rebirth would have to be seeded in the diamond sector, in other words, and pivotal to any renaissance is cash. "In the past weeks, we've explored how to bring more liquidity into the market," explains Claes. "The diamond business is capital-intensive. You need financing from banks that in turn need collateral. That guarantee is usually given by accounts receivable, unpaid bills in other words. But there's so little trade and thus few receivables and they're not as reliable anymore. The money takes longer to come through, if it comes through at all."
Banks are understandably reluctant to use this as collateral, which is why the Antwerp World Diamond Centre wants to go back to using the diamond inventory of those seeking a loan as a guarantee. This practice was outlawed in the 1980s because speculation on such stock causes a massive shortfall during market depreciation. But it may have become the only option for resurrecting the market, and one that is endorsed by the banks.
If the value of stock is carefully ascertained and possible depreciation built into the equation, banks have said they're willing to lend the industry up to one billion euro, which should suffice for the financing of a resurgence.
"This shouldn't become the modus operandi, but it could provide some relief and shift things into gear," says Claes.
"Diamonds are a store of value," says Rosy Blue. "As rough production diminishes with insufficient new mines being discovered and existing ones becoming depleted, diamonds are assured to remain an excellent store of value."
Should the banking commission approve the scheme, the Flemish government might also kick in €200 million as an added guarantee for the banks, to pre-empt another round of losses.
Whether it's in anticipation of this impending scheme or thanks to a round of price drops - up to 30% in polished diamonds and 70% on low-quality uncut diamonds - the Antwerp market is already picking up.
"We're seeing a very slow and careful reopening of the market," says Claes. "The last months, since April, things are getting a little better." Before the crisis, mega producers De Beers delivered sights (a total sum representing all sales to Antwerp) of about $650 million per month. The period December to March saw those sights slip to just $100 million and in one case barely clearing $60 million. The months of April and May witnessed sights of $200 million, far from a full recovery, but encouraging nonetheless.
"Retail confidence in the USA is now improving, and in the last few weeks we have been seeing stable polished prices. Polished prices had fallen sharply but they have now recovered. Trading volume in both rough and polished goods had decreased to 20% of peak but has now recovered to about 50%," says Rosy Blue.
"It's hard to predict when the market will recover fully," says Claes. "But we think we can be moderately and carefully optimistic. It's heading in the right direction, although we're not expecting full recovery until 2010." Such exuberance aside, Belgium's recovery, in a funny twist of fate, is in the balance. If it is to recover its ability to buy cheap, essential products, it will first have to figure out how to sell the expensive, non-essentials once again.