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Diamond industry analyst Chaim Even-Zohar proposes the Indian government implement a months-long moratorium on rough diamond imports to clear inventory and stabilise prices.
Diamond industry analyst Chaim Even-Zohar proposes the Indian government implement a months-long moratorium on rough diamond imports to clear inventory and stabilise prices.

India's rough choice: An import moratorium?

The diamond industry’s supply problems have been compounded by the coronavirus crisis. CHAIM EVEN-ZOHAR offers a solution to balance prices, regain trust and stabilise supplies.

Stuart Brown, the former joint managing director of De Beers and current CEO of Canadian mining company Mountain Province Diamonds, made an amazing statement in a recent Financial Times article, stating the very obvious: “We need India to open up. Until the manufacturing opens up there, there will be no demand for rough diamonds.”

It seems as if miners have suddenly realised that they need India far more than India needs them. Mines are deeply indebted. Dominion Mining, which also owns parts of Canada's Diavik and Ekati mines, has seen its Fitch credit rating reduced to Triple C, which is a junk bond status.

South Africa's Petra Diamonds has scaled down operations for a mandatory lockdown aimed at containing the spread of the coronavirus pandemic. It too is deeply indebted.

"It seems as if miners have suddenly realised that they need India far more than India needs them"

That list could be expanded – but that's not the purpose of this article. Let it suffice to note that coronavirus has caused some mines to be put on care and maintenance, many are overly leveraged, and a few producers may even face bankruptcy unless India opens up quickly.

And if it doesn't? Then producers may literally choke on their diamonds.

Speaking of choking, looking at the total diamond pipeline, still the most uncomfortable place to be is in the mid-stream. India alone has somewhere between $US1.5-2 billion worth of rough diamond inventories. Add to this some $US5 billion polished, and you are getting the picture.

To say that bank debt can be settled out of future earnings is to believe in fairy-tales – unless, of course, India uses this moment to seize the initiative and become the game changer everyone has been waiting for.

The government of India can assist the industry in a tremendous manner if, after the lockdown has been rescinded, it simply puts a moratorium on rough diamond imports.

Whether the moratorium would be for two, three or four months is something it could discuss with the industry. It certainly depends on how long it takes for the diamond market not just to stabilise, but also to pick up.

The Indian banks have literally given up on the diamond sector. They shy away from diamond financing with the same resolve as we run away from the coronavirus! If sightholders remain addicted, with a monthly rush to De Beers, Alrosa and other producers, falling over each other to get rough, they will ruin any prospects for India to clear up its inventories.

Major diamond producing countries such as Botswana, Russia, Canada and others, are now facing a typical Saudi Arabian oil dilemma: either reduce or stockpile output or risk a freefall of prices.

True, there will always be some huge Indian companies that will happily accept diamonds at a 30-50 per cent discount, provided they can find the cash. But today there are fewer bona fide tycoons that can play this game. The unscrupulous players have by now largely eliminated themselves – probably much to the regret of some producers.

"The government of India can assist the industry in a tremendous manner if, after the lockdown has been rescinded, it simply puts a moratorium on rough diamond imports"

But if some major conglomerates get heavily discounted rough, that doesn't do much for the Indian industry as a whole. In order to regain trust and confidence from their banks, India needs to sell only from inventory for a couple of months.

This will reduce their banking debts, bankers may warm up to the novel idea that the industry is bankable, and the overall health of the industry will certainly improve dramatically. Business becomes more manageable when one can calibrate current rough purchases with expected polished demand.

No euphoria around future demand

Assuming that trillions of dollars worldwide have simply evaporated, that tens of millions of people will be added to the ranks of the unemployed and that salaries will be reduced everywhere, it is unavoidable that the consumers' disposable income will take a severe hit.

The luxury wallet will shrink; in some places it might even disappear. Diamond jewellery will certainly not be the first item consumers will buy in the post-coronavirus era.

Moreover, the diamond manufacturers and traders of polished diamonds also may have to compete with the liquidation sales of bankrupt High Street jewellery retailers, including some chains. Stuart Brown talks about the producers’ need for manufacturers – yet even after the crisis is over, there will only be cutters and polishers of natural rough if manufacturing margins are assured.

Both the industry and the producers must be very cautious about interpreting price information from incidental sales. Some say the market is ‘dead’, yet it is more accurately characterised as an illiquid or ‘thin’ market.

"Major diamond producing countries such as Botswana, Russia, Canada and others, are now facing a typical Saudi Arabian oil dilemma: either reduce or stockpile output or risk a freefall of prices"

Those who need to sell for whatever reason – mostly debt reduction – will need to reduce prices. However, those who need specific items in a market without ready sellers may have to pay more than they would have if there were plenty of willing buyers and sellers. Thus, the current spread between selling and buying prices is considerable and neither price accurately represents the price that would have been achieved in a liquid market.

Sophisticated speculators may find opportunities, but they also take considerable risks. As long as the consumer markets don't improve, traders will primarily trade amongst each other and uncertainties will prevail.

In the absence of willing mid-stream lenders, the producers may have no choice and start to behave no differently than any other pipeline player and provide supplier's credit. This will make the pipeline a much healthier place for everyone. If a producer extends credit, it must double-check or even triple-check the financial strength of its clients. They will need to mitigate the lending risks.

That's almost like going back to the old days, when one knew that De Beers sightholders were solid and dependable, trustworthy companies. That disappeared when producers changed the system and basically sold to almost anyone that could produce the cash. When several sightholders subsequently filed for bankruptcy, or got in trouble with the law, the producers incurred no losses.

It's an appealing idea, mining companies assisting in sharing the financing burden of their customers like any other pipeline player. They have undoubtedly more access to financing than their clients.    

Restoring price stability

In the last few years, we have learnt to live with a certain price volatility – within an acceptable range. But none of us can survive a protracted downward price curve or, God forbid, a freefall. Unlike coronavirus, a ‘flattening of the curve’ will not do!

Above everything else, what the industry needs is some measure of price stability and to enjoy the resultant price certainty or predictability. If some wealthy Indians in Belgium were to circumvent an Indian rough import moratorium – if one were to be put in place – and were successful in purchasing rough at heavy discounts outside of India, that is quite alright, provided they fight to preserve polished prices and don't use their power to corner the polished market at even more discounted prices.

"None of us can survive a protracted downward price curve or, God forbid, a freefall. Unlike coronavirus, a ‘flattening of the curve’ will not do!"

At the end of the day, stability in polished prices is needed by every player in the pipeline.

But stability in rough prices is no less crucial – stability, in conjunction with profit margins. One cannot go without the other! There are plenty of bankruptcies that provide evidence of that. India should use its market power to try to curb producer greediness in which some players perennially are trying to outperform others.

Producers will protest that they operate in a competitive market. They do not. From being a cartel, the supply side now represents an oligopolistic market characterised by few sellers, giving the hundreds of potential buyers few choices. But, in an odd way, that is changing now.

The synthetic factor

The rough producers should know, as De Beers itself knows very well, that every diamond manufacturer in Surat, big or small, has alternatives; alternatives he did not have a few years ago.

They can buy, manufacture and sell synthetic diamonds.

The advantage of synthetics is not just their lower price, but the risk of not having a worthwhile margin in the resultant polished seems considerably smaller than in the natural rough category. That brings us back to the natural diamond miners; it won't help the mining companies if the diamond cutters come back to Surat, just to manufacture synthetics.

"Have no illusions – if the added value and profits are higher on the man-made product, they will walk away from naturals. Retailers will do likewise"

Have no illusions – if the added value and profits are higher on the man-made product, they will walk away from naturals. Retailers will do likewise. Therefore, mining companies must restore profitability to the manufacturing centre if they want to have any realistic opportunity to improve their own financial plight.

Stuart Brown was absolutely right: producers need the Indian cutters, and there is no alternative to India. Over the years the Indian industry has produced enormous wealth for them. Going back even to the last century, Indians showed their skill in turning near-worthless industrial diamonds into the so-called ‘near-gem’ category that has over time produced tens of billions of dollars in profits for the producers – billions they never dreamt of receiving for a product where demand had been dwindling.

Now the shoe is on the other foot. The demise of the natural diamond mining sector is far from imminent. There still will be some dozen or so mines operating 30 or 40 years from now, and beyond. But that should not be taken for granted; certainly not by the producers. This is, however, largely in their own hands.

Saudi Arabia shot itself in the foot on oil prices – let this not be the future of the diamond producers.

 


This story was first published on Idex and republished with permission. Idex publishes diamond industry news and offers one of the largest online diamond-trading platforms with real-time pricing information updates on the hour. 




ABOUT THE AUTHOR
Chaim Even-Zohar

Veteran industry consultant & journalist


In his 45 years as diamond trade journalist and industry consultant, Chaim Even- Zohar has now retired. He is an Honorary Life Time Member of the diamond bourses in Israel, South Africa, Dubai and New York in recognition of his service to the industry. He has authored several books, published magazines and served as editor of the Diamond Intelligence Briefs.

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Friday, 10 July, 2020 06:49pm
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