By Erik Jens, CEO of ABN AMRO Bank’s International Diamond and Jewellery GroupJanuary 31st, 2015
Last year's New Year reception here in Antwerp took place at a time when the market was optimistic and positive. Unfortunately, this year the mood is more subdued, with a less positive short term outlook.
Profit wise, the industry is seeing lower prices, lower operational profits or even losses. The ongoing situation of floating or no margins is worrisome.
In addition, the industry is witnessing increased volatility and price declines in both polished and in rough trading. The inventory hangover is probably hurting throughout the pipeline, exacerbated by lower results in the diamond jewellery markets, in particular at the end of 2014.
Look at the recent results of Tiffany, Chow Tai Fook, Luk Fook, and others - also US CPI jewellery is back to 2010 levels!
Of course, the entire industry, i.e., from producers to retailers, are in favour of a stable and predictable market and each participant carries its own responsibility for being profitable, bankable and sustainable in the future and thus contributing to a sustainable sector. But the industry must also recognize the interdependency between the silos. The one can't go without the other. This will be our theme for 2015.
We do see manufacturers responding to these challenges. We see consolidation too.
We see also opportunities for companies that have a clear strategy, that look at their balance sheet, control inventory levels and seek efficiencies and improved asset conversion cycles.
We also observe producers taking action by adapting their pricing strategy.
Since the retail market outlook only envisages moderate growth, it is important to ensure that in the midstream there is strong focus on inventory management and avoiding excessive intake.
For banks, bottom line results are more important than top line revenue developments.
So from an economic textbook perspective, lower quantities in trade and manufacturing volumes seems more effective for now. Most people here in the audience have been able to deal with adverse market situations in the past, enabling them to use the lessons learnt to cope with the current circumstances.
So let’s use the energy to get through this situation, together, and be agile!
We need to realize that diamonds are not the only sector where you see volatility and price swings, we see that in all commodities. Look at oil, that sector is also readjusting itself to stay profitable under current circumstances. Who expected price <50, i.e., who are they blaming?
From a sector perspective, the industry itself needs to carry its own responsibility throughout the pipeline, from miner to retailer. Sustainability, and in particular transparency are key.
We already see multiple initiatives in the sector, proving steps are being taken; take for example De Beers Insight Report, the recent Bain Report, the strong focus of WDC to make KP and the industry more transparent, the WFDB when it concerns conduct and compliance, and the efforts of CIBJO, RJC on sustainability to name a few.
Winston Churchill said "never waste a good crisis if you wanna change".
The market is still adjusting from a mega trend change in supply and demand, an overall credit crunch and pressures to become more corporate.
Remember, there is no polish without the friction!
As for ABN AMRO Bank, our division, D&JC, also needs to take its responsibility.
We will for instance roll out a borrowing base verification program, asking the clients of our clients to confirm to us their outstandings this week!
We will further increase the focus on the collection of invoices handed over to the bank to be included in the borrowing base. We will also shortly send out letters - covering the majority in value of the sales invoices - to your customers as part of our borrowing base verification process.
This means more focus on 'your customers' payment behaviour and them realizing the importance for timely payments, also for their own benefit.
In short, it is all about KYT, know your transaction. Remember that theme!
This will be a generic exercise for all clients, no exceptions.
Why you might ask?
Firstly, this is standard auditing procedure in so many other industries.
Secondly, we simply see too many doubtful practices with invoices and that must stop. Round tripping, frauds, cooking the books at our expense and more important at the industry’s expense, is simply not constructive to our shared future.
Of course, only a small group of players are doing this, but they mess up for the whole sector!
Bankability remains a key topic, i.e., sum transparency and profitability.
We see other good banks coming into our sector and I am glad the efforts are starting to pay off, step by step.
We see also good initiatives in the various centres, i.e., Dubai, Singapore, the US to name a few, to enhance the industry.
Of course, we know about the very active approach that AWDC here in Antwerp have undertaken and still do.
As I have said before, for good companies there is liquidity and there will be supply of the right goods at the right prices.
We must continue our shared responsibility and efforts to find new ways of financing the industry - read for example the recent Bain report – ensuring the industry will be sustainable, and be able to exist for another 100 years.
This brings me to sustainability.
Last year’s New Year speech emphasised on the importance of sustainability.
Sustainability is our right to exist and will determine the future of the sector. Transparency and corporate structures do play a magnificent role for the sector in this perspective. But apart from the economical aspect, social and environmental topics are equally important.
ABN AMRO’s sustainability strategy is defined as ‘A Better Bank Contributing to a Better World’. This serves as our guideline in that matter.
In this context, many things have been achieved over the last year; dialogues with stakeholders, mapping of the human rights in the value chain together with Shift, etc.
Therefore, today we are very proud to officially launch the Sustainable Diamond Jewellery Guide. The Sustainable Diamond Jewellery Guide aims to further develop the internal and external dialogue. Through dialogue we want to create mutual understanding and respect to see where we can help each other out.
The guide will equally be a tool for you, our clients and stakeholders, supporting in the set-up or enhancement of your sustainability strategy.
We thereby recognize the efforts and initiatives the sector already is engaged in and the differences in resources and attention points/issues between the different players in the market. We have included examples in the guide of non-diamond companies dealing with sustainability issues. We see an increasing interest in the sector towards the sustainability issues. And there are also good examples of companies, which even have their own CSR report and companies seeing business benefits of being member of the RJC for example.
We invest in sustainability because we believe that sustainability is part of doing business and that companies that have sustainable business practices will ultimately perform better and this more bankable.
We have seen the business advantages that a well-implemented sustainability strategy can bring. Especially, as end consumers pay more and more attention to the origin of their diamonds, the circumstances in which they are produced and manufactured, transparency on the environmental and social conditions.
It is consumer demand, which in the end determines the sector! That’s key, it appears certain parts of the industry tend to forget that the consumer is right in the end!
In the coming period, our relationship managers will reach out to you to continue the dialogue on these topics. We are sure the Sustainable Diamond Jewellery Guide will provide you guidance herein.
Finally, we do not want to pretend that we have all the answers and solutions for the industry.
It is important that all stakeholders continue to work jointly work together to address the challenges of the industry. And many industries have their own challenges, so from that perspective we are not the only one.
We are partners, we highly respect you as clients and stakeholders and the banking relationship you have with D&JC. Together we will elevate the sector towards a sustainability future!