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Trade concerns point to hedging

Record bank debt to the diamond trade, combined by high inventories in the cutting centres could trigger a slowdown in the next two to three years, some industry sources say.

Although bank financing to the diamond industry dipped slightly in Antwerp and Israel over the past two months, this year’s total bank debt is estimated at around $11 billion.

Much of the swelling bank debt is the result of industry players expanding into other areas of the diamond supply chain as the sector consolidates.

However, some warn there is a limit to how much banks can continue lending to the industry.

Over the past two years, manufacturers in particular have seen their margins squeezed by sharp increases in rough prices in relation to the polished they produce. In addition, many are currently holding large stocks.

According to Dilip Mehta, CEO of the Rosy Blue Group, industry players face a choice either to expand upstream in mining, or downstream at retail level.

“At the mining and exploration end, large players, such as Alrosa and the three majors (De Beers, BHP Billiton and Rio Tinto) are expanding heavily internationally which is limiting opportunities at that end of the pipeline,” he said.

At retail, demand growth in volume, or number of items being sold, is limited in the short-term.

“The key challenge for the industry is to get consumers to pay more for diamond jewellery items in the key US market,” said Richard Platt at WWW Diamond Forecasting Ltd.

“There is little opportunity there to increase the number of pieces being sold, so any growth must come from consumers moving up to higher price points.”

The impact of China and India, which currently account for around 5% of total demand, as major consumer markets, will only be felt in the next five to ten years, he added.

Platt’s overall outlook is that developed countries will grow at a level slightly lower pace than GDP. Emerging markets will grow quicker, he said..

As far as bank lending to the diamond industry is concerned, ABN AMRO’s Loet Kniphorst said banks will continue providing finance to companies with a strong balance sheet.

The bank’s outlook for the industry is optimistic, based on projected shortages of rough diamonds and steady demand growth at retail level for the medium segment.

However, hedging tools could serve as an advantage in the face of declining manufacturing margins, said Kniphorst.

“Although there are various ways of hedging, for example through Interest Rate Swaps (IRS), or by fixing the euro/dollar rate forward, there is no mechanism for fixing future prices of diamonds.”

By Emma Muller.

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