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Special Report
In a Special Report, presented by the WFDB to the DTC, July 2001, the following was written about financing in the industry with reference to small and medium manufacturers and their dependence on the DTC.
"Having an industry with a large diversified group of players
will also draw more banking credits to the industry as banks give preference to an as wide as possible spread of clients. Reducing the number of players in the business will only reduce the available own equity, but also lowers the total available bank borrowing capacity."
Debts - Stocks - Markets - Level of Rough Prices
In an article, July 2001, on www.diamondintelligence.com, Gary Ralfe expressed concern about the industry's debts, stocks, markets, and level of rough prices.
Mazal U'Bracha reported that, after selling $2.6 billion worth of rough diamonds in the first half of 2001, De Beers said it is on target to make the $4.8 billion that it wants to sell for the whole of the year. "This obviously implies that we would be looking for sales of $2.2 billion for the remainder of the year", says managing director Gary Ralfe, in extremely frank comments underscoring the commitment to continued corporate transparency and disclosure of the now privatized company.
Expressing concern about the industry debt of the cutting centers, Ralfe flashed his intention to direct the sights in the second part of the year more to dealers. Says Ralfe: "Indeed one of the challenges we have in the second half of the year is to be able to access those clients with sufficient available credit or indeed sufficient available equity in order to be buying what we hope to sell in the second half of the year."
Build Up of Polished Stocks
Referring to the banking debts, Ralfe said, "The [banking] debts in
the cutting centers remain, I'm afraid, at obstinately high levels of
about $6 billion and this is one of the major inhibitors I suppose. First
of all say this is a demonstration of how difficult things are in the
trading centers trying to get stock to move. There is a build-up of stock in the cutting centers, probably more now in polished than in rough, as excess rough inventory has been manufactured into polished."
"There is concern, I know, amongst the bankers about flowing rotations, about more outstandings and, indeed, a fear that perhaps the credit from the banks is not being used to finance just receivables and turnover but also perhaps to be financing some of those stocks. This is always a warning signal to the bankers and indeed to the whole trade that it is getting into an illiquid position."
Will there be pressure to start bringing DTC prices down and also pressure to start slowing down on the sales? Says Ralfe: "Yes, I'm afraid in the perversity of these things is that we made certain price changes towards the end of last year, which were better not made because the market was already then going off and I suppose again we should have held back on those price changes. So for the moment there is no doubt, and you will have heard it from the cutting centers, from our sightholders, that they regard a number of our boxes as being over priced."
"Now the remedial action that we have started taking and which
we will continue to take lies particularly in refining our assortments. The problem that we find is actually that where polished prices are falling, where there is too much polished available and the particular area would be in pique polished in sizes from, say, what we call pointers, from 20 points up to three-quarters of a carat. There is a plethora, an excess of stock there. So what the challenge on us is to do and we have already started to do this, is to remove from our boxes particularly those items that are producing undesirable polished. That should very largely correct the pressure that our clients are under. So the pressure is particularly not to be producing the polished for which there is no demand right now and to continue to make our boxes as attractive as possible in terms of the sort of polished that is coming from them."
The 3-6 Grainer Spotted Box
In the article it was noted that Ralfe became very specific, which was something that "rose some eyebrows in the market", as he mentioning a specific box that - after the improvement - was still trading at a (small) discount.
Ralfe said, "An example is in our 3 to 6 grainer spotted box, which is one of the staples of the DTC. At last sight we removed from it the more heavily piqued rough which was producing some of this undesirable and unsellable polished and I believe that that will be a long way to redressing that staple box and making it again desirable and profitable to our clients."
Banks
When questioned whether there is no concern among the banks that the DTC was selling too much into the market, Ralfe was described as "both defiant and straight shooting".
He said, "We have had no indication from the banks financing the industry that they regard us as thrusting diamonds on our sightholders.
"After all our sightholders buy willingly from us. There is no force involved in this matter at all."
He continued, "We understand that a lot of that [banking] credit is actually not to our sightholders, but a large amount of it is actually to non-sightholders."
"I believe that if the bankers have any concerns they are likelier to be with smaller diamantaires but not our sightholders who are within their limits in terms of their credit. As I said, in looking to sell $2.2 billion in the second half of the year, we will be pursuing a policy of what we call 'tight distribution' and we will be looking particularly to place our diamonds with those people who do have the liquidity in order to buy those goods in the second half of the year."
Bank Debt and Financing a Sight
In an article about the sightholders on www.diamonds.net it was noted that "uncertainty is just an example of how change is
challenging us".
New Market Realties Spur Higher Diamond Debt
In an article posted on 5/3/01, on www.diamonds.net
Marc Goldstein, the site's correspondent from Belgium noted:
- An accumulation of bank debt in the diamond pipeline in the
wholesale sector had increased by about $1 billion over the last 18 to 24 months.
- A breakdown of the total industry debt, estimated at $6 billion:
- Antwerp - $2 billion
- India - $1.5
- New York - $1 billion
- Ramat Gan - $1.4 billion
- One should understand the system by which banks finance major diamond transactions in order to understand the forces at work on
the financial end of the market.
- Sights and the global debt are intimately connected.
Financing a Sight
Goldstein says that :
If a sightholder has purchased a $3 million box from the
De Beers Diamond Trading Company (DTC), he must pay cash; and, therefore,
he will ask his bankers to lend him between half and two-thirds of the
amount.
Then there are 2 options:
1)
If the sightholder is a rough dealer, he has 30 to 35 days to submit his
receivables to his banker for an amount equivalent to $3 million plus
profit margin.
The receivables must be payable within 60 days if the sales are on the local market, or 120 days if the goods are sold on the international market.
The financial situation of the issuer of each receivable is monitored with great care; bankers would reject any document issued by a company that does not meet strict criteria.
Still, the typical repayment delay is 90 to 155 days.
2)
If the sightholder is a manufacturer, the system is the same as it is for dealers, but for a longer period of time (60-65 days), since the manufacturers need the time to polish the goods before seling them.
Repayment delays average 120 to 185 days.
Therefore, you can see, in the example above, that a DTC sale of $3
million can automatically result in a 5 to 6 month debt of $1.5 million to $2 million.
Although the bankers double check the origin of the receivables, if the goods do not move downstream (fast enough and efficiently), the banks are likely to end up financing inventory instead of working capital.
Antwerp - Bank Debt - www.diamonds.net
We invite your attention to the opinions of Mr. Goris, Mr. Hanard, and Mr. Gross.
First, Mr. M. Paul C. Goris of the Antwerpse Diamantbank felt that that , "in light of the present state of the market" the bank debt in Antwerp was reasonable. "At the end of March 2001, the debt was about $1.95 billion, compared to $2.2 billion in March 2000."
Paul Goris said, "Fortunately it appears that De Beers is acting as a responsible market leader."
Explaining that the reduction of the DTC's allocation to Antwerp (by about 35 %) was good news for Antwerp market, he said that "a further downsizing of sights would have a very positive impact on our industry." He noted "returns of about 15 percent expected, the too high U.S. inventories, the gloomy U.S. economic outlook, the absence of stock replenishment, and the resulting lack of optimism" as his reasons for this.
Second, it was the opinion of Mr. M. F. Hanard of the ABN-AMRO Bank, however, that the overall debt has risen to a higher level than had been reported, because "the global figure referred to is $6 billion, but this figure applies only to sightholders, secondary market dealers or manufacturers, wholesale jewelers and wholesale diamond/jewelry dealers."
"Nothing has been said about the increase in debt that took place at the retailers' level and that is certainly not negligible."
He then explained that :
- In 1998 - the stock was at the DTC level.
- In 1999 - the stock moved to DTC customers.
- In 2001 - some of this stock has reached the retailers.
Third, in the article, Peter K. Gross of the ABN-AMRO Bank said, "The financial impact of the sell-down has moved from De Beers' balance sheet onto those of the banks in terms of additional loans, because the inventory in part is stuck with the trade."
Gross also said, "The recent sights are lower compared to
last year, but one can still argue that into this market environment, even the reduced sights that we have had are too high."
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