Oct. 26 (Bloomberg) -- Diamond traders in Antwerp may have to wait another two years for a recovery made possible in part by two of the industry’s biggest banks, which kept many of the dealers afloat during the recession.

Pierre De Bosscher, chief executive officer of the Antwerp Diamond Bank, said 2009 is a “lost year” for the world’s diamond hub, and the industry may not see a recovery in demand in the U.S. and Europe until 2011.

To help the Belgian city’s estimated 1,800 diamond companies stay in business, De Bosscher’s bank and ABN Amro Holding NV’s diamond and jewelry division have maintained credit lines even as business dipped. The banks gave clients more time to cover their costs as a drop in demand for diamonds hurt customers’ sales and sapped collateral.

“If we would have pulled all the lines, we would have created a lot of insolvency,” said Victor van der Kwast, chief executive officer of ABN Amro’s International Diamond and Jewelry Group, in an interview. Without restraint, as many as 30 percent of the world’s dealers might have been lost, van der Kwast estimates.

About 80 percent of the world’s uncut diamonds pass through Antwerp and are handled by the city’s gem dealers, known as “diamantaires,” according to data compiled by the Antwerp World Diamond Centre. Both banks predict a recovery in the industry could take as long as two years, and Antwerp Diamond Bank, part of Belgium’s KBC Group NV, plans to set stricter lending standards in the first half of 2010.

Difficult 2010

“I think 2010 will be another difficult year,” De Bosscher of the Antwerp Diamond Bank said in a Sept. 30 interview. “We’ll have to live with the current turnover levels also next year and hopefully it will pick up in 2011,” he said, referring to the U.S. and Europe.

The collapse of Lehman Brothers Holdings Inc. in September 2008 and its effect on the world economy reverberated through the diamond market as consumers in the U.S., the Middle East and Europe spent less on luxury items.

“The effect of Lehman Brothers was much bigger than we all expected,” said Freddy Hanard, CEO of the Antwerp World Diamond Centre trade association. “Collateral was no longer there because invoices were overdue and there were no new invoices.”

The diamond industry revolves around finance as dealers use credit to buy rough stones from miners and offer clients payment terms that at times are as long as 180 days. Diamond trading almost stopped from late November to March because there was no liquidity and no trust, Hanard said.

Rough Diamonds

“Diamond companies essentially act as finance houses, as well as traders of diamonds,” said Anish Aggarwal, a partner at Gemdax, an industry consulting firm in Antwerp. “It was the financing aspect that made the industry vulnerable.”

Aggarwal said the industry was “over-reliant on credit and debt financing, and has a once-in-a-generation opportunity to reform itself.”

Prices for rough diamonds fell about 35 percent during the four- to five-month span starting in September 2008, according to Hanard. Global retail sales of diamonds declined as much as 20 percent since Lehman’s bankruptcy, he said.

After the crisis erupted, Antwerp Diamond Bank and ABN Amro told miners to restrict the supply of diamonds and simultaneously advised their customers, the gem dealers, to stop buying unnecessary stock.

Dealers, many facing slow payment from customers, needed to reduce inventory, focus on collecting their bills and shorten their payment terms, said De Bosscher and van der Kwast. The banks gave traders more time to repay their debts, as customers chased unpaid invoices and managed their cash flow and stock.

Rising Prices

Diamond miners reduced supply in response to the crisis. ZAO Alrosa, the world’s second-largest diamond producer, stopped selling gems between December and July except for the state stockpile. De Beers, the world’s largest producer, reduced first-quarter output by 91 percent.

The supply and prices of uncut stones have risen since the first quarter of this year, according to Gemdax. Excess supply would be the biggest threat to a recovery, De Bosscher said. Van der Kwast also said oversupply would be of concern, and has again been urging miners to keep supply in check.

“We are now in a situation where polished prices have stayed fairly firm, and that has injected confidence into the market,” Aggarwal said. “Today, we are in a position where probably demand and supply are pretty well balanced. Demand has picked up and there’s less rough-diamond production.”

De Bosscher and van der Kwast say the market is bottoming out. While demand from China and India is increasing, it isn’t enough to make up the shortfall from the U.S., they said. The U.S. accounts for 50 percent of worldwide diamond sales.

“When times are good, we are all waving the flags and making good money,” De Bosscher said. “We are there to stay, and that’s why we need to support our customers, not only in the good times, but also in the bad times.”

To contact the reporter on this story: Andrew Clapham in Brussels at aclapham@bloomberg.net

Last Updated: October 25, 2009 19:00 EDT