Diamond Banks Rein in Lending as Gem Speculation Drives Prices

Banks lending in the $15 billion diamond-financing industry are cutting the amount they’ll offer to clients amid fears that prices are rising too fast.

Antwerp Diamond Bank and ABN Amro Group NV, two of the biggest lenders to the industry, have reduced the amount to 70 percent of rough diamond purchases from 100 percent, demanding that buyers of the stones front up more of their own cash.

“It relates to concerns that we have about the industry,” Bruno Nelemans, executive vice president for strategy and communication at Antwerp Diamond Bank, said by phone. “The bank was not feeling happy about the pricing of rough diamonds compared to polished prices and diamond jewelry.”

Diamond cutters, polishers and manufacturers are being squeezed as miners demand they pay more for rough stones, costs that haven’t been passed on as increased jewelry prices. De Beers, the biggest producer, cut the discount between its selling prices and the secondary cash market since appointing Philippe Mellier as chief executive officer in 2011.

“Over the last 12 to 18 months, we’ve seen major diamond producers adopt more aggressive pricing policies and we expect this to very much continue,” said Anish Aggarwal, a partner at Antwerp-based industry consulting firm Gemdax. “As trader profit margins are squeezed –- in part by more aggressive producer pricing -– banks are reassessing their exposure to the diamond industry.”

Less Speculation

De Beers sells diamonds at 10 events each year at a price and to customers selected by the producer. Under Mellier, the company changed its pricing policy to discourage buyers from flipping rough stones instead of polishing them.

“Speculation hurts us as much as anyone,” said Howard Davies, commercial head for De Beers’ global sales. “The banks have played a good role this year by not providing surplus liquidity.”

Rough-diamond prices gained 10 percent last year as the U.S. economy recovered and Chinese consumers bought more of the stones. Prices have more than doubled in the past five years, according to data compiled by WWW International Diamond Consultants Ltd.

“They’ve pushed up prices to unreasonable levels,” Nelemans said. “The manufacturing and trading industry is less profitable than it used to be and we feel it is affecting the quality of our lending, the quality of our assets and the quality of our balance sheet.”

Balance Risk

ABN Amro said it reduced the ratio of its loans to better spread the risk between the bank and diamantaires, as cutters, polishers, manufacturers are known, to try to entice new lenders to the industry.

“Clients should have more skin in the game themselves,” said Erik Jens, CEO of the International Diamonds and Jewelry Group at ABN Amro. “We want to balance the risk and reward for all stakeholders in the industry.”

ABN Amro say that while they’ve slightly reduced the size of their total loan book to the industry, that wasn’t the objective of their new terms. Antwerp Diamond Bank have reduced the ratio of funding for individual transactions while their total loan book has remained about the same size.

“The stronger companies that have responded to these changes will survive,” Jens said by phone. “If margins are eroding there will be companies that won’t be able to step up to these standards, and some companies will indeed go bust. Others will leave the business.”