Diamond industry financing has considerably declined over the last couple of years. Generally, the industry views this as unfavorable; yet, this can be debated. What is not in debate is that right now the diamond industry’s debt level is at its lowest in well over a decade.
Currently, diamond industry financing is estimated at around $9 billion. According to our estimates, industry indebtedness averaged $9.7 billion in 2019, with a downward trajectory throughout the year. That includes bank-supplied credit and money supplied by other financial entities such as investment firms and insurance companies.
With some fluctuations, the downward trajectory is not unique to this past year. It is a drawn-out process that goes as far back as 2011. Although money and credit supply bounced upwards in 2014, it has since withered. It hasn’t been since 2004, 15 years ago, that industry debt has been so low. This is a healthy sign, as I will show.
Diamond industry financing or diamond industry debt?
One could argue that asking if we are talking about diamond industry financing or debt is just a question of semantics, two sides of the same coin. Clearly, bank financing is the engine behind an industry’s growth – any industry. Silicon Valley could not have become the shining success story of the past few decades without VCs, IPOs, and other sources of financing.
Yet at the same time, financing can sometimes become a double-edged sword in the hands of those who don’t wield it well. An over-leveraged, heavily indebted diamond industry is vulnerable. Solid consumer demand for diamond jewelry in 2010 triggered a sharp rise in demand from Chinese and Indian retailers, starting in early 2011. This led to a rise in polished diamond prices and naturally translated into rising rough diamond prices, as the midstream shifted into a buying, manufacturing, and wholesaling frenzy to satisfy demand.
At the time, Standard Chartered Bank poured a massive amount of money into the diamond midstream. It seemed that everyone in the midstream was making a killing. But the extra financing only fueled price hikes. It did not contribute to R&D, added value, or sustainable growth. The price hikes were a price bubble, of course, and polished prices started to nosedive in July 2011. With them, diamond industry financing started to contract. Polished diamond prices have been heading south ever since.
Worse, with a large inventory in declining demand and a drop in inventory value, credit suppliers start calling in their money. That hurt the industry immensely and led to a round of business failures.
Rising diamond industry financing leads to rough price hikes
It was said before, but should be reiterated. As diamond industry financing rises, so do rough diamond prices. When financing contracts, rough diamond prices decline. The correlation is rather direct. The infusion of money in 2010–2011, as well as in 2014, had a direct impact on rough diamond prices.
