A new research paper by the Rapaport Group provides a good overview of the current state of the diamond market. As late as the early 1990s, the Debeers Company controlled about 80% of the rough diamonds coming into the diamond pipeline. They used that control of diamond supply to maintain stable and modestly increasing diamond prices. Today, the 3 largest diamond mining companies, Debeers, Alrosa and Rio Tinto combined control less than 60%. There are new players in the market, more competition and more price volatility.
Diamond mining companies sell their rough diamonds to manufacturers who cut (polish) rough diamonds into the finished product that is sold to retailers (or wholesalers). The mining companies insist on getting paid in cash in order to fund continuing investment in their operations. Manufacturers have a hard time selling their finished product for cash to retailers and often lend them diamonds “on Memo” for them to sell, waiting to get paid until the inventory sells. A wait of six to nine months after their initial outlay for rough is not unusual. The manufacturers need financing to fund the purchase and stockpiling and that has historically been provided by European, Israeli and Indian Banks.
But the banks have become skittish about the midstream and are pulling back the amount of credit they are willing to extend. They believe “the midstream is congested with too many players and too many stones…the diamond sector is still operating in an oversupply environment with inventory largely stuck in the midstream…That is part of a long term correction the polished diamond market is undergoing, resulting in a prolonged decline in polished prices…The RapNet Diamond Index (RAPI) fell for the sixth straight year in 2017.”
The accompanying chart shows the decline in prices, the predictable result of oversupply. Consequently, three major banks have closed their diamond lending departments, resulting in $2 billion of credit either shifting to other banks or being lost to the trade. The remaining banks will surely cherry pick the dislocated manufacturers on the basis of their credit worthiness with the rest resorting to alternative financing, self financing or leaving the trade.Diamond Price Chart