The diamond industry’s ongoing issues with the banks could spark mass closures among smaller players, says a new Bain & Co. report on the diamond industry.
“Smaller players who currently provide lot of liquidity could go out of business if they don’t have enough financing,” says Bain partner Olya Linde, one of the report’s authors.
The bank financing issue “is causing waves in the short term, but the industry will find a new normal,” she adds. “It has been quite adaptive through various challenges.”
Just four banks—ABN AMRO, the Antwerp Diamond Bank, the State Bank of India, and Standard Chartered—provide 70 percent of the industry’s financing. But with Antwerp Diamond Bank closing, traders may have to shift from traditional financiers supportive of the trade to less-educated newcomers.
“The new banks don’t know the industry and that could lead to higher interest rates,” she says.
Over the last decade, industry debt has more than doubled to $16 billion, the report says, with middle market players stretched by longer wait times at grading labs and increased demands from consolidated retailers.
At the same time, the ratio of nonperforming industry loans has increased from 1 percent to about 4–10 percent. Banks are growing increasingly leery of middle-market profitability, which averages 2 to 5 percent.
“Banks have to be comfortable with the risk and return they get form the industry,” says Linde. “The industry needs to change its business model and adapt to new realities.”
Specifically, the report argues the industry must become more transparent, with better reporting standards and inventory control. In addition, bankers and miners and retailers must act to support the middle market.
The report, which takes a favorable review of the industry’s prospects, was prepared in association with Antwerp World Diamond Centre.