The first trimester of 2015 has not been entirely positive for the Italian jewellery sector. While overall the economy has shown signs of improvements, the credit pipeline suffered yet another preoccupying setback.
In February the Italian Treasury sent its inspectors to Banca Etruria, finding hidden losses for around € 500 Million. The bank was immediately subjected to compulsory administration and, as the news became of public domain, stocks dropped to a negative record of € 0.58 before being suspended. Just 6 years ago, they were traded above the € 10 level.
Following a consolidated EU protocol for dealing with those situations, the special commissioner proceeded to freeze several non-core banking activities. This included cutting down credit lines and pushing harder on debt collection procedures.
Often dubbed the “Bank of Gold”, Banca Etruria has a pivotal role in the Italian jewellery sector: for decades it has been the major financier of the Arezzo jewellery district.
Located in Southern Tuscany, Arezzo has a long tradition in jewellery making, but acquired a prominent role in the Sixties when several jewellery companies, led by UnoAErre, blossomed in the area.
Today Arezzo hosts around 2.000 enterprises active in all sectors of jewellery production: from high-tech machinery to stone cutting, from gold jewellery to silverware. Overall it employs over 9,000 people, and has an aggregated turnover of more than €1.5 billion.
With the beginning of the economic crisis in 2008, the Arezzo district was swift in reorienting its products from the limping domestic European market to overseas export. At that time, with crude oil price cruising at around $150 a barrel, the Arab countries became an obvious target, as they offered a lifeline against collapsing demand for luxury products in the West.
Today the situation is quite different. With oil prices on a fall and a deteriorating geopolitical scenario, oil-producing countries are not in the position to buy large quantities of jewellery products. Export to the United Arab Emirates market, which used to absorb almost half of Arezzo’s jewellery production, has dropped by 40% between 2013 and 2014.
All economic indicators suggest that it is time for a new strategic and geographical switch. This time the proposed targets are the ever-growing Chinese and the revived US markets. But a market switch in the jewellery sector is not just about shipping products to another country. It would require a complete redesign of jewellery collections to accommodate different tastes in terms of style and materials. And of course, new collections require in turn new investments. This is the heart of the matter.
For Italian small and medium enterprises (SMEs), borrowing money was a major issue already before the global crisis, but it has now reached an untenable level. Recent opinion polls have shown that entrepreneurs consider access to credit their main problem (36%), well above weak market demand (20%). For years, banking institutes have been frustrated by the European Central Bank to inject new liquidity into the country by systematically reinvesting the money in government bonds, rather than assisting the real economy.
As traditional credit institutes are proving to be inadequate in supporting the jewellery sector, other actors are scrambling in to help the business getting on its feet again. Two initiatives deserve particular attention.
The first initiative was launched by Federorafi, the Italian federation of jewellers and goldsmiths. Last November Federorafi presented “Give Credit to the Jewel”, an innovative program designed to improve access to credit for the jewellery sector. The program is rather ambitious, as it promises jewellers access to credit instruments at conditions similar to those that were in place before the credit crunch. This means that even companies offering low guarantees in terms of liquidity or collaterals will have once again a good chance of borrowing money.
Additionally, Federorafi will provide a temporary financial management support to those companies that, due to their small size, cannot afford to hire a full time manager. This is particularly important for the Italian jewellery sector, as it is largely composed by SMEs. In the Arezzo gold district, as an example, over 60% of the businesses employ less than 10 people.
A second initiative was taken at the governmental level. Preoccupied by an overall decline in employment in Arezzo, the Governor of Tuscany Enrico Rossi came out in September 2014 with an unusual proposal. The local government offered a free guarantee of up to 80% on any 18-months gold loan. In exchange, jewellery companies were required to commit to hiring a new employee for every 5 kilograms of gold borrowed under the program.
The objective of the program was twofold: on one side, it was designed to fight the unemployment rate which is still plaguing Italy at 13%; on the other, the local government used its stronger credibility as a borrower to facilitate supplies of gold to the local jewellery industry, thus circumventing traditional credit limitations. The initial budget for the program was €6 Million, and it contributed to the creation of some 300 new jobs.
While innovative in approach, so far those proposals have not been sufficiently funded to produce macroscopic results. Yet they should be praised for proposing fresh solutions to an old problem. They might just be two drops in the oceans, but at least they are showing what should be done to reverse the tide.
Matteo Butera, Rough&Polished
