This article was written by Yair Sahar, President of the Israel Diamond Exchange, and published at www.israelidiamond.co.il.
The first and most basic element of the Israeli diamond industry that requires profound change is financing. Full cooperation between the industry and the banking system in reviewing and outlining a new arrangement is essential to our development and growth.
Shortly before I sat down to write this article, I returned from a meeting of the Exchange presidium, which convened for a special discussion of developments that occurred in the world diamond industry during August. I called the meeting when we got back from our summer vacation and several diamantaires approached me, expressing concern about instability in the level of rough premiums, ?uctuating polished prices and a downward trend on the Rapaport pricelist.
After the meeting, I published a message to the public, in which I explained these developments and my views on them. Naturally, the present issues are not limited to Israel. At a meeting with the sightholders at the August sight, De Beers CEO - Philipe Mellier - and DTC CEO - Varda Shine - also addressed the oversensitivity of many diamantaires in diamond centers around the world. The two executives promised to maintain the stability of prices and planned supply quantities until the end of 2011. Other mining companies made similar announcements. Clearly, the rough companies have decided to allay anxiety in the industry and reaffirm their confidence in the market. At the same time, the major retail jewelry companies published their results for the second quarter of 2011. The luxury retailer Tiffany & Co. announced that its second-quarter results deserve at least a similar superlative description to that of the first quarter, when sales rose by 20% and income by 39%. The second-quarter figures exceeded expectations, showing an increase of 30% in sales and 58% (!) in net income.
The major retailer Sterling Jewelers also reported impressive growth in the second quarter, ending 30 July: during this period, sales in the entire chain increased by 11% to approximately 800 million dollars. Sales in the US division also rose by about 11%, reaching 640 million dollars. The Financial Times devoted front-page space to reports on the strength of the American jewelry market during the first half of 2011. The figures support the information we received on the ground, in conversations with diamantaires who have representative offices in international marketing centers. All these indicate lively demand for polished diamonds and stable prices of polished at the retail level.
So it can be said, as of late August, that the diamond industry is healthy and undergoing some correction. At the time of writing this article, the Hong Kong show is still ahead of us. That event will determine whether the market is indeed consuming diamond jewelry at the same rate, or if there has been some slowdown. Whichever the case - and even if we are entering into a slower period - I believe it will be brief and temporary.
This was also the upshot of a conversation I had with Martin Rapaport, upon our return from the summer vacation. Rapaport said that he believes the market is healthy, what we are seeing are only minor price corrections and the source of the problem is not demand but liquidity, particularly in India and the United States.
We both agreed that the difficulties facing the world diamond industry today revolve around liquidity. In order to better understand this issue, let's look at the changes in rough prices this year: Since the beginning of 2011, rough prices have risen by about 50% compared with last year, meaning that diamantaires have to recruit another 6-8 billion dollars in order to buy the same quantity of rough as last year. To do this, they need financing. They have raised some of the money from private sources and some from the Indian banks, which stepped up their financing of the diamond industry during the global crisis. The Indian banks are now moving into a more moderate phase, reducing the pace and level of financing they provide. These developments are putting pressure on the system as diamantaires find it difficult to finance rough purchases in increased scope at the higher prices of 2011. As a result, we are seeing some realization of assets and corrections of a few percent in the price of polished, which are meant to move stock in order to raise the capital for rough purchases.
Financing in Israel
When I think about the best strategy for financing the Israeli diamond industry, I look first at the entire basis on which our activity is founded: approximately 1500 smart young men and women - possessing power, bursting with energy and endowed with infinite potential - are active in the Israel Diamond Exchange today. We see them in the corridors, at the shows and in the offices of rough and polished companies throughout the world. Wherever there are diamonds, they are there. These young people are our future and our growth engine.
Our diamond industry is robust, founded on experience passed from one generation to the next, professionalism and wisdom. Our complex of Exchange buildings - the largest in the diamond world - functions as a closed, secure and well- protected system, providing all the services a diamantaire requires under a single roof. We have a special industry, with a judicial system that has stood the test of the courts and been praised for its rulings, and a control and monitoring system unmatched in any other industry or market.
Our contribution to the Israeli economy is of the greatest value. For decades, we have maintained excellent relations with the leaders of all the relevant state institutions; warm, open and transparent relations with the banks that finance the diamond business and good ties with all the diamond centers throughout the world, including countries that have no diplomatic relations with Israel, so that we also contribute to the state's foreign relations.
The Israeli diamond industry has a fine reputation wherever we go. The fact that Israelis - Moti Ganz, Avi Paz and Eli Itzhakoff - serve as the leaders of the world diamond industry's most important organizations is just one example of this. We have a stable leadership that passes the torch by means of fair, transparent and democratic processes and life in the diamond industry is characterized by genuine friendships, mutual responsibility, family-like warmth and much more.
I am certain that all these strong points have helped us build our strong and open relationship with the banks. However, despite all these advantages and our good relationship with the banking system, we know that the financing we receive is not commensurate with our abilities and does not provide us the leverage we deserve.
Diamonds/Real Estate
It is important to remember that our instrument of work is money. Were the real-estate industry to receive financing by the same method as the diamond industry, not one contractor would be able to build even a single room. Just imagine what would happen if the contractor had to buy the land himself - as we buy a parcel, and then had to erect the building - as we manufacture diamonds, and after that he had to sell the apartment - as we sell polished diamonds, and then expect payment on the sales contract within 90 days at best. And all this with 50% financing. Show me the contractor who could survive under these conditions. We have been working for decades this way, proving beyond any doubt how very strong the Israeli diamond industry is. If we need further proof that bankers can feel secure about the Israeli diamantaire and diamond industry, we can point to our conduct during the recent global economic crisis. While whole countries and giant corporations collapsed, the Israeli diamond industry demonstrated its resilience and its sense of responsibility in its dealings with suppliers, clients and, especially, the banks. The diamantaires cut back on rough purchases, reduced their manufacturing systems and urged their sales personnel to reach out to every possible corner of the world. At the request of the banks, and with the cooperation of the diamantaires, we recruited more equity capital and reinforced our collateral to the banks - measures that helped stabilize and calm the banking system.
However, when the crisis ended and the industry began moving forward, our banking system was not there to enable us to purchase rough when prices were low, or surge forward with the onset of renewed growth in 2009.
The figures bear this out: prior to the crisis, the credit to the diamond industry totaled 2.5 billion dollars, while today it is just 1.7 billion dollars. While credit lines dropped by some 30%, the price of rough increased to 20% above its level before the crisis. This 50% difference amounts to about 1 billion dollars, at a time when turnover returned to its pre-crisis level. As part of the effort to close this gap, diamantaires are also continuing to use equity capital.
Brainstorming
The relationship with the banking system in Israel is as important to us as the air we breathe. We believe that it is also important to the banks, which have benefited for years from their relationship with us, in terms of both scope and the resulting income.
In light of this assumption, there is no doubt that it is imperative to reconsider the financing of the industry, applying new thinking to examine old habits that became an integral feature of our daily conduct.
Seventy years of experience are an excellent foundation from which it is possible - and essential - to think twenty years forward. The industry today is not the same as the industry of the past:
Once we would sit in Ramat Gan and wait for customers to come to us to buy diamonds; today we run after them, wherever they are in the world. Once we made large deals with a few customers; today we close tens and hundreds of small deals with numerous customers. Once we would meet our customers personally; today we sell by e-mail and websites. Once we were manufacturers or exporters or traders; today we are all of these, and in many cases jewelry manufacturers and/or retailers, as well. Once we were a centralized industry; today we are remarkably diversified, ensuring a strong, quality safety net.
And despite these vast changes, the banking system still follows its conservative approach that treats export deals as second- or third-rate guarantees only. There are many ideas that we can consider together, such as financing rough purchases from a recognized primary source, reassessment of our property as collateral and more.
We know that the banks don't operate in a vacuum, that they are obligated to comply with the regulator. There is no doubt that Basel II and the imminent Basel III require both the banks and ourselves to follow new rules of conduct, meeting unprecedented requirements. We take this into account, and nevertheless, it doesn't dampen our desire - and need - for progress.
Therefore, as I announced at the last general assembly, I have convened a team, with the participation of former governor of the Bank of Israel, Professor Jacob Frenkel - one of the most outstanding scholars and greatest experts in the field of international economics and macroeconomics in Israel and the world over, who volunteered to assist us - and of leading diamantaires such as Dani Steinmetz, Lev Leviev and Elliot Tannenbaum.
In the weeks that have passed since my election as president, I have spoken with the highest-ranking bankers, who have expressed the will - one could even say eagerness - to reexamine the financing of the diamond industry and sit together with us to develop new and original ideas.
All of us - diamantaires and bankers alike - recognize that the entire world is different to what it was, and the diamond industry, once considered a conservative industry, has changed beyond recognition. This brainstorming team, comprised of Israel's most outstanding leaders in the field, will concentrate its efforts on long-term strategic thinking. I am confident that together with the Israel Diamond Institute and the Israel Diamond Manufacturers Association, under the leadership of Moti Ganz, we will succeed in developing effective measures, finding ways to increase our credit, examining the issue of guarantees and modernizing the system for industry financing. We believe that this brainstorming will contribute significantly to the banks and our diamond industry alike.
Cooperation is a two-way street. Therefore, even before we begin discussing long-term changes, I can assure you that in the short term, we intend to take decisive actions regarding Diamond Exchange members who do not honor their commitments vis a vis the banks, as well. I have instructed the appropriate entities in the Diamond Exchange to exercise the legal measures available to us to ensure that no exchange member that fails to honor the prevailing rules and regulations of the Exchange, can not repay its debts and fails to reach an acceptable payment arrangement, thus also posing an economic risk to other exchange members, continues to walk through our halls as though nothing happened. The bank is a very important institution, for which we have great respect, and we certainly see such cooperation with them as a priority. At the festive event held by Bank Igud in early September, I shared a memory from five years ago: At the World Diamond Congress held in Israel in 2006, we were asked at a press conference, attended by some 50 journalists from the world over, how we planned to compete with India, China and other diamond centers when we have neither a local source of rough nor inexpensive labor, but only - according to the journalist asking the question - terrorist attacks and exploding buses.
My answer was that Israel is our home. Each of us can live anywhere he pleases, but we choose to live in Israel. It is here that we want to raise our children and see them raise their children. And that is why we put every effort into making the diamond exchange a vibrant, thriving place, a place where it is good to be. For this reason we must make sure that Israel and the Israel Diamond Exchange are the best place in the world for us, a good place to do business and a fun place to live. In order to realize this potential, we need a banking system that is stable and supportive, and at the same time, a creative and full partner in our efforts for renewed growth. I am certain this will happen. Together we will create a better future.
