WFDB commissioned report credits traders for enhancing business stability

In an address to the Presidents’ Meeting in Antwerp in November, industry analyst Chaim Even-Zohar reported on a study commissioned by the WFDB to examine the impact of the global financial crisis on the future of the international diamond trade, the relative contribution of the diamond trade to the diamond distribution pipeline, and future of the business after the recession.

Even-Zohar stressed that the diamond trade will have to adjust itself by realigning its business practices to overcome economic changes that will affect the industry long after the crisis is over. Some of these developments include a fall in unrestrained consumer spending, increased government regulation, reduced banking, stricter terms of credit, and a shift away from traditional markets like the United States towards the Far East, where economies continue to grow and are relatively unaffected by the crisis.

Even-Zohar said that market researchers believe that consumer spending habits are changing dramatically over the long term. He quoted a McKinsey report on the  on the U.S. market, which noted that: “U.S. consumers have responded to the global economic crisis by curtailing their expenditures, paying down debt, and saving more—all logical responses to a recession. Yet most consumers have acted by choice, not necessity.”

Data collected for the report indicates that the diamond trade’s position in the pipeline has not weakened over the past 10 years, as many have believed, but is actually stronger than it once was. Even-Zohar said that the instrumental role played by the international diamond trade in steering the industry through this difficult time with minimal damage has seemingly gone unnoticed.

“The expanded role of the diamond trading sector proved its worth during this most recent financial crisis,” Even-Zohar said. “In every previous diamond-industry crisis or economic recession after World War II, it were the producers who maintained the industry’s ‘buffer stock”’ and were willing to stockpile and wait for the storms to recede. But at the beginning of this century, producer policies changed; they would not use their stocks to support the market in adverse economic conditions ...The effect was that at the eve of the crisis, the industry’s buffer stocks were held mostly by the trading community. What has been disparagingly referred to as the enormous ‘fragmentation’ of the industry, in fact turned out to have been a most fortunate dispersion of stocks and of economic and commercial risks.”

“While extreme hardships were suffered in the retail sector (some 2,000 stores were closed in the U.S. along, while no new stores were opened) and also at the mining and manufacturing levels, the trading level proved to have resiliency and the leadership to ensure continued functioning of the diamond pipeline—minimizing damage to the members and to the value chain in general,” Even-Zohar stated.

Touching upon the issue of long-term supply, Even-Zohar discussed the potential of recycled polished diamonds, which he compared to gold recycled from jewellery being returned to the market.  If the established diamond trade does not develop the means to source such merchandise from consumers, it may find itself being left out from what could develop into a very lucrative form of business, he said.

In conclusion, Even-Zohar made a number of recommendations for the WFDB to consider:

The trade must move—or even move ahead of—the shifts in global demand, by encouraging the establishment of bourses in developing centres. The proliferation of bourses allows better service to faraway regions, provides added security to all members and will assist the opening of new markets. The trade should reach out to governments in producing countries. An active trading community—and bourse—may enhance their beneficiation aspirations.

Methods should be found to mitigate the problems of “unsecured” creditors in retail bankruptcies. This is not just a U.S. problem, he noted. There have been reports of great difficulties in securing payments from other jurisdictions, such as Switzerland.

The trade might consider the acceptance of some “best practice principles” in the areas of extending credits or memo terms. Some of the “insane credit periods” one has seen before the crisis should not be allowed to become the norm of the future.

The trade should reflect on, and maybe resist, the proliferation of new bodies that aim at “presenting our interests,” though they are basically funded and directed by the producers. Actions which greatly benefit the trade should be initiated and financed by the trade itself.

In summation, Even-Zohar commented: “It seems prudent that while bracing for still very difficult times ahead, the trade should take comfort in knowing that it has successfully weathered the storm so far—and there is no reason to assume that it will not continue to do so.”