Wall street crisis and the gems industry

Industry Analysis: Wall Street Crisis Will Tighten Diamond Industry
Credit Worldwide. from the GIA insider. Oct. 3, 2008

As insolvent and loss-plagued banks continue to be absorbed by a few
strong players, it is certain that credit will become tighter for
the world diamond industry and U.S. jewelry retailers.

In a related development, Fortis – the Belgian bank that acquired
as much as $3 billion in diamond industry loans as part of its
purchase of ABN Amro late last year – was itself saved from
dissolution on Monday by a $21 billion bailout package from the
Belgian, Dutch and Luxembourg governments. European press reports
say Fortis will be forced to sell its ABN Amro assets, including its
diamond portfolio, as part of the deal.

Fortis paid nearly $35 billion for ABN Amro’s business-to-business
and investment operations, then found itself badly over-leveraged as
the value of these portfolios eroded over the past year. European
press reports said Deutsche Bank’s offer for the ABN Amro assets is
substantially below the price Fortis paid.

The ABN Amro division of Fortis holds about one-third of the diamond
industry’s debt, which totals an estimated $12 billion to $13

The Fortis bailout occurred while the U.S. Congress was debating the
$700 billion Wall Street bailout, Citibank and Wells Fargo were
vying to acquire Wachovia’s banking operations for $1 per share, and
the German government was setting up a $60 billion credit line to
keep one of its major investment banks afloat.

Analysts worldwide hope the Wall Street bailout passed by Congress
this week will ease the tightening credit situation.

DIAMONDS: The September Diamond Trading Company (DTC) sight was
estimated at around $600 million; this was about $150 million lower
than the previous month because of problems in South Africa’s State
Diamond Trader (SDT) office.

The difficult economic climate has taken its toll on premiums for
rough. Until recently, rough traders were commanding hefty premiums
– 20% or more – on DTC goods and a bit less on rough from other
producers because it was priced higher. This was especially true of
large rough that would polish out to more than 3 cts. Demand and
prices for such large polished stones have begun to decline after
peaking in June, particularly after a slow Hong Kong show where top
goods usually do well.

South African rough diamond exports remain in limbo as problems in
the SDT office continue. The SDT was established last year to
purchase as much as 10% of local diamond production and resell it to
local diamond cutting operations as part of the country’s Black
Economic Empowerment program. The office has not been given the
funds to do so, however.

A group of local diamond cutting operations complained that the
problems in the SDT office were damaging their business, and just
last week, the government declined to renew the contract of the
office’s chief executive, Abby Chikane. Some local press reports
said Chikane was let go because he was allied with outgoing
president Thabo Mbeki while his boss, the minister of minerals,
backed Mbeki’s rival, Jacob Zuma.

The local diamond industry called for a mid-October meeting with the
government to try to resolve the impasse.

COLORED STONES: The U.S. ban on gemstone imports from Myanmar
(formerly Burma) was expanded Monday, as the Tom Lantos Block
Burmese JADE Act of 2008 took effect.

The U.S. Customs and Border Protection agency has issued new,
harmonized tariff system codes for all non-Burmese rubies and
jadeite imported into the U.S. to distinguish them from the ones
that have been banned, according to a press release issued Monday by
the Jewelers Vigilance Committee (JVC).

Gems from Myanmar can still be bought and sold in the U.S., as long
as they entered the country prior to the ban.

Meanwhile, the military rulers of Myanmar, while publicly denouncing
sanctions on their country by the U.S. and European Union, beefed up
security and anti-dissident activities last week during the first
anniversary of their violent crackdown on protestors.

A bomb detonated in a park in downtown Yangon, the country’s
capital, marked the anniversary of the protests, which began last
Sept. 26. Over the next several weeks, government forces killed at
least 110 protestors, including 40 Buddhist monks, and jailed some
2,900 others.

In Thailand, where September’s violent demonstrations helped bring
down Prime Minister Samak’s government, business is running
normally, according to local press reports. The caretaker prime
minister Somchai Wongsawat is preparing a reconciliation package to
bring to the parliament next week. The package will address some
demands of dissident groups and improve ties with neighboring

Russell Shor
Senior Industry Analyst