If either rough prices or credit terms start diverging with the bottom line once again, we must keep our financial discipline and, above all, a level head, writes Kaushik Mehta, Chairman & CEO, Eurostar Diamond Traders, and vice president of the Antwerp World Diamond Centre (AWDC).

 
We need to be asking ourselves how much will polished prices actually follow through and then pare our expectations down with our rough purchasing and operate as if we were starting from zero.
 
Whilst 2009 was a challenging year where many of us were suddenly detoured, 2010 is a time to begin afresh and to prepare ourselves to run faster than ever before. As we begin the New Year and a new decade, a wave of cautious optimism is already beginning to unfold across the broader economy as well as the global diamond industry. What lessons can we take with us as we move forward? Will this all turn out to be a second wave progression as we expect or a second wave recession for the global diamond industry in 2010?
 
We can now look back on the past year and be fairly certain that the worst is over. Due to quick and decisive action by mining companies and banks, the diamond industry remained relatively well-sheltered throughout the financial maelstrom compared with other industries.
 
The global financial crisis certainly presented challenges for the diamond industry, yet it also unveiled blind spots that were not evident during booming economic times – such as runaway credit terms and market speculation, particularly with regard to rough prices. The rough market crash of 2008 was really a wake-up call and if history speaks for itself, one thing is certain: the faster the boom, the quicker the crash.
 
Yet, due to the agile survival skills of diamantaires around the world, the industry is now once again facing a new dawn. Rough prices have been on a steady hill climb the past six to seven months. It remains to be seen whether the recovery will be V-shaped, W-shaped, or L-shaped. More importantly and more logically, we need to be asking ourselves how much will polished prices actually follow through and then pare our expectations down with our rough purchasing and operate as if we were starting from zero.
 
Moving forward, we must be ever more cognizant of risk management, which in the diamond business means keeping a level head about
rough prices and especially credit terms. If either rough prices or credit terms start diverging with the bottom line once again, we must keep our financial discipline and, above all, a level head.
 
In terms of key consumer markets for the diamond industry, the overall picture looks much more promising than six months ago. While the world’s largest diamond consumer market, the United States has, for a time, weighed down short term wholesale level demand for polished diamonds, diamantaires have turned their full attentions to emerging markets such as China and India.
 
Over the short term, there has been a margin squeeze in these markets as an influx of polished diamonds flood these markets. However, China and India look poised to hold the most brilliant potential for long term diamond sales growth in terms of the BRIC countries. Already, a cultural imperative for diamonds is starting to develop in China and India and once consumer demand really starts gathering momentum, the growth potential in these markets would be unlike any we’ve seen in the recent past.
 
The U.S. market still remains the world’s largest diamond jewellery market – the one everyone must pay close attention to. Whilst it has been seemingly one step forward and one step back with the US economic outlook, we can be certain that US government policy will continue to dictate the pace of the economic recovery – a recovery that remains hinged on the overall health of the US financial sector, employment prospects, consumer confidence, and ultimately, consumer spending.
 
Recently, we finally noticed results of the extensive US economic stimulus programmes paying off and all other positive data aside, US consumer confidence and holiday retail sales were surprisingly more upbeat than expected, which are confidence boosters for the diamond industry. Keystone retailers are now holding much lower inventories than before, which means pipeline congestion will begin to significantly improve throughout the next several quarters. Coupled with the $100 billion job stimulus bill that the Obama Administration is proposing, this could spell positive news for the US economic recovery, and more importantly, the diamond sector.
 
Yet, the past week and a half have been wrought with market uncertainty based on a number of wild cards: the financial regulatory overhaul proposed by the Obama Administration; the FOMC rate decision; and the vote to reappoint Mr. Bernanke as Chairman of the Federal Reserve Board. Whilst two wild cards have been revealed, if the Obama Administration now chooses financial regulatory overhaul policies that unwittingly throw the baby out with the bath water, will this potentially set off a second wave recession and lead to either a W-shaped or worse, an L-shaped recovery for the diamond market?
 
The future is anyone’s guess, but the diamond industry has so much to be grateful for as the global economy begins to pick up where it left off. No one can be certain whether this is set to be a second wave progression or a second wave recession, but the tides have clearly begun to turn slowly and gradually in favour of the diamond industry. Liquidity, inventory levels, and confidence have all improved. The diamond industry is facing a new dawn indeed.
 
As much as the world has changed, the diamond business has always been, and always will be, based on trust: trust that our suppliers have procured their rough diamonds with the highest ethics; trust that our partners are managing their businesses well; trust that every mazal will be a promise kept. So long as we remain clear-headed about rough prices, credit terms, and the bottom line, the future of the diamond business continues to look brighter than ever before.