Rough diamond bubble bust (Part 1) – by Martin Rapaport (Mineweb.com – November 25, 2015)

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Artificially high rough diamond prices are going to collapse taking companies and banks with them.

The diamond industry is undergoing fundamental structural change as the rough diamond distribution system self-destructs amid collapsing rough prices. Frankly, it’s good news. Unprofitable, unsustainable and unfair rough prices have been the bane of our industry.

For too many years artificially high rough prices have stolen profits from our trade. The hard-working cutters, polished dealers, jewelry manufacturers, designers and retailers who have honestly added value to diamonds have not received their fair share of diamond profits.

The major mining companies and the banks have milked our trade dry by systematically supporting rough prices that were significantly higher than polished prices. This effectively moved profits from the trade to the miners. The banks helped the miners squeeze profits out of the trade by showering money on firms that boosted rough prices to speculative unprofitable levels.

The overextension of credit created a situation similar to what happened in the Real Estate Bust of 2008. Too much credit created a price bubble that burst when it became clear that the value of the underlying assets was insufficient to repay loans.

In the case of the diamond industry, the banks were complicit in the creation of the rough price bubble because they consistently lent money to buy unprofitable rough diamonds. As in the case of the real estate bust, the banks were more interested in their short-term profits than the ability of their clients to repay loans.

For the rest of this article, click here: http://www.mineweb.com/news/diamonds-and-gems/rough-diamond-bubble-bust-part-1/