Questions:
• Fears in the middle part of the diamond pipeline - "midstream" - about granting credit to other participants in the middle part of the diamond pipeline and retailers after the recent large defaults.
• After the purchase of $ 1.5 billion worth of diamonds in the first cycle of the year, the volume of purchases fell to about $ 400 million, as diamond prices fell 12% to 33% from mid-2014.
• The limited purchases of diamonds seem to have been designed primarily to support the operation of factories, mainly in India, and not to ensure growth or profit.
• There is great hope for expensive banking or intra-market financing.
• Small profit margins at the level of polished production, where there is no room for error, despite the large drop in diamond prices.
Why is this happening? There is no direct answer. The five questions listed above have several interrelated reasons. One main reason is the difference between the cost of diamonds and the production of diamonds, on the one hand, and the price of diamonds that are obtained.
Diamond producers produce about 140 million carats and after sorting and valuing the goods they sell the middle part of the diamond pipeline for $ 16.5 billion. Why do they value diamonds at this price? Yes, the cost of production, royalties, labor costs, energy, mine maintenance and previous exploration costs - all these costs must be covered. They also have to make a profit, and also seek to grow their capital. But there is a difference between covering costs during the creation of profits and covering costs when creating huge profits. Why are diamonds delivered to the midstream should have such high prices? Is there a need for this?
If the cost of diamonds is reasonable, then you can protect profits, earn capital and less use of bank financing. If there is a downward trend in the market, the offer can be reduced so that reserves do not accumulate and the business continues without swaying the boat. If the reduction in supply is not enough and the prices for diamonds are declining, then a cautious fall in diamond prices may accompany a decrease in supply.
If this is not enough, then we can consider the decline in production. Diamond companies also do not need to create large reserves, and a decline in production is much more financially acceptable than moving excess diamond to the middle of the diamond pipeline. This is part of what caused the current crisis, remember? And if the industry decreases during a major crisis, as now - and it can still happen because of external factors such as the 2008 crisis - then you can resort to a sharp decline in prices combined with a decrease in production.
The logic is simple. The imposition of large volumes of diamonds at a high price of the middle part of the diamond pipeline ultimately turns against diamond miners and damages them. It makes sense from the economic point of view for everyone to avoid an unnecessary crisis all together, right?
Wholesalers cut purchases from previous high volumes by $ 22 billion to about $ 17 billion; This required a reduction in prices and a reduction in volumes. This decline did happen, but it's too late. We knew about the onset of this crisis for many months, but still a sharp decline occurred only last month.
This brings me back to the original question: who should say that setting such a high price for diamonds is right? Does this decision only concern the maximum increase in value, or is this, to some extent, the germs of our hope?
http://www.ehudlaniado.com/home/index.php/news/entry/some-fundamental-issues-and-how-we-can-solve-them
No comments:
Post a Comment