ALROSA Beats EU Ruling

RAPAPORT… In July, Russia’s biggest diamond miner ALROSA won back the right to sell rough diamonds to South African giant De Beers. The European Union’s (EU) Court of Justice overturned an earlier EU antimonopoly decision that ordered ALROSA to cease all sales to De Beers by 2009.

The 2006 EU ruling that curbed cooperation between the Russian and South African companies resulted in the increase of rough diamond prices, since De Beers was losing one of its biggest suppliers. This recent decision appeared to produce little turbulence.

“It doesn’t influence us at all,” said Andrei Polyakov, ALROSA representative. “We are not under EU’s jurisdiction.” ALROSA has already brought down what it supplies to De Beers to around 19 percent of its overall sales. While it is still interested in cooperation with the South African giant, developing its own network of long-term clients has become a priority.

ALROSA is creating its own trading platform where it is going to sell the bulk of its production. Around 40 percent of its rough diamonds will be bought by Russian companies; the rest will go to foreign clients. And this foreign client list is likely to include De Beers. The difference is that this time De Beers will be standing in line with other buyers.

Manufacturers Nix Rubles

As soon as ALROSA’s trading platform is operational, the company’s foreign clients will have to come to Moscow with something they don’t often carry in their pockets – Russian rubles — because the company already has announced it plans to trade in its national currency. “It’s natural that we are going to trade in rubles,” said Polyakov. “We are a Russian company and the trading platform will be located in Moscow.”

The move is likely to benefit ALROSA’s sales and make it an even stronger rival to De Beers. Yet it has already raised some anxiety among Russian diamond-cutting companies because the ruble has been appreciating at an intense rate over the past two years and shows no signs of abating.

Although most Russian companies pay for diamonds in rubles now, the price tag is still in dollars. So the falling dollar-exchange rate sweetens the deal. “If the price is based on rubles, then the cost of rough diamonds will go up,” said Nikolay Zhuravlev, representative of diamond manufacturer Smolensk Kristall.

The recent increase in the price of rough diamonds has already put a strain on Russian manufacturers. Since domestic jewelry demand is still not big, companies sell their production abroad – which means in dollars.

Consumers Favor Natural

The use of the word “synthetic” to describe a gem would startle a Russian buyer, especially if it referred to diamonds. “Russians are conservative; they like natural stones,” said Aleksey Smirnov, director general of Expert-Jeweler LTD. “The consumer market is not ready for synthetic diamonds.”

Yet the country’s producers aren’t upset about synthetics. In fact, creating synthetic gems for technical use has proved to be more profitable for them than selling stones to jewelry makers. “If we sell stones for technical use, we earn six to seven times more than we would by going to jewelers,” said Sergey Terentiev, of the Technological Institute for Superhard and Novel Carbon Materials.

A jeweler will pay around 60 percent of a natural stone’s price for a synthetic gem of the same quality. Meanwhile, a lab in the U.S. or Europe is ready to pay a premium to get a stone possessing a set of required characteristics, or even more for a ready-made instrument incorporating the necessary synthetic stones.

Russian synthetics producers, located in Moscow and Siberia, usually custom-make stones to the specific orders of their clients. While sizes of the crystals may vary, one of the major requirements is the purity of the stone. Most in demand are stones with no nitrogen and stones with bromine. Next in demand are yellow stones with nitrogen and fancy colors.

One problem with supplying jewelry makers is that they usually have the same color and size preferences. And there is an additional hurdle: The volume required is too big. “We can’t compete with natural stone producers in the jewelry segment because of the volume of production; it would take a huge plant to compete with the daily output of a mine,” said Terentiev.

Low production volume is the factor that holds Russian producers back on the world market. “There hasn’t been any significant increase in synthetic diamond production in Russia for the last ten years,” said Yuri Shelementiev, head of the laboratory at the Moscow University Gemological Center. “New capacities are not appearing on a grand scale. We estimate all gem-quality synthetic diamond production in Russia is only several hundred carats per month.”

Experts say, however, that production volume could grow if companies invested more in expanding production capacity. It is thought that the market could absorb the additional production since Russians are developing a taste for fancy colors and the consumption of synthetics by the country’s jewelry producers is expected to grow.

The Marketplace

• The consumption of fancy color
diamonds is growing inside Russia.
• Russia’s Jewelers Guild estimates the country’s diamond jewelry retail market at around $1.8 billion, half of Russia’s overall retail jewelry sales.