Ramping Up the Carats

RAPAPORT… ALROSA, Russia’s largest diamond miner, produced 16.6 million carats in the first six months of 2010, slightly less than the amount it mined in the first half of 2009. The company’s rough diamond sales for the first half of this year totaled $1.93 billion, an increase of more than 500 percent from the results of the first half of 2009, when the miner’s sole buyer was Gokhran, Russia’s state treasury.

The miner said its current rough shipment levels exceed the precrisis levels. However, ALROSA President Fyodor Andreev expressed concern over the price bubble that he said was developing again in the market. ALROSA sees long-term contract sales as one way to prevent such bubbles. “Selling all diamonds through auctions is unacceptable; only long-term contracts will give stability to manufacturers,” he said. So far this year, the company has sold 31 percent of its production through long-term contracts, with a target to bring that share to 50 percent.

Selling Stockpiles

There is some talk that the Russian government may step in once again to help contain any price increases that could result from the current shortage of rough. “The government of Russia decided to buy $1 billion of rough in 2009 to support the stability of the prices and, based on this logic, the government is planning its commercial strategy of selling stocks held by Gokhran,” said Alexei Kudrin, Russia’s finance minister.

Andreev said the government already has earned 15 percent to 18 percent yearly profit on the rough it bought from ALROSA during the global economic meltdown. He estimated the current deficit of rough in the market at between $800 million to $1 billion. “We are discussing with Gokhran the sale of $500 million to $800 million worth of rough by the end of 2010 — we don’t want to encourage the speculative demand in the market,” he added. In an interview with RDR, Andreev said rough prices can go either up or down, depending on movement in the global economy. “If the World Bank prognosis is that the global economies will go up 3 percent on average, we agree with analysts who say the prices will rise by 4 percent to 5 percent a year,” he said.

Kristall Sees Favorable Market

Kristall Smolensk, Russia’s largest diamond manufacturer, signed a long-term contract with ALROSA that regulates the assortment and the volume in carats that Kristall will buy from the miner. “The current treaty with ALROSA just formalized the relations that were already in place,” said Kristall’s Director General Maksim Shkadov.

The manufacturer’s 2009 net earnings were $254.8 million, almost the same as in 2008. Shkadov said that the market is favorable at the moment, noting that “There are no problems selling diamonds, but sometimes we do not have enough rough.”

According to its agreement with the state treasury, Kristall is to sell $100 million worth of diamonds to the treasury — the figure excludes value-added tax (VAT) — which represents approximately 40 percent of the company’s production. Sales to Gokhran supported the company in the economic crisis years of 2008 and 2009, when the treasury bought the bulk of its production. “The government acted as a smart investor buying rough and polished,” said Shkadov. “It has earned 5 percent to 7 percent on the polished diamonds it bought from us.”

India: Friends With Benefits?

When it comes to the relationship between India and Russia, the figures tell the story. India imported 2.6 million carats of Russian rough in the first quarter of 2010 — the largest quarterly purchase by India since 2004 and 1.2 million carats more than the country bought in the final quarter of 2009. In March 2010, ALROSA signed contracts with three Indian companies to sell them $490 million worth of rough over the next three years. It also has said it expects to supply $1 billion of unpolished stones to Indian buyers in 2010.

But this hunger for rough doesn’t make Russian manufacturers happy. They frequently express the opinion that accessible credit and the low-cost workforce in India put the two countries in unequal competition. On the other hand, Indian manufacturers would like to sell more of their polished gems to Russia, but the 20 percent import tax on diamonds and the 18 percent VAT present serious roadblocks for foreign products entering the country.

Still, the number of Indian companies taking part in Russian jewelry shows is increasing every year. “Many Indian companies buy plants or companies in Russia because only 15 percent of rough diamonds can be exported by law but the laws do not limit polished exports,” said Vladimir Logvinets from V.V. Almaz-Zoloto.

“The small stones in most of the jewelry imported to Russia come from India,” said Rajesh Gandi, director general of Choron Diamonds. However, India’s Gem and Jewellery Export Promotion Council (GJEPC) said there’s room for more cooperation. “What damages the image of our companies is the perception that India is Bollywood and nothing more,” Bakul Mehta, convener of the GJEPC’s Diamond Panel Committee, said when he visited the New Russian Style show on a promotional mission in May.

The Marketplace

• Russia exported 12.5 million carats worth $765.8 million in the first quarter of 2010 against 6.5 million carats worth $657.9 million in the fourth quarter of 2009.
• The biggest importers of Russian rough were Belgium, with 7.5 million carats, and India, with 2.6 million carats, according to the Russian Ministry of Finance.
• Russia imported 16,900 carats worth $20 million in the first quarter of 2010, half the average amount imported in each quarter of 2009.