Russia Market Report

RAPAPORT… ALROSA has shown steady sales in the third quarter of 2009, but troubled times are not yet behind Russia’s largest diamond miner. The company sold $1.34 billion worth of rough in the first nine months of 2009, which includes $651.5 million worth of gems sold in September. Most of the gems were bought by Gokhran, the country’s state treasury. Gokhran Chairman Vladimir Rybkin told Prime-Tass news agency that the treasury had already spent around $1 billion on ALROSA rough in 2009. It was previously reported that Gokhran was planning to spend $3 billion on purchases from ALROSA in 2009 and 2010.

The company’s sales to the market totaled approximately $200 million in September, about the same as August sales. If the company continues the same volume of sales in the final three months of 2009, it could sell more than $2 billion worth of diamonds by the end of the year. That total includes stones purchased by Gokhran. Even so, it will be hard for ALROSA to reach its 2008 sales totals of $2.7 billion.

Fyodor Andreev, ALROSA president, told Russian news agencies the company was planning to end 2009 without a loss, yet without a gain. He also said the company is trying to bring down its debt burden, which reached $5 billion by June 30, 2009, to $3.2 billion by the end of the year. He is working on a plan to cut expenses on major construction projects, where spending has remained intact to date.

Meanwhile, the company is bracing for a possibly tough 2010. Andreev has ordered a special contingency sales plan put in place to use in case market conditions worsen next year. But no matter what happens to the global diamond market, the company can still rely on the Gokhran purchases. According to Russia’s preliminary budget for 2010-2012, a similar amount of money has been committed to buying precious stones and metals in 2010 as in 2009. However, the government also has put ALROSA on notice that it plans to cut those expenditures by 75 percent, beginning in 2011.

Manufacturing up
Although activity in the polished diamond market is increasing, it is less than manufacturers expected. “The market is still very dull,” said Ararat Evoyan of the Russian Diamond Manufacturers Association. However, companies are increasing their production volumes. Kristall Smolensk, the country’s largest manufacturer, has returned to cutting its usual sizes and qualities; the company had been polishing smaller and cheaper rough in the first half of 2009 in order to keep facilities operating and avoid shutdowns. The renewal of ALROSA sales to the market has made life easier for manufacturers, but its prices are higher than are being charged on the world market.

“ALROSA has to stay with the prices for which it sells its rough to Gokhran,” said Evoyan. Gokhran in turn sells rough through the auctions. However, at its most recent auction, only 40 percent of the lots offered actually sold and auction participants said the prices were quite high.

“Gokhran prices are rather high, but sometimes it offers gems that can be polished very effectively,” said Valery Morozov, the director of Ruis Diamonds, which is owned by Lev Leviev. The company says it buys half of its rough from ALROSA and the other half comes from its own mine in the Urals or from outside Russia.

Finding good-quality rough is another challenge for manufacturers. “There is a shortage of rough that can be turned into the polished gems that are most in demand,” said Evoyan. ALROSA usually sells its rough in boxes, basically a collection or assortment of stones of different sizes and qualities. “Stones both fit and not fit for profitable cutting go into the boxed sets. You can’t just come and cherry-pick the best stones that you would like to have,” said Morozov.

The other major headache for manufacturers is the return of the value-added tax (VAT), which Russian companies resumed paying in January 2008. By law, the tax should be refunded to companies when they sell their gems abroad, but it can take as long as a year to collect the refund.

Despite all the obstacles, jewelry makers see the current situation in the market as favorable. “It’s a good time to buy diamonds because you can negotiate a bargain,” said Maksim Strezhnev, director general of Ekaterinburg-based Rifesta.

Holiday sales
Jewelers are cautiously optimistic as the holiday season approaches its peak and sales continue to grow from the summer standstill. Many in the industry repeat that despite the financial crisis, people will continue celebrating their holidays and giving gifts. However, buyers are shifting to cheaper items, leaving the shops with the same number of goods as in 2008, but with a smaller bill. The figures released by the Russian Assay Chamber show that in 2009 factories are producing 40 percent more silver jewelry items than gold, while in 2008 companies made on average 30 percent more gold items than silver.  “Items with semiprecious stones have the most demand,” said Aleksandr Kazakov, the head of sales of Zoloto Yakutii. Sales also have been boosted by the fact that many of the jewelry retailers have run out of supplies because they were not buying in spring or summer.

The Marketplace

• The two best-selling categories of gems are less than 1/10 carat and between 1/3 and 1/2 carat.
• Many of the stones smaller than 1/10 carat are being imported.
• Gems of less than 2 carats are selling well.
• The most requested characteristics of gems over 1/3 carat are no less than H and SI1.
• Fancy colors are seeing more demand.