One of the most prominent tendencies influencing the development of the global raw diamond market is the growth of speculative operations with raw diamonds in their number and range. In fact, today almost all market participants happened to be involved in dealing business to one extent or another - from large extractive companies to petty lapidary workshops, not to mention those companies, which considered dealing to be their primary business from the very outset. This situation resulted from the following developments:
- Nascence of large independent producers of raw diamonds (BHP, Rio Tinto, Argail) and their own client base selected by substantially more liberal principles as compared to those practiced by De Beers towards their site holders;
- Breakup of the USSR and subsequent re-formatting of all the Soviet diamond industry followed, among other things, by unprecedented increase of speculative operations with raw diamonds along several lines. In the first place, in 1992 - 1998 the market was inundated by longstanding stocks of the State Depository for Precious Metals (by various estimates, from $7 to $12 billion) through the network of “joint lapidary ventures” engaged exclusively in dealer activities in their overwhelming majority; in the second place, in Yakutia they used political lobbying machinery to create the so called “national lapidary industry” which operated a quota equal to 25% of the current ALROSA output but actually was engaged in speculative operations with raw diamonds; in the third place, ALROSA itself gained an opportunity to build up its own client base, the major part of which also took part in dealer transactions. At the same time, in the post-Soviet space – in Armenia, the Ukraine and Belarus – the fragments of the former Soviet amalgamation “Kristall” were also actively engaged in dealing. Remember that the diamond-mining industry of the USSR was strictly integrated into a one-channel system controlling the global diamond market created by De Beers and practically was not involved in independent dealer operations;
- The specific development of political process in some West-African countries brought radical groups to control significant part of alluvial deposits and subsequently impelled them to set up their own dealer networks which sometimes operate significant amounts of raw diamonds (the "diamond section" of UNITA).
On the whole, the growth of speculative operations in this period affected the position of extracting companies: De Beers was compelled to significantly increase buffer stocks – up to $4439 mio. in 1997 (In 1997 De Beers kept $2684 mio. in stocks.) and simultaneously the CSO several times decreased the purchasing list prices – for instance, the “March 97” price-list decreased the average price for diamonds sold by ALROSA for about 7%. Such consequences of the speculative boom were possibly one of the reasons, which lead De Beers to its decision to abandon monopolistic regulation of the market. From 1999, buffer stocks, being the most solid instrument for regulating prices, were consistently reduced. In 2000, De Beers officially introduced a new selling policy (Supplier of Choice).
This new selling model offers among other things a strict control over speculative activities of site holders by way of obtaining consent for auditing their companies by De Beers. About 30 clients of De Beers notoriously noted in the period of speculative boom were deprived of their site holder status. The events of the 90s demonstrated that the games played by speculators might reach a scale seriously fraught with a market collapse. At the same time, there was noted a clear difference in positions of major market participants towards dealer operations. In the eyes of large extracting companies, dealing business is an evil, though inevitable. Their main task is to support and develop the extremely capital intensive mining production where the rate of capital turnover is very low. This is a difficult business and it is very sensitive to fluctuations of prices for its end products – the raw diamonds. It would be ideal if prices in this industry could grow slowly but constantly. A similar position is supported by companies, which are really engaged in gem cutting. Dealer business for them is an imposed kind of activities, just a way to get rid of raw diamonds, which at a particular moment it would be unprofitable to process. However, market stability and absence of crises are very important for them too. The professional speculator, especially a major one, possessing sufficient capital to maintain significant stocks, takes up a diametrically opposed position. For him and for any speculator in any market it is important to maintain the amplitude of price fluctuations to have an opportunity to gamble on price increases and price decreases, in other words the important thing for speculators is to create crisis situations.).
Subsequent events proved that such an alignment of forces was true. Analysts explained significant price fluctuations in 2005 – 2006 as being the result of speculative gambling by mostly Indian diamond dealers, while the record stock interventions performed by De Beers in the summer and autumn of 2005 as an attempt to counter their actions. The active vertical diversification of large extracting companies trying to set up chain-like patterns involving extraction – sorting – gem cutting – jewelry production – marketing – retail networks, where there is just no place for dealer operations with raw diamonds, may be viewed as a means of restricting speculative activities.
Nevertheless, these seem to be makeshift measures and the community of speculators incredibly spawned during the last 15 years continues to pose a serious threat to market stability. However, due to some objective reasons their future may look not at all brilliant. According to competent experts, the next five years will witness an intensive decrease of diamond extraction in the world against a powerful increase of demand. In current prices, by 2012 demand may go up to $18 billion while extraction will produce about $9-10 billion. It should be noted that extraction would be concentrated in 5 corporations of which two will account for 70%. For the first time in the history of diamond market, there will be a genuine and not artificially created supply deficit of raw diamonds. Under such circumstances there may arise real preconditions for an agreement between major diamond producers permitting to restrict the speculator business to a minimum necessary for production if not totally clearing the market from it. In this case, the situation will return to the “sellers’ market” state thoroughly and for a long time, which will preserve vitality of its major element – the extracting companies. Feverish price fluctuations so dear to speculators will change to a monotonous growth and finally it will be the consumer of diamond jewelry who will pay for everything – judging by demand forecasts, the consumer is ready for this.
This tendency did not pass unnoticed by those people who are seriously involved in dealer operations in the diamond market. Quite logically, the first bell rang in Russia, which in its time made an enormous contribution to the speculative diamond boom. On the 30th of August this year V. Maslov, the Smolensk Region governor, asked the Russian government to increase the quota of raw diamonds supplied to the Smolensk Kristall workshops. His reasoning was that if the quota would be increased Kristall would be able to raise its annual turnover from 13 billion roubles to 25 billion roubles without any additional investments. According to the governor, the lack of raw diamonds supplied to Kristall was connected with “the trading policy of ALROSA”. It should be noted that the governor’s speech produced an emotional and sympathizing reaction among the government members and personally on the part of M. Fradkov. Thus, there is a clear and classic conflict between an extracting company and its major site holder represented by its lawful lobbyist. But why did this conflict come up to the front so strongly in this very moment?
Was it just a coincidence that the problem “arose” two weeks after the featured publication of the above-mentioned expert assessment concerning possible decrease of raw diamond extraction and increase of raw diamond demand? As recently as the last year, M. Shkadov, the General Director of the Smolensk Kristall works, in his interview with the trade magazine “Diamonds and Gold of Russia” was asked: “Kristall cooperating with ALROSA has no deficit in the supply of raw diamonds. Is it possible that the initiative taken by the plant will lead to decrease in cutting diamonds coming from extracting companies?” He answered this question quite definitely: “It is true that we have no deficit in raw diamonds…”
Incidentally, in another interview M. Shkadov declared that he was ready to buy raw diamonds from ALROSA for $1 billion annually (just compare the figure to the current sales of this plant amounting to $358 mio. per year). Along with these somewhat inconsistent statements, M. Shkadov is well known in professional circles for his oddball proposal to set up a “diamond OPEC” and for his attempt to promote the De Leri jewelry brand whose official face is singer Valeria popular in Russia but unfortunately almost unknown in Antwerp, Hong-Kong, Tel-Aviv, Dubai, New-York and Los-Angeles, i.e. in places where Kristall diamonds are being sold. Kristall receives raw diamonds from ALROSA (95%) and from De Beers (5%) and V. Maslov unfortunately lacks lobbying abilities to demand from the government of the Republic of South Africa and that of Great Britain to make De Beers increase the supply quota. Resorting to administration authorities for business purposes looks more like a Russian tradition. Using such techniques, about 150 “joint lapidary ventures” received their quotas for raw materials in the 90s emptying the State Depository for Precious Metals and flooding Israel and Belgium with “black” and “grey” diamond export.
However, the most peculiar thing is that it is Kristall that is considered a lobbyist in this industry for the Decree of 2002 permitting to export some part of raw diamonds (15%) bought in Russia. This is a direct and undisguised speculative potential. If the quota of ALROSA will be doubled, it means that this potential will be doubled too. Some time ago, M. Shkadov disappointedly noted in “Vedomosti”: “It was a good intention but these 15% are just a drop in the sea…”. Sure, 30% would be better and 50% would be just excellent. And if $1 billion would be passed through the Kristall dealing centers in Antwerp and Dubai, there will be no need in any plant in Smolensk. A smartly cut speculative transaction may produce the highest profit rate compared to all other operations with raw diamonds. In May this year, Shkadov himself noted to “Vedomosti”: “A situation may come when it is sometimes more profitable to re-sell diamonds than to cut them, because cut diamonds are cheaper than unprocessed raw materials".
Rough&Polished
