The news released by information agencies about China’s readiness to buy a large amount of rough diamonds from Russia in 2009 and purchase virtually all ALROSA’s output assortment in 2010 creates a sudden intrigue and may have a pivotal impact on forecasts for the global rough diamond market. Despite the fact that the official representatives of ALROSA and Shanghai Diamond Exchange made almost simultaneous statements that they “did not know anything of such deals being prepared,” some objective reasons for such collaboration do exist.
ALROSA’s readiness – and incidentally Gokhran’s readiness too – to sell their rough stocks at some agreeable price does not give rise to any doubts. ALROSA is already in a pre-bankruptcy state, while Gokhran’s rough diamond stocks in view of their composition and amount are an utterly risky asset dependent on fluctuations of the currently weak and unstable rough market. Taking into account that by 2010 Russia will have a budget deficit and have to seek foreign loans any further purchases of rough diamonds from ALROSA by Gokhran will mean higher risks since the probability of another price slump on the diamond market is very high. The excuse for such a decision is evidently found in the political sphere – it is quite clear that without state assistance Western Yakutia may face quite real problems as soon as this autumn. In this situation the appearance of a buyer, who may not be very generous but ready to operate on a bulk scale, could solve all the problems of the Russian diamond industry at once.
Why would China need such a purchase? Undoubtedly, among the countries which happen to be consumers of rough diamonds, China looks best. In 2008, only online jewelry sales in China surpassed $1.7 billion while the annual turnover of the Chinese jewelry industry reaches about $17 billion. Total transactions at the Shanghai Diamond Exchange in the first six months of 2009 grew almost 7% compared with the similar period in 2008 hitting $692 million. This success is particularly impressive on the background of decreased activity on the traditional trading floors – in Israel, Belgium and the United States. According to some estimates, China’s share in the global diamond consumption has already reached 5% and will continue to expand in the next 10 years. This is true, but transition from 5% in the global consumption to 25% (this is exactly the share which Russia may offer to China) within a mater of some 18 months very much reminds of the “Great Leap Forward” period in China though the time of Chairman Mao has long passed into History. If China really intends to purchase all the stocks from ALROSA (and maybe those of Gokhran) as well as buy all the Russian company’s output in 2010, such a deal cannot be explained by a growing domestic consumption of diamond jewelry in China and export breakthroughs of Chinese diamond cutters. Still, there is one explanation.
China is the largest importer of energy products and without imported oil, coal and uranium its economy may turn inexistent. The faster China is developing, the more dependent it is on this import. This is why China’s strategic target is to acquire control over minefields of energy products. By the end of June 2009 China’s gold and foreign exchange reserves rose 17.84% reaching $2.13 trillion versus 2008 and were up another $177.9 billion in the second quarter 2009, while the Chinese sovereign funds account for $300 billion. Such assets permit China to make a claim for hefty shares in any transnational mining companies, but the Chinese efforts to buy them run across desperate resistance based on political reasons and very often put up by political means. When in the summer of 2005 CNOOC trying to buy Unocal lost to Chevron, the Chinese representative explained their defeat by “unprecedented political pressure.” Since then the Chinese have significantly advanced in purchasing mining assets, but the resistance is growing and the scramble is less and less looking like using economic methods.
The uranium market is the most important for China. Currently, in the energy balance of China 84% of consumed electric power is supplied by coal thermal power plants and only 1.3% by nuclear generating stations. This colossal disproportion compared with industrially developed nations should be redressed by 2030 when China’s generating capacity is to increase 30 times by building about 100 new nuclear power plants. There are no doubts that the plan to construct nuclear power stations will be fulfilled, but China’s free access to uranium appears more problematic. China’s own proved uranium reserves do not exceed 1.5% of the global amount, while its annual output reaching about 850 tons is not sufficient to cover all the current needs. Meanwhile, the Chinese program for developing nuclear power industry envisages increasing uranium consumption 5 times by 2020 despite the fact that the global uranium market is turning scarce with explosively growing prices – this year’s forecast says they will go up two times. To make the vast nuclear industry under construction work without a hitch China needs control over appropriate amount of uranium minefields, which is utterly difficult to attain.
Uranium mining leaders are Australia, Canada and Kazakhstan, which account for 45% of the world uranium reserves. China buys from these three countries, but only in Kazakhstan it managed to get a share in the joint ventures to develop uranium deposits, which makes it possible to view Kazakhstan as a reliable source of uranium for China. For the countries of the British Commonwealth the political aspect of interaction with China appears pace-setting and to acquire at least blocking stakes in the companies developing the Canadian and Australian uranium deposits seems unrealistic for China. Chinese attempts to make a significant gain (up to 18%) to its stake in Rio Tinto (which controls Energy Resources of Australia turning out more than 10% of the world’s uranium) flopped and transformed into a political scandal resulting in the arrest of four employees of the Shanghai office of Rio Tinto on suspicion of espionage.
In 2009, Namibia occupied the fourth place on the global uranium market. This country has three very large uranium deposits capable to supply 10% of the world’s uranium output: Rossing developed by Rossing Uranium Ltd, a subsidiary of Rio Tinto (68,6%); Langer Heinrich owned by Paladin Resources Ltd; and Trekkopje. China is extremely active in the uranium segment of Namibia. In august 2008, China signed a contract to supply uranium from the Rossing Minefield and two months later Guangdong Nuclear Power Corporation, a Chinese company, tied up a contract with Areva for purchasing a 35-percent stake in the Trekkopje Project. This was the most successful move made by China (besides Kazakhstan) on the global uranium market and it did not go unnoticed.
By the time the Trekkopje Project was put into commercial operation to produce uranium the Chinese ran into serious troubles. In July 2009, the Namibian authorities initiated an investigation into the business activities of Nuctech, a Chinese government-owned company, which has close ties with Hu Haifeng, the son of Chinese President Hu Jintao (Hu Haifeng was the president of Nuctech and currently holds the position of the party secretary with Tsinghua Holdings Co., whose subsidiary is Nuctech). Namibia arrested three persons, including a Nuctech employee, all accused of corruption. Of course nobody is going to say - at least publicly - that this investigation was a reaction to excessively hot operations of China on the Namibian uranium market. But there is no doubt that China’s main interest in Namibia is uranium and all the other Chinese moves in this African country are just negligible compared with the uranium projects.
Namibia’s budget is mainly filled by the national diamond industry accountable for no less than one third of export revenues. Unlike the uranium market, today the diamond market is in deep coma and in particular the profit of Namdeb equally owned by De Beers and the government of Namibia decreased by 65% in the first six months of 2009 compared with one year ago. Despite the fact that starting from April up to the end of June diamond mining was stopped, Namdeb has accumulated a significant stock of unsold rough. Under such circumstances the diamond industry of Namibia is highly vulnerable to any threats of price attacks. Consequently, the government of Namibia will be attentive to any arguments of a party able to deliver such an attack.
To guarantee a lethal blow to Namibia’s budget in 2009-2010 it will be needed to throw $1.5 - $2.0 billion worth of rough diamonds to the market. This is exactly the amount which China may buy from Russia in the result of an alleged deal with ALROSA. For China with its gigantic gold and foreign exchange reserves, sovereign funds and assets belonging to government-owned energy corporations this is just a trifle kind of expenses, while the stake is high – actual control over the fourth uranium producer in the world, control without which the perspective energy strategy of the Heavenly Empire will be left hanging in the air.
Sergey Goryainov
