For the last couple of years the inadmissibility of speculative operations and the need to support the development of diamond cutting appears to be the talk of the town among industry participants, because it is the state of the diamond market which diamond mining is hinging on. But what is said in theory does not always stand the test of practice.
According to market sources, during the last few months regular shipments of rough coming from Smolensk are put on sale in Antwerp. The sources estimate these shipments at $20-25 million a month.
The mere fact that a diamond manufacturer is re-selling rough diamonds is not surprising. Maxim Shkadov, the head of Smolensk-based Kristall and now the president of IDMA, often said that Kristall is used to sell small portions of rough not suitable for cutting at the company’s facilities in the open market - not more than 15%. However, the above amounts can hardly be called "small" – according to our estimate, they make up at least one half of goods bought by Kristall every month.
Most of the rough bought by Kristall is sourced from ALROSA and delivered in the course of several years under a long-term contract: these rough diamonds account for about 60% of Kristall’s total purchases.
Of course, both Kristall and ALROSA do not disclose the amount of goods under the long-term contract, citing commercial confidentiality. However, the commitment taken on by ALROSA after going public to disclose information on the stock exchange makes many secrets revealed. In one of the diamond miner’s open-access documents we can find an approved agreement stipulating the pledge of polished diamonds by Kristall as security under a long-term contract. According to the document, "the maximum amount of the pledge agreements (polished diamonds) corresponds to 18% of the average value of a three-month batch of rough goods sold to OAO PO Kristall and comes up to $15.3 million." This refers to operations within the long-term agreement signed in 2010 and valid to 2012.
By a couple of simple mathematical operations it can be easily established that in this case the "three-month batch" of rough supplied to Kristall is worth $85 million, while the total value of goods is $340 million and the average monthly delivery is priced at $28 million.
It should be once again said that the above mentioned terms cover the period extending up to April 2012. After the end of this contract period Kristall signed a new long-term contract. But, taking into account the general weakness of the market in 2012, there is no reason to believe that rough supplies under the new contract were increased – in every likelihood, they were decreased. Especially because Maxim Shkadov told the mass media that since August Kristall reduced its rough purchases by 20-30%.
The rough supplied by ALROSA accounts for 60% of Kristall’s purchases. It is definitely known that in Russia the company buys rough from Nizhne-Lenskoye and Gokhran. Even if we assume that Kristall buys rough diamonds only in Russia (though in fact the company buys these goods overseas as well - for example, from DTC), it turns out that the total value of rough purchased by this manufacturer from Smolensk is about $566 million, which makes an arithmetic mean of about $47 million a month.
If Kristall is now selling rough in Antwerp for $20-25 million a month, it means that its sales account for about 43-53% of monthly purchased goods.
Historically, the amount of resold goods by diamond manufacturers was limited to 15% of their total purchases. The relevant statutory limit was introduced in 2002 to protect the market from speculative transactions. At that time, the terms under which Yakutian diamonds could be sold to resident companies were much more lenient for the latter than for foreign players. As a result, many companies used to get officially registered in Russia as diamond manufacturers just to have access to rough, which was then re-sold abroad.
The rules of the game have since changed significantly. Most of the companies noticed in speculation were screened out from the market, while the terms of rough supplies inside the country and abroad levelled. So after a long discussion the 15 percent limit was removed in 2010 due to insistent requests from Russian manufacturers as interfering with their activities. However, after the removal of this limit Kristall repeatedly said there was no fundamental change in its operations and the company was still selling abroad about 15% of its rough stock.
The main argument raised by manufacturers re-selling rough is that it does not pay to cut some of their goods. Earlier, Kristall’s representatives in interviews to media explained that they buy rough diamonds (at least, from ALROSA) in boxes. These boxes contain goods of different mix, some of which it would be economically unviable to cut at Kristall’s facilities, whereas to choose only "cost-effective" stones is impossible under the auction terms.
However, according to market sources, at least some part of Kristall’s goods sold in Antwerp belongs to the size/weight categories of 5 to 10 carats and 8 grainers to 4 carats and have good color and quality. So, the inefficiency argument relating to cutting such rough can be easily put into question.
Having earned 8 billion rubles in revenue in the first half of this year, Kristall expects to gain 12-14 billion rubles at year-end or about 20% below last year's level. The company is expected to reduce its production accordingly. On the backdrop of such a fall in performance sales of rough diamonds may be an obvious opportunity for the company to close the financial year producing successful reporting data. Striking deals in the rough market means money right now, whereas returns from polished diamonds take time.
The current situation looks strange, to say the least. Just think of the fact that a month ago, Maxim Shkadov criticized De Beers for the excessively large sight held last October and attempt "to collect cash from the market."
This situation is unlikely to leave the producers selling rough to Smolensk - both ALROSA and Nizhne-Lenskoye - indifferent. For them, such actions taken by the Smolensk diamantaires mean lost revenues. It is hardly possible that Kristall resold its rough without a premium to the purchase price - it would be pointless. And if there are buyers willing to purchase Russian rough at prices higher than those paid by Kristall, it means that diamond miners could sell their goods directly.
A separate "zest" to the situation is given by the fact that the above mentioned companies are state-owned, and therefore, in theory, should work for a common cause. From the point of view of advancing Russia as a diamond power, the three main objectives which can be seen are to support the diamond mining, establish a unified authorized sales channel through ALROSA as the world's largest producer and develop diamond manufacturing to promote the role of Russian polished diamonds on the world market (in 2011, Kristall’s share on it was less than 2%). Currently, Kristall’s activities look more like creating an additional sales channel rather than developing production and sale of polished diamonds. Kristall’s bid for the sale of goods to Gokhran fits into the picture...
Despite the fact that diamond mining and diamond manufacturing in Russia are controlled by the state, it seems that so far there is no document defining some kind of coordinated policy aimed at developing the diamond industry, or at least, the rules governing the relationships of its participants. Perhaps, we have to regret it.
Elena Levina for Rough&Polished
