In November this year, ALROSA started signing long-term contracts for the supply of diamonds in the contract period of 2015-2017. On the backdrop of possible sanctions and aggravation in relations with the EU, the Russian state-owned company announced that it would take into account the interests of Russian diamond manufacturers "if there will be available resource capabilities." The focus on customers from Russia is unusual for ALROSA - their share in the first half of 2014 fell to 11% in the miner’s consolidated revenue. The domestic market has been reducing purchases of rough diamonds from ALROSA for several years, giving ground to Indian and Chinese competitors in terms of cost efficiency due to the more expensive labor force and fuel, as well due to the 18-percent VAT on transactions with precious stones. Not the last role in ALROSA’s possible realignment to the domestic market could have been played by the wind-down of large banks used to credit diamantaires in Antwerp, as well as by pro-active promotion of the idea to support national diamond cutting businesses within the frames of a diamond-focused Territory of Priority Social and Economic Development (TOPSED) to be established in Yakutia - this idea is characterized as negative for ALROSA by a vast majority of experts. However, the question is whether all this is really about changing priorities?
As if confirming the intention to take into account the interests of Russian diamond cutters, ALROSA made public a new long-term customer. The customer is a Moscow-based firm, Lazurit-D. It is unknown to the public at large - in contrast to such domestic customers of ALROSA like EPL Diamond, Smolensk Kristall or Ruiz (Moscow Jewelry Factory), Lazurit-D has no own network of jewelry stores. However, Lazurit-D is a major player in the Russian market of other precious stones, emeralds, attributed to the first category gems along with diamonds. Lazurit-D, incorporated in 2001, is engaged in cutting and polishing emeralds on the site located in the Degunino District in Moscow. The company sells polished diamonds and emeralds, as well manufactures diamond and emerald jewelry to order. According to SPARK, a database on companies operating in Russia, Lazurit-D raked in RUB 546 million in revenues (posting a 45-percent rise y-o-y) driving its net profit to RUB 1.7 million (up 70 percent y-o-y) in 2013. The company says that its purchases of raw materials and equipment were financed by Konstantin Bazolin, its owner and CEO. According to the information on the website of Lazurit-D, the company acquired an exclusive right to purchase 5% of the rough emerald output from the Malyshevskoye minefield.
The company’s collaboration with the state-owned Kaliningrad Amber Factory holding a license for the Malyshevskoye minefield, started with two pilot batches of emeralds received last year to determine their quality. Lazurit-D working in team with the gemological laboratory of the Moscow State University submitted a market assessment, pricing systems and processing methods for the Ural emeralds to the Ministry of Finance of the Russian Federation. "Along the way, it turned out that there were practically no businesses in Russia that could handle emeralds. I have a feeling that we are the only ones who are legally engaged in this," Lazurit-D’s lead economist said.
According to him, there is no emerald market in Russia as such. "You can find jewelry with emeralds from Colombia, Zambia, even Afghanistan in jewelry stores here. These are emeralds of the lowest quality; they have more plastic in them than precious matter. Actually, these are fakes, which are sold without any documents," the spokesperson of Lazurit-D said. "It is easier for our jewelers to buy low-quality Colombian emeralds, then treat them to improve and pass off as full-fledged gems. Although under global standards, enhanced emeralds should cost two times less than those natural," he says. Due to wide distribution of counterfeits and undemanding consumers in Russia, domestic jewelers here are not interested in buying natural emeralds. Large and regular contracts for emeralds in Russia are a rarity, so the company has no need for pro-active marketing of its goods. As a result, almost all of the Ural emeralds are sold for export, as the overseas emerald market is well established and the cost of this or that parcel of gems does not cause problems with customers.
The website of Lazurit-D presents a whole range of certified and uncertified emeralds, but price tags are there only for a few finest cut emeralds. Interested customers come to the company’s office, inspect offered goods and may enter into a contract for the purchase of a jewelry piece with a chosen stone. Jewelry items with emeralds - rings, brooches – are made by Russian jewelers working in partnership with Lazurit-D. Buyers are issued certificates in their name. Lazurit-D does not intend to start massive online sales of its goods or open stores and promote Russian emeralds in the domestic market. "That's not necessary, especially now. We are interested in selling big amounts, and in Russia you may count only on one-off purchases of emeralds," the company’s spokesperson explained.
Focusing on large contracts for emeralds, Lazurit-D is pursuing a similar policy for polished diamonds, which account for the prevailing part in the company's revenue. The company offers diamond contracts starting from $ 500,000 upwards. Lazurit-D buys rough from ALROSA in the size range from “minus 4, plus 3” to 5-10 carats. Long-term contracts will allow Lazurit-D to increase purchases – the company has such plans, according to its chief economist.
Contrary to the view that Russian cutters abuse reselling rough purchased from ALROSA, Lazurit-D claims that it initially acquires only that kind of rough that can be processed and sold as polished diamonds. "While buying rough diamonds, we inspect them in the presence of gemologists,” the chief economist says. “And if the mix is not suitable, we don’t buy. It is pointless to freeze funds for purchasing goods that will not be demanded as polished diamonds and then try to resell. However, if you grab winning gems and then resell them in Antwerp, this is to imply that your underlying business is loss making. In this case, you will first run into problems trying to intercept lucrative rough and then later while seeking a buyer."
At the same time, Lazurit-D performs agent functions being a technical intermediary in subsequent diamond deliveries to its counterparts overseas, says the company’s spokesperson. However, according to the latter, such transactions involve relatively small amounts of diamonds and they are not very remunerative, because rough exports, unlike polished exports, are subject to customs duty. Therefore, more often than not operating under contracts with overseas customers the company buys rough diamonds, cuts them to fit specified parameters and exports as polished. This is not the so-called “minor processing” used by unscrupulous market players in the 1990s to export rough diamonds under the guise of polished diamonds. “Such things will not work out nowadays because the customs requires a Gokhran certificate to prove that polished diamonds comply with the state standards for cut stones," the company’s spokesperson said.
The company purchases rough diamonds and emeralds using its own funds and resorting to loans only for the period of VAT refund in export transactions. This period is now about 7 months. The manufacturer also buys industrial rough. As for the latter, Lazurit-D sees no need to enter into long term contracts since such kind of rough may be bought in large amounts on the spot market. Besides ALROSA, Lazurit-D makes purchases from Gokhran.
Lazurit-D does not comment the issue of production costs topical for all Russian cutters, saying it is impossible to have a common denominator for the cost of processing different categories of rough diamonds. "Rough processing costs in the size range from "minus 4, plus 3" to 5-10 carats are totally different, whereas talking about some average cost would be nonsense," the company’s spokesperson said.
Lazurit-D has long acquired small but steady amounts of rough on the spot market and took part in tenders, said the press service of ALROSA. Based on the results of this work, Lazurit-D was awarded a long-term contract.
According to Sergei Goryainov, an expert of Rough&Polished, Lazurit-D will anyway have to export a significant part of purchased rough in order to maintain breakeven in manufacturing operations. "Resale is an inevitable source of income in this industry. Being a “first hand” customer and having a network of international clients ready to buy specific categories of rough, one devotes a significant part of business to these operations. Especially now that there are no legal restrictions on exports. Even such large diamond manufacturers as Smolensk Kristall resell up to 40% of rough," he said.
The fact that boundaries between incorporated diamond dealers and manufacturers are getting blurred is recognized not only by experts, but also by the supply department employees of ALROSA. In these conditions, the Market Council of ALROSA deciding to include or not this or that company in the ALROSA Alliance is mostly preoccupied with a positive financial record and lack of criminal background, rather than with loyalty to the hierarchy of the diamond pipeline. According to Sergei Goryainov, such questions as whether customers are really engaged in diamond manufacturing, or how they handle their rough, or if their manufacturing and jewelry business segments are well balanced may be put on the backburner. But this may hardly compromise the customer selection quality, although ALROSA is not immune to pitfalls – it is enough to remember the case of ChelPromDaymond associated with filmmaker Nikita Mikhalkov.
The fact that a company based in Russia turned to be a new long-term customer of ALROSA does not point to a possible rise of purchasing power in the domestic market, the expert said. "Changing the sales proportion by 15-20 percentage points in favor of the domestic market is unlikely. In Russia, there are just no customers able to buy these amounts of diamonds," Sergei Goryainov said.
Russian and foreign sightholders of ALROSA have been operating on an equal footing regarding their purchases of rough for several years, but if overseas customers are lining up to buy from ALROSA, even the most steady going Russian companies are reducing their purchases. Lazurit-D’s intention to increase purchases from ALROSA is not very revealing in this sense. In the midst of preparations for the new contract period, many customers are seeking to prove their loyalty to ALROSA willing to buy more and at prices viewed by them as excessive in the current market environment, according to a representative of another sightholder of the Russian diamond monopoly. And even if Lazurit-D’s intention will materialize, it is logical to assume that for the company looking to export all of its manufactured gems the only way to “offset” higher purchases from ALROSA will be to increase transactions with overseas customers – be it outright resale or go-between functions. An acute shortage of liquidity due to an unfavorable economic situation, to put it mildly, is not conducive to expansion of the core business, which failed to achieve a 5-percent profit margin even in the best years (as it is admitted by diamond cutters), and this means that domestic companies in Russia are under the threat of losing even their mere 11-percent share in the revenue of ALROSA.
The situation may change if the concept of establishing the above mentioned Territory of Priority Social and Economic Development (TOPSED) will be put into practice and ALROSA - contrary to logic and efficiency - will have to increase supplies to the domestic market. More likely than not, this will hardly result in higher polished production in Russia - rough diamonds will leak abroad through "gray" channels, just like emeralds from Malyshevskoe. But that's quite another story.
Sergey Bondarenko for Rough&Polished
