A radical change is taking place in the structure of the world diamond market in the third millennium just started. De Beers, the world leader in diamond business, while loosing its one-time monopoly in diamond trade officially announced in July 2000 its new sales policy of Supplier of Choice, or SoC for short. Exemption of De Beers from regulating diamond supplies to the world market and consequently from making up market prices for rough meant aggravated competition between large-scale diamond producers like Rio Tinto, ALROSA and BHP Billiton for their share in the world market. The strategy of success in such a competition involves not so much increased mining output, which may lead to decreased rough prices, as setting up one’s own sales network by each of these diamond-mining companies. Besides, not to be dependent on price fluctuations for a single type of raw stuff, all the above-mentioned enterprises, excluding ALROSA, have been turned into large-scale mining holdings (see Table 1). For example, the same De Beers is a part of Anglo American Holding.
Table 1
World’s largest diamond-mining companies in 2006
|
Indicators |
Unit of measure |
BHP Billiton Ltd. |
Rio Tinto Group |
Anglo American |
ALROSA Group | ||
|
Total |
De Beers |
Total |
ZAO AK ALROSA | ||||
|
Diamond output
|
$ million |
418 3.0 |
838 35.1 |
31481 |
5742 51.1 |
2332 37.32 |
1795 27.62 |
|
Sales |
$ billion |
39.10 |
25.44 |
38.64 |
6.63 |
3.52 |
2.79 |
|
Diamond share in sales |
% |
1.1 |
3.3 |
8.1 |
99.8 |
85.3 |
84.6 |
|
EBITDA |
$ billion |
18.10 |
12.57 |
12.20 |
1.23 |
1.95 |
1.54 |
|
Net profit |
$ billion |
10.45 |
7.44 |
6.40 |
0.73 |
0.72 |
0.57 |
|
Capitalization in early 2008 |
$ billion |
1734 |
1364 |
934 |
27.22 |
17.22 |
13.62 |
|
Diamond stock |
carats, million |
approx. 45 |
more than 300 |
more than 300 |
more than 300 | ||
1Diamond sales
2Author’s estimation.
3As of 30.06.07.
4As of 04.01.2008 according to the “World Mining Stocks” magazine, February 2008.
The world’s largest mining companies BHP Billiton Ltd and Rio Tinto Group are engaged in mining diversified mineral products, including diamonds, and do not pursue any further vertical integration. Perhaps, it is justified from the point of view that these enterprises, being specialized in mining only, are developing their competitive advantages in one direction. Lately, BHP Billiton is trying to take over Rio Tinto for a record-breaking amount of $147.4 billion in an attempt to prevent its rivals from pinning down this deal. In case of their merger, there will appear a mega-company with assets exceeding $300 billion. Having enormous financial influence, the new enterprise may totally change its policy and this may lead to a fundamentally modified situation in the diamond business.
Ordinal No. Company 2004 2005 2006 Growth in 2004-2006 Company’s share in output / sales in 2006, % Diamond output, $ million Sales, $ million Diamond output, $ million Sales, $ million Diamond output, $ million Sales, $ million Output, % Sales, % 1 ZAO AK ALROSA 1750.8 1856.5 1730 2105.9 1795 2225.8 2.52 19.89 71.84 73.33 2 OAO ALROSA-Nyurba 350 492.5 533.1 606.5 543.4 650.2 55.26 32.02 21.75 21.42 3 OAO Almazy Anabara 27.1 40.0 77.7 82.1 81.4 80.5 200.37 101.25 3.26 2.65 4 OAO Nizhne-Lenskoye 48.6 52.4 68.0 68.3 78.7* 78.7 61.93 50.19 3.15 2.59 Total 2408.8 2176.5 2441.4 2408.8 2862.8 2498.5 3035.2 14.79 24.32 100
If we view the development strategy of the rough and polished diamond complex in general and that of ZAO AK ALROSA in particular, we shall find it entirely similar to the strategy of De Beers ensuing many consequences in terms of this industry’s competitive edge. Of course, studying the experience of other diamond mining companies is commendable, but this should facilitate the most efficient strategic decisions permitting to take the leading position in the diamond business. In his report delivered to the “Russia-2008” Forum in the end of this January, Sergey Vybornov, the Company’s President, told that due to the loss of its leading position in diamond trade by De Beers due to the political moves made by Canada and some African countries, ALROSA is gradually turning into a new regulator in the world market.
It should be stressed that lately this company made certain positive steps reflected in its new management’s recent moves aimed at gaining direct access to the rough and polished diamond jewelry market in an attempt to master the whole diamond cycle chain. Practically, full vertical integration of diamond business has been achieved only by Israel oligarch Lev Leviev.
The rough and polished diamond complex of the Republic of Sakha (Yakutia) comprises the diamond mining and diamond cutting industries. Diamond mining in its turn is represented by ZAO AK ALROSA with its two subsidiary companies – OAO ALROSA Nyurba and OAO ALROSA Almazy Anabara, as well as OAO Nizhne-Lenskoye. Presently, the republic accounts for 99.8% of diamond output in the Russian Federation and about 19% of the world output in terms of money (Table 2).
Table 2
Diamond output and sales by diamond-mining enterprises
in the Republic of Sakha (Yakutia)
in 2004-2006
The table is compiled by the author and based on company reports
* Author’s estimation
In conclusion, it should be emphasized that it is necessary to review the existing development strategy of the rough and polished diamond complex of this country taking into account the current trends and threats in the modern world diamond business. In 2008, diamond prices are expected to go up, maybe even with an abrupt surge, since they remained almost unchanged from 2004, whereas prices for other raw materials grew significantly during this period. While such developments will facilitate increased profits for diamond mining companies, the diamond cutting industry may run into ever complicating problems, if it will refrain from a more active penetration into the diamond jewelry market seeking a way out. Under these circumstances, AK ALROSA will also have to correct its strategic plans considerably.
Yuri Danilov, Senior Research Fellow,
Department of Mining Complex Economics,
Institute for Regional Policy of the North (Federal State Scientific Entity)
