"For much of the past year of the current global economic recession, ALROSA and its state-owned repository proxy, Gokhran, has held the trump card for the diamond industry close to its chest. With its $1.5 billion-plus stockpile, the company could spoil any anticipated reasonable rate of recovery by opening its vaults to the market," Rapaport says.
According to the agency, dumping these goods at unreasonable prices for the sake of a quick Russian profit could bring the industry to its knees again. With a $3.8 billion outstanding debt, the company could certainly use the extra cash.
We therefore welcome the pledge made this week by Gokhran’s chief executive officer (CEO), Vladmir Rybkin, in an interview with Rough&Polished during which he said that Gokhran will not be selling the diamonds it bought from ALROSA in 2008 and 2009 in the next two years.
“They might appear on the market in 2012 or 2013,” Rybkin stated. Similar assurances to deal with its stockpile in a responsible manner have been made by ALROSA’s senior management, further calming our nerves.
These comments allay fears that the market would have to absorb an extra billion or two dollars worth of rough in the current weak trading environment, as well as over the extremely negative effect that these goods could have on pricing.
Of course, this postponement may only serve to delay the problem and the same questions will arise again in 2012. By then, we assume — or at least hope — that the market will have sufficiently recovered to better handle such a threat and that the Russians will be responsible enough to inject small portions of its excess stock into the market in a gradual manner. Much to our relief, recent trends evident at ALROSA suggest that it will do just that.
Since Fyodor Andreyev took over as company president in July 2009 and, in fact, before then, too, ALROSA has stressed that it will focus on supplying its rough through long-term contracts. It signed up a number of companies already in May 2009, and intends to be selling approximately 70 percent of its goods through these contracts, and additional ones, by the end of the year. This marks a significant change from its previous practice of auctioning off its output.
The question now is why does this make sense from ALROSA’s point of view? The company would certainly generate more revenue for its diamonds at tender; we have seen some of the smaller major producers, notably BHP Billiton and Rio Tinto, embrace the tender system for that very reason.
Our difficulty in understanding this strategy increases when we consider the fact that manufacturers have consistently praised ALROSA’s goods as offering the best market value over the past six months.
We can interpret ALROSA’s strategy in one of two ways: either the company is expressing its confidence, or extreme pessimism in the diamond market.
By locking manufacturers into long-term supply agreements, ALROSA could well be hedging against another downturn two to three years down the line, or one as severe as that of September 2008 further along. The miner may be willing to sacrifice some extra short-term revenue now to avoid having to put its sales on hold later – as it did for most of 2009 - if the markets crash again. Through these long-term relationships, ALROSA is assured of a sustainable level of demand for its stock, regardless of market conditions.
However, we like to believe that ALROSA is expressing a more positive outlook. As the second-largest diamond mining company, it surely must believe in both its product and the diamond market. Through its new long-term strategy, ALROSA is more likely saying that it is here to stay and is willing to strengthen partnerships with its clients in the process.
One way or another, manufacturers stand to benefit and the Russian miner’s current approach is good for the market. It will serve to stabilize rough prices and provide further balance against the tender system, which many believe is the cause of the speculative atmosphere that often envelops the industry.
ALROSA has clearly matured as a company. It has also emerged from the recession in a very strong position. The miner also seems to have realized that what is good for its clients, likewise works to its own advantage. In addition, it still holds a $1.5 billion trump card. At least, for now, it has laid some of its cards on the table.
