Russian diamond miner ALROSA continues its transition to rough sales under long-term contracts: initially the company signed such contracts with foreign customers only, but on Monday ALROSA came to a decision to enter into long-term contracts with Russian diamond cutters.
The company told Interfax they planned to supply at least $1.4 billion worth of goods to diamond manufacturers based in Russia in 2010-2012. This was discussed by ALROSA’s Market Council at its meeting on Monday. “Taking into account an increased demand the company decided to prepare long-term contracts to be signed with major diamond-cutting companies for rough diamonds supply. ALROSA will hold negotiations with each of these companies,” the company spokesman said.
The diamond-mining company intends to sign such contracts with the largest Russian manufacturers of polished diamonds including in particular Smolensk-based Kristall, Ruiz-Diamonds, EPL Diamonds and two companies belonging to the Almazyuvelirexport Group.
More transparent, more reliable
Before this time ALROSA had no long-term contracts with Russian diamond cutters. “Earlier the situation was as follows: ALROSA used to conclude contracts with manufacturers being guided by its own sales policy,” Maxim Shkadov, CEO of Kristall, said. “These contracts were either long-term, if concluded for one year and to be prolonged at the parties’ discretion, or one-time. Home market participants were offered such conditions: ALROSA was to sign a one-year contract under condition it would have one-time monthly agreements to regulate the product range of rough supplied.”
In the opinion of Sergey Goryainov, a Rough&Polished expert, “ALROSA’s sales policy which was tailored for the export market now will probably be grafted at home.” “ALROSA is tying up long-term contracts with those manufacturers with which it used to work for a long time - as a matter of fact new contracts simply arrange the existing relations in an ordered fashion, they are more transparent,” he noted.
“The purpose of long-term contracts with internal consumers is to safeguard ALROSA itself against possible price fluctuations in the market,” Goryainov said. “When the crisis came ALROSA virtually remained without customers whereas De Beers’ partners continued to trade. The new contracts create a system taking into account mutual interests of marketers, they will permit to preserve stability during possible crisis periods.”
As he said, long-term contracts to some extent will also allow protecting the market from dealer operations. “Formerly there were repeated occasions of playing the following game: large-scale diamond manufacturers sprawled small-fry subsidiaries which used to sell some part of their parents’ rough stock – in other words these were dealer operations. With long-term contracts such practice will probably be minimized,” Goryainov believes.
Maxim Shkadov confirms the existence of such sales. “Such operations take place in any company, now they are one of the components in business. They are necessary to define the volume and product range which will be efficient for processing. Certainly, some part of rough offered in boxes and lots is not efficient. It should be separated. This part enters the market for free circulation and this is basically a normal technological operation,” he said.
At the same time, the general manager of Kristall stressed that any factory’s major aim was to have a full workload and that Kristall “was not going to concentrate on trading operations.”
Shkadov did not specify how much rough Kristall was planning to buy under new contracts and remarked that his factory would like to preserve the pre-crisis level of purchases. “The production capacity and sales potential allow this enterprise to work and reach a turnover of up to $500 million annually. To reach such figures we need a corresponding amount of purchased rough,” he said.
Will prices change?
There is one more front-burner question: What kind of prices will Russian consumers be offered under new contracts? Late last year ALROSA said it considered expedient to provide equal conditions of access to rough diamonds to domestic and foreign customers. Russian diamond manufacturers were wary about this statement. Valery Bogomolov, President of the Russian Association of Diamond Manufacturers, interviewed by Interfax pointed to the necessity of joint and harmonious work between ALROSA and Russian diamond cutters, emphasizing that diamond mining and diamond cutting in the Russian Federation happen to be an “integrated economic complex.”
In the opinion of Goryainov, the new long-term contracts with Russian diamond manufacturers will be similar to contracts signed with Western consumers not only by their pattern, but also by their prices for rough diamonds. “If home market prices turn out to be less - that will be only by some trifle. I think the “spread” is commensurable with the size of the export duty – once again, just to prevent speculative transactions. Formerly ALROSA’s prices offered on the home market were notably below the prices offered to Western players,” Goryainov said.
According to Shkadov, ALROSA’s contracts with the Belgian companies signed last year meant a fixed price. “For that moment it was above the market though there was actually no market as such at that time. In view of the recession occurred it was quite understandable. Of course, it was an obvious fact that the market would recover in some time (and this is actually what happened) and prices would go upwards,” he observed.
That said, he noted that the new contracts do not envisage any fixed price for Kristall in particular. “And we also do not insist on it,” he said. “Our primary goal is to work under market conditions keeping a certain amount as our reserve since this is vital for stable operation of our factory.”
Goryainov also believes that the new contracts with Russian consumers are unlikely to bear any fixed prices. “It is hardly possible to fix prices till 2012 - the market is still rather volatile,” the expert said.
Full speed forward to 70%
ALROSA started to work under long-term contracts since July last year - after being out of the market for six months and selling rough diamonds only to Russian Gokhran. The company’s target in the current year is to bring 70% of its total sales under long-term contracts.
Last year ALROSA entered its first long-term contracts with 15 companies from Belgium - last summer the company informed its sales under these contracts will reach about $500 million.
In 2010, ALROSA signed three-year contracts with the Indian diamond manufacturers - Rosy Blue, Diamond India Ltd and Ratilal Becharlal and Sons. Under these contracts they will receive a total of almost $490 million worth of rough; the contracts stipulate quarterly coordination of the assortment and prices of exported diamonds depending on the situation in the world diamond market, and also an opportunity to increase rough supplies. In 2009, ALROSA already shipped more than $500 million worth of rough to the Indian companies, and this year its supplies to this country may reach a one-billion-dollar level.
The total amount of sales scheduled by ALROSA for 2010 is $3.3 billion in comparison with $2.187 billion in 2009. The company’s output remains approximately at the level of 2009. In particular ALROSA plans to sell during this year some part of its diamond stock accumulated outside Gokhran.
The company’s new marketing policy and market recovery prove that during the current year ALROSA may do without Gokhran’s support and sell all its output independently. Earlier ALROSA’s President Fyodor Andreyev informed Interfax that this matter would be the subject of discussion at the Board of Directors. So far the company’s sales to Gokhran in 2010 are pinned at $870 million compared with 32.5 billion roubles in 2009.
Interfax
