Russia May Market Report
Rough diamond prices are returning to their precrisis levels of spring 2008, according to reports by ALROSA, Russia’s largest diamond miner, Rapaport says. The company’s press release said this trend was confirmed by the results of its April auction of large diamonds, defined as stones over 10 carats.
However, while rough prices are gaining back their highs of two years ago, the cost of polished gems is still below precrisis levels. “The demand for rough diamonds is not based on the demand for polished diamonds,” said Ararat Evoyan, vice president of the Russian Diamond Manufacturers Association. “The demand for polished is around 30 percent lower than in 2008,” said Rajesh Gandi, director general of Choron Diamonds. As RDR reported in previous months, many manufacturers and dealers are concerned that the increase in rough prices is forming a bubble that could burst.
This discrepancy in rough and polished prices is shaping the manufacturing picture in Russia, as companies face the decision of whether to polish diamonds at all. “It’s often not profitable to cut diamonds of less than 0.5 carats in Russia,” said Aleksandr Fedorov, director of Yakutia-based manufacturer and jewelry maker Zoloto Yakutii. Daniil Efremenko, who used to work for a Siberia-based manufacturer and now is launching his own jewelry factory, said that for many companies, it makes more sense to buy small diamonds from Indian and Chinese manufacturers than to polish them. “Some companies buy up to 90 percent of diamonds they use in Asia,” he noted.
ALROSA’s April sales
ALROSA said its rough sales in April could reach $300 million. The company is now working to seal a number of long-term contracts at home and abroad — in China and Israel, in particular. The miner is planning to sell around $100 million worth of rough to Israel in 2010 and around the same volume in each of the two following years, according to ALROSA’s representative. During the same three-year period, the company is planning to sell $1.4 billion worth of rough to Russian manufacturers, including Smolensk Kristall, Ruis Diamonds and at least three others. “Members of the Russian Diamond Manufacturers Association were consuming $1 billion worth of rough a year before the crisis,” said Evoyan. “If the industry recovers a bit, they will need $800 million worth of rough in 2010.”
New sales contracts and an increase in demand for rough allowed ALROSA to sell all of its goods on the open market in the first three months of 2010, and to refrain from selling to the state treasury, as it had in the same quarter in 2009. From January to March, the company’s revenue was approximately $900 million and net profit almost $70 million. ALROSA is targeting the same level of sales in the second quarter of 2010. The company also paid down its debt by $170 million in the quarter and reduced its interest rate with lenders by 4.54 percent.
Investment Search
ALROSA is looking for a large investor for its mining facility in the Archangelsk region of Northwest Russia. The company may sell up to 49 percent of JSC Severalmaz, which delivered its first million carats in 2008 but has yet to bring its mining operations to full capacity. Morgan Stanley is reported to be conducting the search for a potential investor. In 2008, the region’s deposits were of interest to Archangel Diamond Corporation (ADC), a De Beers subsidiary, which almost sealed a deal to invest in the Grib diamond pipe, along with Russia’s Lukoil. But that agreement fell through after failing to receive government approval in time.
Polished sales
The demand for polished gems in Russia is split between two extremes: either small stones or big ones larger than 1 carat. Small manufacturers and dealers say their best market is large, exclusive diamonds, sold on a per-order basis, while larger companies say small gems of less than 0.3 carats have the most demand. Reports on the quality also vary.
“Our customers want stones of no less than VS1, J,” said Yulia Verakso from Arkhangelsk-based manufacturer Zvyozdochka. “People are more eager to buy less expensive stones of SI2, J,” said Efremenko. Fedorov said that among large diamonds, those of good quality are sold more often. Although many say the polished sales are up, the crisis year had a negative effect on the assortment. “Some old companies went out of business, but new ones have yet to take their places,” said Alex Popov, the president of the Moscow Diamond Bourse. “There’s difficulty in buying good polished diamonds,” said Gandi, “because many production facilities have been closed but, by the end of the year, this will recover.”
Jewelry Sales
“April is traditionally a difficult month when sales are down for jewelers,” said Stanislav Hofman, commercial director of St. Petersburg–based Sadko. Traditional gift-giving holidays fall in February and March, while wholesalers stock up for summer in May. However, Hofman said going to Basel brought positive results for his company. “Basel was good for sellers, but buyers were complaining about high prices,” said Popov. The companies are working to present inexpensive, but original, jewelry for May, as people are reluctant to spend much on jewelry in summer and want something bright if they do. “The biggest volumes are sold in the range below $700,” said Isabella Soltys, director general of Yakutia-based Sakha Taas.
