ALROSA’s president, Fyodor Andreev, said this week that the Russian government is mulling the sale of part of its diamond stockpile as a means to ensure price stability in the rough market, www.diamonds.net writes. “We are discussing the sale of $500 million to $800 million worth of rough with Gokhran by the end of the year in order to stop supporting the speculative demand from the market,” Andreev said at the World Diamond Congress meeting in St Petersburg.
The suggestion to bring as much as $800 million worth of rough to the market this year is far less threatening today than it was just four months ago. In March, the industry breathed a collective sigh of relief when Gokhran’s chief executive officer (CEO), Vladmir Rybkin, said the state repository would not sell any of the diamonds it bought from ALROSA in 2008 and 2009 before 2012.
The concern then was whether the market could absorb such quantities and the trade should pose the same question now. This time, the answer appears to be positive, given the recovery evident in the market, reported shortages and the current rate of production relative to demand. Under these conditions, an additional $800 million, estimated as comprising about 5 to 10 percent of the global production, could quite reasonably be absorbed without having an adverse effect on prices.
Consider that according to Kimberley Process (KP) statistics, precrisis global production in 2008 was valued at $12.7 billion derived from 162.9 million carats, with similar numbers achieved in 2007, whereas Rapaport estimates indicate production was valued at around $8.4 billion from approximately 125 million carats in 2009, a tally that is expected to ramp up to around $10 billion this year. Even with the additional stock from Gokhran, global production would remain well below the levels seen in “normal” years.
The only risk factor at this point is whether Gokhran will focus on supplying the larger sizes where there appears to be more dire shortages or if it will balance its supply evenly across all categories. A weighted supply of larger stones could yet throw the market out of synch. As it appears that the Russians have acted responsibly in the past year, however, it can hopefully be assumed that they will continue to do so.
Andreev said he was concerned that a price bubble was again emerging in the market and that additional supply would help calm these anxieties —this despite the easing of prices reported recently at mining company tenders. It may well be that the mining companies will start ramping up production and supply because prices may have peaked.
Des Kilalea, an analyst at RBC Capital Markets, said in a report this week that rough diamond prices could be impacted in the short term by the current uncertain financial market conditions. “Volatile financial market conditions and fears of slowing growth in major jewelry markets cloud the immediate outlook for prices,” Kilalea wrote.
Back in April (see “Holding Rough”), we posed the following question in this column: “In the current rough market environment, wouldn’t a mining company bring as much stock as it could to the market to take advantage of the strong demand?” with particular reference to the Gokhran stockpile and De Beers holding back of production.
Our conclusion then was that “in a purely competitive market, where both De Beers and ALROSA to maximize sales by throwing as many diamonds as profitable at the industry, the result would be a softening of prices. Both companies would ultimately suffer as a slump in demand would follow.”
Could it be that in gauging the market, ALROSA believes that given a softening of prices in the near term, now might well be the time to throw more goods at the market? It is more likely that Andreev genuinely seeks to reduce the speculative aspect of the market and to ensure that the speculation doesn’t control the market in the short term. The net effect will hopefully be rough price stability.
