The participants of the World Diamond Congress held last July in Moscow repeatedly stressed the necessity to make this market more transparent. However, it is probably not so simple to do it: historically it was created as a closed market or a “seller’s market”, and its most opaque elements are the setting of diamond prices and sales volumes. Yuri Okoyomov, Sales Vice President of ALROSA, told Interfax what the company understands by transparency and how it organizes its own sales and sees the prospects of their growth.
Fyodor Andreyev, President of ALROSA, has already said that the diamond market needs to become more transparent. And what is understood by “transparency”?
First of all, it should be pointed out that things are not at all bad as far as transparency of the diamond market is concerned. Over the last 10 years the diamond industry made a huge jump forward. To meet the tasks set by the Kimberley Process the data relating to diamond output and rough exports and imports is registered and published at an intergovernmental level, while any export delivery of rough diamonds is accompanied by a specially developed KP Certificate whereby the government of the country participating in the Kimberley Process confirms the origin of diamonds. In this sense the diamond industry today is perhaps ahead of any other raw minerals market in terms of its openness and availability of data on raw materials flows.
Still, judging by the statement of Mr. Andreyev, there is still not enough transparency in the industry.
Transparency is rather missed at the companies’ level. First of all, it is meant that market participants are expected to disclose their essential business data such as output, long-term plans, financial indicators, criteria used to choose partners and significant elements of their financial and marketing policies. Generally speaking, this is everything that is usually requested by shareholders, investors and creditors to size up a company.
Historically, the majority of participants of the rough and polished market are closed, non-public companies, and this hinders inflow of credits and investments into the industry. In this sense ALROSA becomes a more and more open company as we regularly publish our sales and financial results and output figures.
Probably, it is necessary to change something and in the sales structure proper since setting prices during sales is one of the most opaque elements in the market. How is it possible to reach?
It is necessary to take into account that the diamond market is inherently different to quite a good extent from the majority of raw commodities markets and first of all due to the absence of a uniform and conventional classification. The diamond is really a unique gift of the nature; the variety of shapes, colors and quality grades is such that it is virtually impossible to create a certain unified classification which would be used by all market participants to estimate these goods without their actual examination. Therefore, in our market there are no exchange trade and quotations in the classical meaning of these terms – in practice, the buyer should get acquainted with goods “alive” at any transaction. This is why it is impossible to increase market transparency using the methods applied in the exchange business or selling goods along the pattern of futures and options transactions.
What are the current ways of selling diamonds in general?
There are three major methods. These are one-time sales on the spot market, auctions and tenders, as well as sales under long-term contracts.
In what way are prices set in each of these methods? How much transparent is each of these ways for the buyer?
During auction sales the price is set by the buyer proceeding from understanding of the ultimate value of the end-product at the moment of sales and from the buyer’s evaluation of the mid-term perspective.
Here it should be remembered that all the raw markets are in many respects expectation markets. There is a long enough time lag from when raw materials are recovered to when end-products are sold in the consumer market, and frequently the raw materials price is to a great extent determined by current market movements and short-term forecasts and not only by the cost of end-products at the time of their sale. Therefore, if the market goes upwards then expectations in terms of end-product price are as a rule overestimated, whereas during periods of stagnation or recession they are underestimated.
Thus, expectations of growth give the seller an additional plus, whereas expectations of recession or stagnation add a minus. As a result, for a rather short interim of time strong price swings are possible. Today due to market expectations you see a fantastic gain in auction price and you take it into account in your plans (any real production requires good planning for the future), but tomorrow the market mood will change and all your plans will go down the drain.
In other words, these are more like speculative sales?
Such a picture is advantageous only for talented dealers, but for real manufacturers it is ruinous. Not to be unfounded, I will give a concrete example. One respectable diamond miner having a small market share, but operating under the umbrella of a very large transnational mining corporation, sold almost all its production on a tender basis. In 2007-2008 they used to get very good prices which were higher than offerings of many other suppliers in the market. In October 2008, at one of their regular tenders prices plummeted by 60%. This brought them into a state close to panic which we did not witness for a long time. Is it possible to say these were fair market prices? No, these were prices based on multiplied expectations both in a growing market and in a falling market. Just imagine, what would happen if ALROSA and De Beers with their sales volumes would entirely be guided by tenders? It would be a disaster for all the diamond market, for all its participants.
But ALROSA itself sells some part of its rough at auctions and Gokhran holds auctions as well.
Auctions are a comprehensible and efficient way if used to sell stones whose content in the output is insignificant. All diamonds of the so-called special sizes, over 10.8 carats, we sell at auctions. In the overall volume of our sales this is a relatively small value segment, therefore it is possible to easily regulate the volume and assortment of the diamonds put up for trading, reducing volumes in periods of decline and increasing it in periods of peak demand in this segment without essential influence on the general results of sales. We also regularly hold tenders for relatively small amounts practically along all the mined product range – to probe the market and monitor the state and structure of demand in different categories of rough.
What is the difference between spot sales and auctions sales?
At auctions prices are set for every box sold depending on maximum bids, while in all other cases prices for similar goods are equal and based on the decision of the company’s market conjuncture council. The only difference is that in case of export sales actual prices are higher by 6.5%, the size of the customs duty paid.
As far as I understand, long-term contracts produce the most stable and clear price to go by?
The majority of large-scale rough producers operate under such contracts. Conditions and terms of such contracts are different and they cannot be identical. Much depends on national legislations, amounts and product range of mined rough, vision and evaluation of further developments in the market. No more than 5% of the world’s total rough output is sold at tenders.
Under the terms of our agreements, the volumes and assortment of minimum monthly deliveries are stipulated for the whole contract period. In accordance with the arrangements made by the parties, each sale may include goods exceeding the amounts pointed out in the agreement depending on the market and availability of goods. In this case the seller, that is ALROSA, sets prices for its production and they are not subject to discussion. As a rule, we change prices once in three months.
In what way are these prices formed?
ALROSA has a market analysis centre monitoring demand and prices in all categories of rough diamonds, which is also keeping track of polished prices and turning out short-term market forecasts. Our affiliated companies abroad in the major and perspective diamond trade centers - Belgium, Israel, China and Britain - are engaged in gathering market information. We have our own diamond manufacturing factory and therefore we have a good measure of the situation in the polished market as well. Naturally, we follow the output and sales of foreign rough producers - De Beers, BHP, Rio, Endiama and others.
What are your price expectations?
From the point of view of a price policy for three to five years, prices for rough diamonds will finally reflect the movement of prices for polished diamonds sold to end-users. Rather strong fluctuations in rough prices are possible in the secondary market within short terms where price bubbles may get inflated and deflated even due to insignificant deviations in consumer demand.
According to the forecasts of our analysts, generally in the next 5-10 years demand for diamonds will exceed their supply. There are no new major diamond fields while those operating are gradually depleting. In the next three years diamond output will grow only because some of the diamond-mining companies essentially decreased or suspended their operation during the recent crisis. By our estimations, it will take three years to bring the global diamond output to its pre-crisis level of 160 million carats, but then we expect stagnation and slump. Jewelry sales which were essentially lowered in 2008-2009, will gradually grow after economic recovery. By our evaluation, global diamond jewelry sales may go up to $89 billion by 2018 which will require about $19 billion worth of rough at maximum output by that time which is around $14 billion at current prices.
So, prices will grow because of rough scarcity...
Yes, but this process will not be smooth and constant. In times of growing demand prices for rough in the secondary market rise at essentially higher rates than polished prices and speculative transactions as well as stocks swell which after a while inevitably brings in corrections for rough prices. Besides, during short-term periods, due to the absence of a global regulator, rough supply in the market may essentially differ from demand to one extent or another, and this also results in price swings. Prices in the secondary market will inevitably be volatile. Accordingly, auction sales will also be marked for high volatility though we are sure that generally there will be an upward trend. So, long-term contracts are the only way to hedge against such price swings.
Is it the reason why ALROSA moves on to long-term contracts?
We are interested in stably rising prices for our production, without sharp differentials. This target may be reached only though long-term arrangements with diamond manufacturers on volumes, assortment and terms of deliveries. Such arrangements fixed by signed agreements allow our buyers to plan both their production and sales, carry out long-term strategies to promote their goods on the market, gaining stable credit lines, decreasing production costs and strengthening their positions in the market as a result. For us, if you prefer, this means hedging against the risks of inevitable market fluctuations, increasing sales and price stability and boosting confidence on the part of our creditors. Sales of great amounts of rough at auctions cannot give anything of the kind.
What is the share of long-term contracts in your current sales?
Our 1H sales totaled $1.97 billion and long-term contracts accounted for about 60% of sales. Another 10% of rough was sold at tenders, including auctions for special-size diamonds. The remaining 30% of rough was sold under one-time contracts and on the spot market.
According to the concept of sales up to 2012 which was approved by the Supervisory Board of the company, we plan to sell no less than 70% of the total amount in terms of value within the frames of long-term contracts. Today we have long-term contracts with buyers in four countries - Russia, Belgium, India and Israel - making a total of 24 companies. These are large-scale manufacturers of polished diamonds and jewelry with well-organized sales systems which proved their solvency by actual purchases from our company during recession periods in the market. Negotiations are under way with the companies from China, Armenia and Belarus, as well as with a number of companies in Russia, Israel and India. So far it is too early to say if they will result in new agreements.
Coming back to price stability: Fyodor Andreyev in his address to the Diamond Congress said that currently the industry faced a threat of new speculative "bubble" due to a $0.7-1.0 billion worth deficiency in the diamond market. He proposed to sell diamonds from Gokhran’s stocks to curb prices.
The idea is extremely clear and logical. Today in the market there is an essential deficiency of rough since in the crisis period rough sales decreased virtually twofold whereas diamond jewelry sales fell by 10-15%. Besides, frankly speculative stocks counting on a further rise in prices are beginning to accumulate against the background of a growing market. From a market point of view it is absolutely logical to increase rough sales in the market to cool down speculative moods. The only supplier who is able to do it today is Gokhran. The government has already played a huge role as a market regulator having bought from ALROSA its surplus amounts of rough mined in 2008-2009 and thus stopping panic in the market. Now it can play a regulating role for the second time, gradually releasing the stock to the market and thus preventing speculative moods from growing and reducing market volatility. Naturally, it can earn quite a good profit on a rise in prices.
In what way could such sales be organized?
It is a side issue in what way such sales may proceed. One of the proposals which was submitted by ALROSA is to begin sales of rough from Gokhran’s stocks to our customers. It would help to strengthen the positions of our clientele in the market, ALROSA’s own positions as well and it would help to cool speculative moods. So far we continue to discuss this problem.
We hope that while planning and effecting sales the management of Gokhran will have necessary consultations with ALROSA. The problem of terms, volumes, prices and sales forms is very important. Making a mistake you may easily get a negative effect instead of stabilizing the situation. Taking into consideration the professionalism and responsibility of all the authorities taking part in preparing this decision I am sure that it will be correct.
Interfax
