(Finmarket.ru) - ALROSA is mulling options to reduce country risks associated with possible sanctions fr om the European Union. The diamond miner, about one half of whose proceeds come fr om its European customers, is ready to trade with other jurisdictions, Vladlen Nogovitsyn, Head of Customer Policy at ALROSA, said in an interview to Interfax. Preparing for the new contract period of 2015-2017, ALROSA may give preference to clients with offices in Israel and Dubai.
Going East
ALROSA’s supplies cover more than 25% of the world diamond market. The main market for ALROSA is Belgium (Antwerp is hosting the world’s largest diamond bourses), which accounted for 45% of the revenue earned by the Russian diamond mining company in 2013. The United States receive 9% of the diamond supply offered by ALROSA. If ALROSA will be subject to a new round of sanctions imposed by the EU and the United States, the Russian state-owned company will have to divert its shipments to other destinations - China, India and the Middle East, according to a recent survey by Morgan Stanley. Despite the fact that a complete ban on exports to Europe will change the structure of the global diamond trade, ALROSA, in the opinion of Morgan Stanley, can benefit from this, since diamond prices will increase by 10%.
“As a public company, we must take into account all the risks, including country risks. Possible sanctions appear to pose a risk not only for the company but also for buyers, who may be left without raw materials. Getting ready for a new contract period, we are now working on ways to reduce this risk,” Vladlen Nogovitsyn said.
“For example, we will give priority to customers having divisions based in other jurisdictions in the structure of their companies – in Israel, Dubai, etc., so that these customers would be able to continue purchasing in the event of possible difficulties,” the ALROSA department head said. “Basically, right now it is a normal business practice for the majority of our clients, who have offices across the world to source for sufficient amounts of rough diamonds.”
He noted that Belgian clients of ALROSA opposed the imposition of any sanctions on the import of Russian diamonds to the EU – “simply because they protect their established business.” “Belgian diamantaires defend their interests, and their opinion has an effect on the situation much more than we ourselves could influence it,” he added. According to him, Belgian customers will suffer more damage than ALROSA in the event of raising obstacles to exports. “There are other diamond centers in the world, through which Russian rough can be sold, but Antwerp in this case will have a very much lower diamond turnover,” Vladlen Nogovitsyn said.
ALROSA has 41 long-term customers, of which seven are Russian manufacturers and one Belarusian, while the remaining majority consists of Belgian, Indian, Israeli and Chinese jewelers and dealers, many of whom are Sightholders of De Beers. ALROSA’s long-term customers include Kristall Production Corporation (Smolensk), EPL Diamond and Ruiz Diamonds, the jewelry nets of Tiffany and Chow Tai Fook, as well as large-scale dealers such as Rosy Blue and Tache. Like Sightholders of De Beers, long-term customers of ALROSA purchase the range of diamonds they need on a monthly basis at prices set by the Market Council of ALROSA subject to trends prevailing in the world market.
ALROSA Alliance
In 2013, ALROSA, meeting the request of its long-term customers, integrated them into a brand called ALROSA Alliance. The use of ALROSA Alliance’s trademark indicates that a client buys non-conflict diamonds after passing quite tough selection in terms of financial strength and responsible business practices, the head of the ALROSA department said. All the long-term customers of the company are expected to conform to a basic set of criteria, including the presence of a sufficient turnover from the sale of rough or polished diamonds (at least $ 50 million per year) and positive liquidity.
This summer, ALROSA adopted the “ALROSA Alliance Guidelines on Responsible Business Practices.” According to ALROSA, the members of ALROSA Alliance should bear collective responsibility for its reputation and its stability. Inter alia, this means to prevent dumping. “We are against situations permitting some market players to destabilize the diamond market to their immediate benefit. For example, engaging in dumping, that is throwing volleys of diamonds belonging to the same product range on the market in a period of weak conjuncture. In fact, such actions are detrimental not only to the participants of the diamond market, but also to diamond manufacturers, as their goods are getting cheaper, too... We have witnessed such actions, and it took us to produce some reaction and we had to make an effort to stabilize the market, taking on additional costs,” Vladlen Nogovitsyn said. A number of ALROSA customers have the ability to influence market conditions, as they buy significant amounts of diamonds belonging to certain product groups.
There is another innovation aimed at reducing the reliance on major customers, earlier reported by mass media, citing the sources close to ALROSA. It is the monthly lim it for the supply of diamonds to long-term customers set at $ 20 million per month. The measure will by no means affect all customers, because the average monthly lim it introduced for their majority is below this line.
Customer categories
Earlier this year, ALROSA declared its intention to focus on large manufacturers and jewelry retailers as the most stable and predictable customers. But not all is that simple, Vladlen Nogovitsyn explained. “To say that we are focused on large-scale retailers is not entirely true - we are focused on creating a balanced customer base represented by all market players. Creating a customer base consisting of retailers only is impossible for us a priori: there are not so many jewelry companies in the world that are able to cut and use the full range of products presented in a box,” he said.
Meanwhile, ALROSA is maintaining an active dialogue with a number of other major networking companies and will consider projects that are already underway with customers having retail units – Tiffany and Chow Tai Fook. “In the near future, we shall reach a new level of relationship with these customers. Cooperation with major jewelry companies is possible not only in the field of rough, but also in polished sales or in generating some joint projects,” the ALROSA executive said.
Previously, ALROSA also announced that the share of foreign customers in the new contract period would increase. This is due to reduced sales and a weaker domestic market caused by the VAT collection and the difference in labor costs with India and China. “At the same time, from the beginning of the year consumption in the domestic market has increased by 10-15% compared to one year ago on the back of positive market conditions. Now Russian companies buy much more than in the past, especially compared with 2012,” Vladlen Nogovitsyn said.
Increasing productions costs make Russian manufacturers shift to processing large-size goods, producing more expensive products, as it was in Belgium, Israel and other countries.
FAQ about stock
ALROSA needs to expand its customer base due to the projected increase in production aimed at more than 41 million carats per year and due to selling some part of its stock in the market. The miner sold 4.8 million carats from its stock in the first quarter of 2014 (about 40% of the total sales in Q1 2014), including 3.1 million carats of gem-quality diamonds. This sale was the largest after the crisis of 2008-2009. The difference between production and sales amounted to no more than 400,000 in the second quarter of 2014, which indicates that the company did not sell rough from its stock. There are 13 million carats in the company’s stock, according to ALROSA’s top managers.
Meanwhile, ALROSA has currently almost no rough ready for sale in its stock, according to Vladlen Nogovitsyn. “The company has two types of stocks. There is a ready-to-be-sold stock, which is evaluated, sorted, packaged in boxes, kept at depot and ready to be shown to customers. There are now almost no such goods, which can be shown for sale – such goods were sold to customers during the first half of the year thanks to strong demand,” he said.
That amount mentioned in the estimates given by the top managers of ALROSA is the so-called stock in processing - diamonds that move along the processing chain, from mine to sale. “It takes several months from the extraction of ore to reach the stage of diamond sorting and readiness for sale, because diamonds have to pass concentration, cleaning, washing, shipping and preliminary evaluation,” the ALROSA top manager said.
ALROSA plans to reduce the stock in processing by 2 million carats by accelerating the turnover and increasing the processing efficiency.
Experience of BHP Billiton
ALROSA plans to adopt the mechanism of auctions, previously used by BHP Billiton, to minimize peak “emissions” of rough to the market, Vladlen Nogovitsyn said.
ALROSA uses auctions to sell 10-15% of produced rough, mainly to monitor market trends. Companies that regularly purchase significant amounts of diamonds at auctions may qualify for long-term contracts that provide regular supply of guaranteed amounts of diamonds.
“We consider some of the elements in the system of auctions practiced by BHP Billiton to be utterly interesting,” he said. “They used an interesting formula for calculating the price. Goods were not sold at the maximum proposed price, but at the price offered in the second- or third-largest bid. That is, the system permitted to cut off artificially “inflated” offers. “Our task is to minimize peak emissions of rough to the market... For this purpose and in order to determine the fair market value of goods, such a scheme is perfect - although, of course, it needs adaptation,” Vladlen Nogovitsyn added.
BHP Billiton was a major player in the diamond market, owning the Ekati Mine (in the Northwest Territories, Canada), annually yielding about 7.5 million carats of diamonds. This minefield and the sales office in Antwerp were sold to Canada-based Dominion Diamond for $ 553 million in April 2013. Recently, Dominion announced plans to sell under long-term contracts by analogy with ALROSA and De Beers, as its production amounts allow the company to provide constant supply for its customers.
BHP Billiton used exclusively auctions, without signing long-term contracts, said Vladlen Nogovitsyn. It “did not give the effect that can be obtained by combining sale methods.” “This system gave rise to unfavorable criticism from all market players, because the released data about the course of auctions influenced market trends. … Any information on the results of any auction run by any diamond producer has a profound emotional impact on customer behavior, and sometimes it has a very negative impact on the market. This was the case in 2008 and in 2011,” he added.
We are not talking about increasing the amount of diamonds to be sold at auctions and in the spot market. ALROSA intends to preserve the current pattern, in which about 70% of rough is sold under long-term contracts, 10-15% is put under the hammer within the auction system, and the same amount is sold in the spot market, Vladlen Nogovitsyn said. “The amount we are currently selling at auctions and in the spot market is comfortable enough for the company. It allows us to probe for market prices and gives real tools to support the market,” he said.
