Photo: swamibu via flickr
Alrosa, the Russian state diamond monopoly and world’s largest producer of rough diamonds, moved this week to resist price-cutting and discounting pressure across global diamond markets by announcing it will reduce its supply of rough for sale instead.What a difference 20 years make! Between 1990 and 1995, when Soviet diamond administrators remained in charge at the State Committee for Precious Metals and Gemstones (Komdragmet), and Alrosa was still in gestation, it was commonly charged that price and supply control tactics by the De Beers cartel were damaging Russian interests.
So Komdragmet’s chief, Yevgeny Bychkov, devised the scheme of selling as many diamonds out of the Russian stockpile as there was need for revenue or demand from buyers. That, in turn, was called “leakage” by the De Beers chief at the time, Gary Ralfe.
He meant violation of the supply and sales agreement of 1990, which had signed a five-year term between De Beers and the Russian diamond authority. Bychkov’s diamond supply forced the price down, but the Russian treasury did much better than the De Beers contract would have allowed.
Fast forward to Monday of this week — according to the company release of October 3, chief executive Fyodor Andreyev (image) “held a working meeting with the Company’s management. The agenda included issues relating to Alrosa’s marketing activities and its current financial situation.
The Company has noted that the key factor determining the world diamond market development is the imbalance between demand and supply. When it is objectively impossible to increase the world rough diamond production volume, the major markets of diamond jewelry consumption — the USA, the PRC, and India — are displaying a steadily high demand. This fact is particularly confirmed by the results of Hong-Kong Jewelry and Gem Fair held on September 19–23, 2011.”
“In the meantime, the Company anticipates a slight decrease in diamond purchase volume in the world market. Such an assumption is explained by two factors. Firstly, by traditional slowdown in business activity on the market in August-October.
Secondly, the world stock market indices fall and, as a result, the shortage of liquidity led to a significant reduction of speculative component in the diamond market. Alrosa will react to the diamond price stabilisation in accordance with the current trade policy aimed at maintaining market stability and avoiding negative influence of speculative factors.”
“In particular, Alrosa is planning to sell rough diamonds under long-term contracts in October, having considerably reduced rough diamond supplies to the market. Overall supplies in November and December will be conditioned by the market demand.”
If this reduction in anticipated supply to the market helps stabilise price, and stops discounting, the company claims that “by the end of the year, Alrosa expects the world’s diamond jewelry sales to hit very high rates as compared to 2010 and 2009, and due regard being had to the current global diamond production, the Company also expects rough diamond price to revive growth as early as in the beginning of 2012.”
The company declines to give specifics of its sales volumes in October, and there is no telling whether the long-term contracts to which the company announcement refers oblige Alrosa to deliver at fixed supply volumes, and preclude reductions in the sights.
A leading Russian diamantaire told PolishedPrices.com the Alrosa announcement “has appeared now as Alrosa wants to give the message to its sightholders that they shouldn’t expect to buy rough on the market at cheaper prices, as Alrosa withdraws goods from the market.
Instead, the message is to keep buying on the long-term basis, while they still have the chance.” The source also believes Alrosa is telling De Beers and other international producers that “sellers shouldn’t sell fast and cheap, but to wait for the prices to go up again.” The source claims Andreyev is not signaling a strategy shift for Alrosa, but no more than a tactic aimed at raising market prices in the short term.
In its latest financial report for the six months ending June 30, Alrosa said it had sold 19.1 million carats for Rb52.4 billion ($1.8 billion) at an average carat price reported of $113. It is unclear what volume of stones Alrosa is selling on 3 to 6-month or long-term contracts. One Moscow source believes that this month this volume accounts for about $200 million, or about two-thirds of total sales for the month.
A second Moscow source is critical of Alrosa for playing tough on price at the expense of it best clients. “The current situation on the market is adverse for all diamond companies. Alrosa has its own plan, and instead of reducing the prices it cuts supplies.
Alrosa has strained relations with long-term customers. When the market prices went up, Alrosa raised their prices, too, but now as the market prices drop, Alrosa doesn’t reduce theirs. The company prefers long-term contracts and doesn’t reduce prices irrespective of the market trend. They only reduce the supply volumes. But I believe Alrosa will come to an agreement with the customers anyway.”
A month ago, after announcing results of its August tender, and in the face of vocal scepticism in Antwerp, Alrosa did not refer to a supply cut, or even a weakening of demand. Instead, it claimed that its United Selling organisation “has registered a strong demand potential almost for all categories of rough diamonds and stabilisation of prices, with an insignificant correction in some categories, which is connected with a significantly lower impact of speculative factors on the market.”
PolishedPrices.com reported that about 90% of the stones supplied to the tender had been sold for $22.5 million. “The purchase prices exceeded the upset prices (Alrosa’s current selling prices for rough diamonds) by more than 5%,” said Alrosa.
The company’s spokesman Andrei Polyakov told PolishedPrices: “we expect a general price correction on the world market, primarily due to the decrease of speculative operations on the market. The prices on several types of rough can be corrected – for example, smalls and Indian goods – but for Alrosa we expect some price growth due to the overall reduction of supply on the world market, and because the quiet summer period is over.”
A Moscow diamond industry leader has attacked Alrosa for attempting to mislead the market. “That’s typical of them, they are a Soviet company.”
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