ALROSA, Russia’s largest diamond miner, said the demand for rough diamonds began growing in the early days of 2010 and that it expected to sell more than $300 million worth of rough in January. For the year, the miner expects $3.3 billion in revenue and approximately $100 million in net profit on production of $2.3 billion worth of rough. If demand remains strong, the miner may even refrain from selling gems to Gokhran, the state treasury, according to a press release published on ALROSA’s website. “Diamond manufacturers started refilling their stocks of diamonds,” said Andrey Polyakov, the company’s representative.
Plans call for ALROSA to sell up to 70 percent of its rough to the market through long-term contracts in 2010. This concept of the company’s sales strategy was developed by the management of the company and approved by the board in late December 2009. The client list may include up to 30 companies, according to Polyakov.
Earlier, the company announced it is planning to reduce its debt by 10 percent to approximately $118 million and to restructure 77 percent of its debt as long term. In mid- 2009, most of the company’s debt was short term. In addition, ALROSA is planning to issue bonds worth approximately $1.5 billion in the second quarter of 2010 and Eurobonds in the fourth quarter, in the event the global economy and the fixed-income bond market recover by that time.
Domestic Versus International
ALROSA said it was planning to provide equal access to rough for domestic and international clients and to standardize the contract terms for foreign and Russian buyers, offering the same selection of gems to both groups at market price. A company press release said its analysis of the economic crisis in the first half of 2009 showed the benefits of such an approach. Traditionally, the miner had divided its markets into domestic and international and treated them differently. “The crisis showed that the market is one, so there should be equal access,” said Polyakov, who added that ALROSA might sell up to 30 percent of its rough to the domestic market.
Russian manufacturers are responding positively to the miner’s new sales strategy. “ALROSA offers a good selection of rough, but its prices are a bit high,” said Ararat Evoyan, the vice president of the Russian Diamond Manufacturers Association. However, manufacturers say they face tougher conditions than in other countries because of various regulations. These include the 18 percent value-added tax (VAT) that companies pay at purchase and get refunded only after selling their product. “Borrowing money is also more expensive for Russian manufacturers because the country’s banks charge higher interest than European banks,” said Evoyan.
According to Evoyan, “2010 was a bad year for manufacturers, with production reaching only a quarter of 2007.” Most of the companies were producing low volumes, if any at all. Business was also damaged by the fluctuations of the dollar and the exchange rate, which went from 35 rubles to the dollar early in the year to 30 rubles by December.
New Year SalesJewelers said the New Year sales had met their expectations and many said they were better than 2008, even though they were 15 percent to 30 percent lower than two years ago, before the crisis hit. “It feels like people are finally not afraid to spend some money,” said Anatoly Kats, the chairman of St. Petersburg–based Sadko. The average value of most purchases was not more than $1,000, with items around $500 in greatest demand. Jewelers dealing in high-end items said that while the number of items sold remained the same, clients were often looking for cheaper options.
Diamond was the season’s favorite stone, with sizes ranging from 0.01 to 0.3 carats in the mass-market segment and 1 to 2 carats in high-end sales. “Classic items, such as rings with one stone, were in most demand,” said Evgeny Alexandrov, the director of Barnaul-based Alexandrov&K. “Our customers would buy rings or earrings to complement previous purchases,” said Irina Zhurba from Leviev boutique in Moscow. Many companies offered so-called “anticrisis collections,” which included special frames to make stones look bigger or placing stones in metals other than gold, like palladium. Most jewelers said the majority of sales were done in the last ten days of December, when people finally made up their minds.
Sales in January are traditionally slow because Russians enjoy their ten days of holidays at the New Year. Activity starts to pick up only at the end of the month in advance of Valentine’s Day. Currently, jewelry makers are preparing for the Junwex exhibition in St. Petersburg, which opens February 3. It is the first major show of the year and 650 companies are expected to show their wares.
The Marketplace
• Russia produced 24.43 million gold items in the first 11 months of 2009, according to the Russian Assay Chamber, 39.9 percent fewer than in the same period of 2008. In the same 11 months, jewelers produced 36.89 million silver items, 25 percent higher than the previous year.
• The list of seven companies allowed to export diamonds from Russia remain the same for 2010 as in 2009. They include ALROSA, ALROSA’s three subsidiaries —OJSC ALROSA-Nyurba, OJSC Almazy Anabara and OJSC Severalmaz — CJSC Uralalmaz, belonging to Lev Leviev, OJSC Nizhne-Lenskoe and Almazyuverlirexport. The latter can sell diamonds from other companies and processes all the international deals of Gokhran.
Article from the Rapaport Magazine - February 2010. To subscribe click here.