Rapaport Magazine
Markets & Pricing

Russia

Oversupply spurs production decline
Kristall Smolensk hopes the government’s road map will ease the tax burden on beleaguered polishers.

By Svetlana Shelest
   November marks 25 years since Kristall Smolensk opened its Antwerp office, which was its first international branch. In 2016, the office channeled over 50% of Russia’s largest diamond producer’s total turnover, roughly $100 million, according to general director Maxim Shkadov.
   In an exclusive interview with Rapaport Magazine, Shkadov talked about the challenges facing the industry. One notable — and worrying — trend on the global polished market, he said, was a dip in demand for gems weighing between 1 and 3 carats over the past 18 months.
   “In my 25 years of experience working in the industry, I’ve never seen anything like this,” he observed. Demand has also weakened for 0.30- to 0.99-carat diamonds, another popular category, he added.
   “The market has already reached saturation point,” he explained, pointing out that India’s active production policy had resulted in oversupply in many categories of polished diamonds. This has made it no longer economically viable for Kristall Smolensk to produce princess- and Asscher-cut diamonds.

Taxing issues
   Adding to the pressure from India are problems Russian polishers face on the domestic front. Regulations that Russia introduced to comply with World Trade Organization (WTO) requirements delivered a serious blow to the country’s diamond-polishing industry, effectively abolishing the 6.5% export tax on Russian-produced rough in September 2016. The tax used to give domestic polishers an edge over Alrosa’s international buyers, compensating for higher production costs and onerous customs regulations. Many smaller Russian polishing companies had to close down in the aftermath.
   “This decimated the polishing industry in Russia, effectively leaving only Kristall Smolensk, Diamonds Alrosa and India’s KGK branch here,” Shkadov remarked.

Price clash
   However, the economic and administrative hurdles in Russia are not, in Shkadov’s opinion, the main problem. Because Russia’s diamond jewelry market share is miniscule on a global scale, Kristall Smolensk’s diamonds have traditionally been traded abroad, with only about 2% staying in the country, making the company sensitive to the global industry’s challenges.
   Of these, Shkadov believes, the biggest two are the growing financial bubble and the increasing disparity between rising rough prices and sliding polished ones.
   “India has not only taken over 90% of the world’s polishing business over the past decades, it has also secured a massive government-sponsored line of credit from the country’s banks. As a result, the industry’s debt burden and risks are increasing, as the recent bankruptcy of two Indian companies clearly indicates,” he said. “The total amount of credit in the global polishing industry has reached about $15 billion, with India accounting for $10 billion. And as India keeps producing more stock, it only increases pressure on the falling diamond prices. Contributing to the problem is that demand for rough is perceived as high by miners, while it is in fact dictated by the system of sights and long-term contract sales, which adds to the pressure on the polishing segment.”
   Salvation, according to Shkadov, lies in two solutions: The first is global-scale market management that could be undertaken by “a regulatory council of rough producers, similar to OPEC in the oil industry,” which would keep rough prices under control for the greater good of the entire pipeline, and the second is large-scale promotion of diamond jewelry, which is the ultimate driver of demand for both rough and polished.

Article from the Rapaport Magazine - November 2017. To subscribe click here.

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