RAPAPORT... Kristall Smolensk, Russia’s largest diamond manufacturer, sold more than $100 million worth of gems in the first quarter of 2008. Maxim Shkadov, the company’s director, said the sales total met projections and that 10 percent growth is expected overall in 2008. However, he expressed concern that the slump in the U.S. market, the shortage of rough and the new value-added tax (VAT), which manufacturers have to pay starting this year, may strain the growth for Russian diamond cutters.
“The unrealized Christmas and St. Valentine’s Day sales in the U.S. will be felt by this summer,” Shkadov said. Yet, sales in Russia, Asia and the Middle East are showing good growth. The company’s domestic sales have doubled to $12 million in the past two years and are expected to grow 20 percent in 2008.
Quality Difference
Shkadov said further growth for the company depends a lot on the amount of rough it will be able to get. This year, Kristall began buying more rough from abroad because the domestic supply wasn’t increasing and had remained at the same level. Kristall has bought several big, exclusive stones from foreign miners, but rough from abroad is not suitable for regular product. “Kristall will continue buying 90 percent of its rough in Russia,” said Shkadov. “African quality doesn’t work for us; we need Russian rough. Otherwise, we won’t be any different from manufacturers in India or China.”
It’s not only the volume of rough supply, but also its quality, that make the difference. “Stones of excellent quality weighing more than 30 points have the greatest demand,” said Raymond Cohen, managing director of Kristall Diamonds, Kristall’s Antwerp-based subsidiary. Shkadov said that customers in Asia and Russia, the fastest-growing markets, are showing the same demand — they want stones of no less than VS2.
Another challenge that Russian manufacturers face is the 18 percent VAT, which ALROSA is scheduled to start collecting from domestic manufacturers this year. Although the tax is refundable after the cut diamonds are sold abroad, it has to be paid up front and the refunds will probably take several months to process.
Armenia’s Dilemma
The supply of Russian rough to Armenia may resume by the end of summer, according to Armenian Finance Minister Nerses Yeritsyan. The country’s manufacturers were scheduled to receive up to $30 million worth of rough from ALROSA, but a customs dispute disrupted the shipments. The Russian miner delivered its first installment of $1 million worth of rough in December 2007, based on the terms of an agreement between ALROSA and the government of Armenia. The stones had been polished by February 2008 and were to be re-exported into Russia. But the terms of re-exporting the manufactured stones conflicted with Russian customs regulations. Efforts to negotiate a solution to the dispute were delayed because of elections and a change of government in both countries.
The idea behind the agreement is that Armenian manufacturers will cut small diamonds that are not profitable to cut in Russia. “The cost of polishing a 1-carat diamond in Russia is more than $40, while in Armenia it is approximately $25, with virtually no difference in quality,” Shkadov said.
In addition to the diamonds Armenia receives from ALROSA, Kristall Smolensk has shipped the first portion of more than 2,000 carats of rough to be polished by the Armenian company DCA. A March 2008 agreement provides for Kristall to ship 4,000 carats to DCA every month.
Shows All AroundFour Russian jewelry companies presented their product lines at JCK Las Vegas. Two show veterans, Rifesta and Almaz-Holding, were joined by first-timers Kabirski and Co. and Gresso.
“There were fewer people at the show and we could feel the influence of the U.S. recession,” said Svetlana Rakhmanina from Rifesta. She said the company’s collection of pears and diamonds saw the most interest. “People are beginning to look at different things, rather than just engagement ring classics,” she said. “I think it is due to the fact that more women are buying jewelry by themselves without any relation to marriage.”
Silver tableware and objects with traditional Russian filigrana — a technique similar to filigree of decorating using silver and metal strings — were displayed by Almaz-Holding. “You can hardly surprise anyone with jewelry at the show, so we decided not to take it,” said Julia Turaeva, the head of the VIP clients department in Almaz-Holding. “But the traditional Russian handmade things are very unusual for the public.”
There were also significantly more foreign companies at the 2008 New Russian Style, an annual exhibition in Moscow. “The collections with colored gemstones have the biggest demand as they are bright and more suitable for summer,” said Lubov Pushkareva from Moscow-based Grace.
The Marketplace
• ALROSA sold $437.4 million worth of
diamonds in the first quarter of 2008. According to the company’s quarterly reports, this is almost 25 percent less than sales in the first quarter of 2007.
• Total revenue for ALROSA’s first quarter of 2008 was $615.8 million and net profit was $48.9 million.
• ALROSA sold more than $17 million in uncut diamonds at an international diamond auction held June 19 in Moscow. More than 30 companies from Russia, Israel, Belgium, India and the United Arab Emirates (UAE) bid on 104 parcels containing 334 diamonds weighing more than 5,200 total carats.
• The biggest diamond sold at the auction weighed 39.36 carats and one lot was sold for a record $48,000 per carat.
Article from the Rapaport Magazine - July 2008. To subscribe click here.