Russia Market Report

Tense anticipation of change can be felt all along the diamond pipeline in Russia, but market participants — from miners to jewelry makers — are not sure if this change is going to be a positive or a negative one. The industry is on hold, with either no or limited production and sales.

“I think demand will recover by the end of the year,” Sergey Vybornov, president of ALROSA, Russia’s largest diamond miner, said in an interview with Vedomosti newspaper. However, he expressed concern that prices may fall. “There is a strong negative factor: big stocks of both rough and polished diamonds have been accumulated,” Vybornov told the business daily. He said the value of the stocks is estimated at $15 billion to $20 billion, which is more than the annual world sales of rough.

ALROSA halted sales to its customers, beginning in late December 2008. At the moment, it is selling its rough to Gokhran, the state-owned gold and gemstones repository. The volume of sales and the prices were not disclosed. Sales to Gokhran is one form of the bailout help that the Russian government pledged to provide to more than 300 companies in the country in an effort to alleviate the impact of the current crisis.

“This gives us the opportunity not to stop production and to continue construction of the underground mines,” said Andrei Polyakov, ALROSA spokesperson. The company is continuing its operations both in Russia and in Angola, where it has a share in the Catoca diamond mine.


Manufacturing Stagnant
Further up the diamond pipeline, the picture is gloomier. “Russia’s diamond manufacturers have switched to the sleeping mode,’’ said Ararat Evoyan, the vice-president of the Russian Diamond Manufacturers Association. The companies have either stopped production or are accumulating stocks. Industry insiders say there are some sales inside the country, but their volume is difficult to calculate. Interfax news agency reported that Gokhran also has bought around $300 million worth of polished diamonds from state-owned Kristall Smolensk, the country’s largest manufacturer. The company didn’t comment on the report.

Evoyan said that if the situation doesn’t improve within the next six months, it may become a point of no return for many companies. “The trade of a manufacturer is very difficult and it won’t be easy to return people to their work if they find new jobs.”


Strained Nerves
As several jewelry makers described it, the industry is “having jimjams” waiting to see what sales will be like after March. The jewelry business is traditionally good in Russia in February and March as the two months have several gifting holidays. But fears are that sales will slump afterward.

The first big jewelry show of the year — Junwex 2009 in St. Petersburg — saw 200 percent fewer visitors than the 2008 show, although the number of exhibitors stayed the same. Many companies participating in the show said it went well for them because their old clients came, but that this year, most visitors were looking for a bargain.

“Cheaper items are in much bigger demand,” said Sergey Tikhonov, commerce director of Almaz-Holding.

As for diamond jewelry, the best-selling items were those with tiny gems and price tags of less than $700. “The dollar rate is rising and it’s unclear what will happen with diamond prices, so people are not sure what to do with diamonds,” said Anna Ivanova, commerce director of Moscow-based Elit. Yet, she said, some show visitors were buying $1 million necklaces as an investment. “People do not care about the design as they used to; they now want a good stone from 1 carat and above in a classical frame,” said Svetlana Maksimova, director general of Casting House.


Investment Diamonds
ALROSA, which also has a manufacturing subsidiary, wants to start selling high-end polished gems specifically as investments. “We are testing this service at the moment,” said Polyakov, noting that “Some banks have expressed interest in this option.” The “investment” diamonds would be gems of 10 carats and above with unique color and clarity characteristics and they would carry the holographic mark of ALROSA. “Every sale will be individual,” said Polyakov.


Drilling
The French company Foraco International SA, which provides drilling services worldwide, has won a contract to conduct large-hole drilling at the Grib diamond field on the Verkhotina diamond property in northwestern Russia. The agreement, valued at approximately $13 million, is with Arkhangelskgeoldobycha (AGD), which holds the exploratory license for the deposit estimated at 50 million carats. The contract is for one year, at which time estimates of the quality and the volume of the reserves will be revised.

The Grib deposit was subject to a decade-long litigation between AGD and De Beers subsidiary Archangel Diamond Corporation (ADC), which also invested in the project. In April 2008, they signed an agreement for mutual development of the deposit, but the agreement terminated in December 2008 on the grounds that some of its conditions were not met.


The Marketplace
• There have been no sales of rough by ALROSA, Russia’s dominant miner, in the marketplace for the past two months.
• Sales of polished diamonds in Russia have been scarce.
• Demand is greatest at the jewelry end for items with stones of 0.2 carats and smaller.
• Classical rings with a 1-carat round stone with good characteristics are selling well.
• More customers are asking for certificates for stones, even for gems of less than 0.3 carats.

Article from the Rapaport Magazine - March 2009. To subscribe click here.