With its winning bid of $75 million, ALROSA acquired the license for three diamond fields in Yakutia, the source of more than 90 percent of Russian diamonds. The purchase at a January auction includes Reka Ebelyakh, the world’s largest placer diamond field. ALROSA paid four times the starting bid price for the 14.26-square-mile deposit in a tough fight with Nizhne-Lenskoe, a local miner owned by the Yakutian government.
ALROSA said it would start open-pit operations at the site in 2011. Although mining at placer deposits costs considerably less than at kimberlite pipe sites, operations are challenged by low temperatures most of the year. ALROSA mined 34.3 million carats in 2010, 5 percent more than in 2009.
At the end of 2010, several top-level employees were fired from ALROSA at the conclusion of their employment contracts, including Sergey Oulin, its former vice president, who often represented the company at international industry events, and Alexander Efimov, its former chief engineer. The company also appointed a new chief accountant in January 2011. Several sources in the industry said that the dismissals of the high-ranking officials were not surprising since the company has been reorganizing since 2009, when Fyodor Andreev took over as president.
Russian diamond miner Uralalmaz plans to produce 60,000 to 70,000 carats in 2011, returning to its 2008 production levels. The company, which is part of the Leviev Group and accounts for 1 percent of Russia’s total diamond production, is projecting a volume of 120,000 carats by 2015. “The market is very strong and there’s demand,” said Roman Golikov, Uralalmaz president. “All our production is being sold.” Uralalmaz needs to invest around $100 million in the next three years in new equipment and technology, since the company hasn’t done much upgrading since Soviet times.
Hopes for Polished Sales
Russian manufacturers, reporting an increase in sales at the end of 2010, express hope that polished prices will rise in 2010 due to increased U.S. sales. “We see the potential for polished prices to increase because rough prices have reached precrisis levels and polished prices have not,” said Valery Morozov, the director general of Ruis Diamonds, a Russian manufacturer owned by Leviev Group. Morozov estimates that polished prices should go up by 10 percent to 15 percent.
“Small business trade in polished is reviving,” said Alex Popov, president of Moscow Diamond Bourse. Although polished sales had grown by the end of 2010, manufacturing levels reached only half of the precrisis output due to the lack of rough and its high prices, according to Ararat Evoyan of the Russian Diamond Manufacturers Association. The best-selling stones remain 1-carat gems and Morozov thinks the demand for 3-carat-plus stones may increase because fewer of these stones were sold during the economic crisis due to their high price.
Jewelry Sales
Reports from jewelry makers and sellers regarding the holiday sales of 2010-2011 are mixed. “Sales increased by 20 percent compared to the previous year,” said Fyodor Poludenny from Estet. Yet, some companies said sales were much lower than expected. Jewelry accounts for only 8 percent of holiday gifts, behind electronics and perfume, according to the Russian Public Opinion Research Center. More premium-class, higher-priced items were sold in December compared to earlier months, although less expensive silver jewelry made up the bulk of the purchases. January is a slow month for sales as many Russians leave for ten-day holidays.
China: Friend or Foe
China arouses mixed feelings in Russia’s diamond industry. On the one hand, it’s seen as an attractive market and a source of quality items at inexpensive prices. On the other hand, many regard cheap Chinese jewelry and gems imports, especially illegal imports, as a threat to local producers. China bought 4,400 carats of rough diamonds worth $10.4 million in 2009, and 1.4 million carats in 2008 from Russia.
Andrey Polyakov, ALROSA spokesperson, said the miner was looking into signing long-term contracts with Chinese companies similar to those it has with Indian and Belgian companies. Manufacturers admit it is difficult to compete with Chinese goods on the basis of cost. Morozov said Russian polishers need to either have government support or target their production to a specific product niche if they are to compete with Eastern rivals. “China is a good example of how government should support the jewelry industry,” said Flun Gumerov of Almaz Holding.
An increasing number of Russian companies are attending the Hong Kong jewelry shows. Although many dealers bring back jewelry or gems from China, they are often unwelcome domestically. “Jewelry with cheap 17-facet stones is big competition to local producers,” said Alexander Martynov, director of Grace, a jewelry and gems dealer. Even though 20 percent duty is imposed on imported jewelry, the low cost of Chinese items makes them strong rivals to Russian products. Although there are no official statistics, illegal imports in general arouse much concern, especially since a large jewelry chain was closed in 2009 for selling such items.
The Russian Jewelers Guild is pushing for legislation to make data on imports from every country available to the public. “Russian customers are suspicious of Chinese and Turkish imports, and this casts a shadow on legal Chinese and Turkish enterprises,” said Valery Radashevich, the guild’s president.
The Marketplace
• ALROSA’s 2010 revenue was $3.2 billion, according to Russian accounting standards, 1.5 times more than in 2009.
• The company’s net income reached a three-year high of $203 million.
• ALROSA sold $3.4 million worth of rough in 2010 and is targeting $3.5 million in 2011.
Article from the Rapaport Magazine - February 2011. To subscribe click here.