The diamond market remains tense, with a plunge in prices
coming on the heels of the rally in the first half of the year. Everyone is
waiting to see if Christmas sales will pick up and whether the mining
companies, ALROSA and De Beers, will maintain their current price levels.
ALROSA already has reduced its supply to the market by selling only through its
long-term contracts, a policy the company says will remain in place until the
end of 2011, unless the market situation changes.
Nikolay Afanasiev, the head of sales for Kristall Smolensk,
Russia’s largest manufacturer, believes such a strategy is beneficial for the
whole market. “It keeps the market more stable,” he said, noting that the
market appears less nervous in November than it was in October. While the
company’s October prices remained approximately at the same level as in
September, Afanasiev said the manufacturer was providing easier terms for its
customers. “We tried to give our clients a better assortment,” he said.
Holding The Line on Prices
Although the manufacturing companies are trying to maintain prices, especially since many bought their rough
at peak prices in July, some dealers are selling at a discount because they
need the cash. Rajesh Gandi, director general of Choron Diamonds, said “The
price decline is 15 percent to 20 percent, with smaller items suffering the
greatest loss.” He noted that such an outcome was expected after the price
surge in the first half of the year. “This is another cycle we have to live
through,” he said, adding that many companies came into this current period of
price fluctuation better prepared than they were in 2008.
“The time for selling goods has become much longer,” said
Marina Yablokova, the head of marketing at Arkhangelsk-based manufacturer Zvyozdochka. Many Russian companies said competition is even stronger
from Chinese manufacturers, who can afford to
lower their prices due to their lower labor costs. “Our selling point is
marketing the fact that we have good cut and Yakutian diamonds,” said
Yablokova.
Although sales have slowed,
demand is strong. However, buyers and sellers are at loggerheads over the
price. “The demand is there, but people are not ready to pay the price,”
said Afanasiev. And the buyers support the
sentiment. “It’s hard to find stones for
good money,” said Aleksey Trushin, the director of jewelry manufacturer Diamond
Gallery.
ALROSA Looks to Northwest
On the back of the rally in rough prices, ALROSA dropped its
intention of looking for an investor for Severalmaz, a subsidiary developing
Lomonosov, the richest diamond field in northwest Russia. ALROSA President Fyodor Andreev said $600 million has
been invested in the development over the past year. An additional $200 million
will be spent constructing a second line at the Lomonosov processing plant,
which will bring it to full production capacity of four million tons of ore
annually by the end of 2013.
The Lomonosov diamond
field contains approximately 20 percent
of Russia’s total diamond deposits, an estimated 130 million carats. Severalmaz
Director General Sergey Gerasimov said the company is expected to reach
profitability in two to three years. At the beginning of 2011, Rio Tinto
reportedly was eyeing the Lomonosov
deposit and was prepared to pay more
than $400 million for 50 percent minus one share. At the time, many analysts
were saying that the cost for developing the deposit was too expensive for
ALROSA.
But the recent surge in rough prices seems to have changed
the situation. Severalmaz reported its sales at $36 million in the first nine
months of 2011, which is 18 percent higher than in 2010. “The high demand in
the global market had a positive effect on the operations and profitability of
the company,” said Gerasimov. More than 60 percent of rough mined at the
Lomonosov field is of jewelry quality, including pink and green diamonds.
Kristall’s Results
Kristall Smolensk reported revenue of $444 million in the
first nine months of 2011, already more than 10 percent higher than the revenue
for all of 2010. Afanasiev credited good
sales and availability of stones, including
the diamonds it received from the state
treasury when the government increased the company’s equity. Yet, he warned
that the fourth quarter isn’t expected to be very impressive, although things may turn for the better.
The company reported net profit for the first nine months of $11 million and it
exported 98.8 percent of its production. “The domestic sales were such a low
share because sales outside the country were very good,” he said.
Jewelry sales were slow in November. “Sales have been worse
than in 2010,” said Yablokova, noting that consumers are buying cheaper
jewelry. “The value of the average purchase has fallen a lot,” said Anton
Schepotiev of Almoss, a diamond manufacturer and dealer. Real holiday sales
start in full the second half of December, so retailers remain optimistic.
The Marketplace
• ALROSA’s net profit increased 3.7 times to $775.9 million
in the first nine months of 2011.
• The company’s revenue increased 17.7 percent to $2.8
billion.
• The company exported 71.9 percent of its production.
• Diamonds smaller than .30 carats are selling best. Sales
of diamonds larger than 1 carat have stalled because buyers and sellers can’t
come to agreement on prices.
Article from the Rapaport Magazine - December 2011. To subscribe click here.