Rapaport Magazine


By Anastasia Serdyukova
Volatility Part of Doing Business

The country’s largest diamond miner ALROSA is expected to report a revenue of over $5 billion in 2014, having sold up to 40 million carats and mined 36 million carats. The company believes in the upward trend at the diamond market for the long term.
   “Volatility at the diamond market is nothing new,” Yuri Okoemov, the company’s vice president, told Rapaport Magazine. “Macroeconomic forecasts for major diamond selling centers and the rough diamond supply/demand ratio show that demand and prices will go up.” The company plans to mine 38.2 million carats and sell 40 million carats in 2015.
   Ilya Ryaschin, ALROSA’s acting president, said in a December interview with Yakutian media that rough prices could go up 3 percent to 4 percent in 2015. The miner increased its rough prices by 7.4 percent over the first seven months of 2014, but in the second half of the year, prices remained level.

Accommodating Fluctuations
   “Long-term contracts help ALROSA smooth out the fluctuations at the market,” Okoemov said. The company sells 66 percent of its rough through long-term contracts, which expired in 2014. “Over the year, we evaluated all our existing and potential clients and how they acted when the market stagnated,” he said.
   The miner is currently signing deals with 50 companies for 2015 through 2017, including 12 Indian firms. In 2014, ALROSA sold $700 million worth of rough to India, although subsidiaries of Indian companies, located predominantly in Belgium, bought $2.3 billion of rough. Russian companies get 12 percent to 15 percent of sales volume, while manufacturers in Yakutia, where most diamonds are mined, get 5 percent to 6 percent. “Our sales network is designed so that none of our clients received a share large enough to become a monopoly customer,” Okoemov said.
   ALROSA also reported reorganizing its credit so that it would have more liquidity in the beginning of 2015. Ryaschin said that since the company is borrowing from Russian banks, it is unlikely to face any problems related to the sanctions imposed on the country in retaliation for its role in the Ukrainian conflict.

Price Concerns
   Manufacturers expressed concern over large stocks of polished that remain with companies and dealers. “The final numbers on Christmas sales will make the situation clearer, but still we are alarmed about the future,” said Maksim Shkadov, director general of Kristall Smolensk. “The prices of rough remain too high for the current polished sales.” Rajesh Gandhi from Choron Diamonds cautioned that if rough prices don’t go down, some manufacturers and dealers will go out of the business in 2015, even while miners will still fail to sell all the rough they offer. Shkadov said that all categories of diamonds are not selling very well but inexpensive goods are doing better.
   The fall of the Russian currency made companies nervous in early December but, by the end of the month, they seemed adjusted to the new realities. Since diamonds are sold in dollars, the fall of the ruble made sales bigger when calculated in rubles. “The fall of the currency also lowers production costs,” said Shkadov. He added that the company has loans only in rubles, so its cost of capital will not be affected. However, the mid-December increase in the interest rate by the Russian central bank will make money more expensive. According to Shkadov, Russia’s largest manufacturer will finish 2014 with a profit.

Jewelry Sales Boom
   Jewelry sales were booming in the second part of December as Russians, scared by the fall of the ruble, went on a shopping spree before the prices could go up. Many boutiques saw lines of customers. Shops in the far east section of the county reported Chinese shoppers buying to capitalize on the falling currency.
   “These were the best weeks for retail,” said Alex Popov, the head of the Moscow Diamond Bourse, noting that despite the increased sales volume, jewelry was still losing to high-tech, designer bags and clothing as something of value to be invested in. Svetlana Rakhmanina from Rifesta, a large jewelry maker in Yekaterinburg, said that clients who typically buy exclusive jewelry bought something in advance of the new year, which doesn’t happen every year. She noted that for the first time in years, sales in the low-end segment were staggering, while sales in mid-range and high-end categories were booming.
   Still, jewelers were worried about sales in 2015 because companies will have to raise prices even though people are unlikely to have more money to spend. “We will have to design jewelry that looks bigger and more expensive than it is,” said Rakhmanina. Fyodor Poludenny from Estet, one of the country’s big jewelry companies, said that the devaluation of the currency will make Russian jewelry more competitive pricewise compared to imported jewelry.

Article from the Rapaport Magazine - January 2015. To subscribe click here.

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