Rapaport Magazine

Maxim Shkadov: The Big Picture

Maxim Shkadov sees his mission as ensuring that the diamond industry has a future, globally and in Russia, and doing everything toward furthering that cause.

By Svetlana Shelest

Maxim Shkadov
As General Director of Russia’s number one polished manufacturer, Kristall Smolensk, Chairman of the Association of Diamond Manufacturers of Russia (ADMR) and two-time President of the International Diamond Manufacturers Association (IDMA), Maxim Shkadov sees his mission as ensuring that the diamond industry has a future, globally and in Russia, and doing everything toward furthering that cause. Having begun his career as a polisher trainee in 1993 and working his way up to become the company’s general director in 2004, he has vast experience and knowledge of the industry. He shares his views of the challenges the industry is facing at present and what can be done.

RAPAPORT MAGAZINE: You are very passionate about your business and you have been steering Kristall Smolensk for over ten years now, as the industry experienced ups and downs and went through some very challenging times, including the present. You have also been IDMA president since 2012. What is diamond manufacturing for you?
MAXIM SHKADOV: This industry is truly unique. Diamond cutting has been an integral part of the jewelry business ever since diamonds were discovered, and jewelry making has been part of civilization since its very inception. The diamond industry has been evolving together with other arts, taking advantage of new technologies, developing unique know-how and execution techniques and establishing best practices so that the product, the polished diamond, has been, and still is, widely regarded as a work of art. We are proud to uphold such high standards. At the same time, a diamond is nothing like a traditional commodity, as its value is of a purely symbolic and emotional nature. I therefore see my mission, particularly as president of IDMA, as reaching out to the global diamond industry’s leaders to draw their attention to the pressing issues facing all of us. While there is no proper understanding between the rough producers and diamond manufacturers, and no sustainable regulation mechanism of the market has been yet worked out, the market players need to remain vigilant and work hard to prevent a possible negative development scenario for the diamond industry. We are already seeing this, as the industry is being eclipsed by the growing consumer demand for other luxury products such as fashion items and electronic gadgets. As I have said time and again, to prevent possible further development of this trend, all major players in diamond mining should come together and work out a consolidated approach, a kind of a road map for the industry.

RM: And the world’s seven major rough producers did form a Diamond Producers Association (DPA) recently, didn’t they?
MS: Indeed, and we welcome that decision. We hope that the DPA will set things finally in motion. As I have often said, it would be good for the entire industry to have a mechanism that functioned similarly to OPEC in the oil industry, where the main producers would monitor the market and align their decisions on whether to increase or decrease the supply of rough and adjust the prices accordingly. That would be a perfectly viable mechanism. In fact, the crisis of 2008 and 2009 forced the rough producers to do just that. As a result, in 2010 and 2011 the overall outcome was that the industry showed positive growth. But that success was brief, and now, once again, everyone seems to have forgotten that the market needs to be constantly regulated. One thing to do in the current situation is to bring down the volume of rough on offer. It far exceeds the capacities of the market to consume it at the current prices and the only way to regulate it is to put the brake on supply. At the moment, rough prices have gone down somewhat, but the gap between them and the cutting and polishing costs is still not enough for the diamond manufacturing business to be profitable enough and stimulate the growth of diamond sales in the jewelry industry. Another crucial thing on the present-day agenda is to take care of the entire diamond industry’s great need for promotion via a generic marketing campaign to help revive customers’ interest in diamonds across the board. De Beers championed such a campaign for decades, until ten years ago. And during the past ten years, we can see how the diamond’s overall standing in the global market has been weakening, all due to the switch to promoting individual jewelry brands rather than the diamond in general as a product.

RM: One of the recent developments in the global market is the notable progress in the production of synthetic or so-called laboratory-grown diamonds. What impact do you think this will have on natural diamond sales? As new technologies improve, laboratory-grown diamond manufacturers will produce diamonds of better color and clarity characteristics and of increasing weight.
MS: And they will keep doing so. And this is perfectly in line with those warnings that we have been voicing via both the IDMA and ADMR for at least three years. We have been asking De Beers, ALROSA and other rough manufacturers to analyze the situation with laboratory-grown diamonds and treated diamonds. Just to give you one example, the market was shaken recently over an inflow of diamonds treated with some yet-unseen technology. This tells us that applied science and technologies are developing and they will keep coming up with new know-how. Why? To find new ways of generating profit. None of this would be happening if each segment of the diamond pipeline was sustainable enough, i.e., if it generated enough added value to cover the business costs and yield profit. It used to be like that for about 50 years while De Beers, then a monopoly, regulated the pipeline. But now the situation is completely different. There are the interests of rough producers, there are the interests of banks and there is the real market, which is the market of polished diamonds and diamond jewelry. And yet these three components are out of sync, which is why the market has become open for such things as artificially grown diamonds. It is clear that the laboratory-grown diamonds are set to win a niche market. What should be of concern to all of us is that the producers of laboratory-grown diamonds might unite and launch their own marketing campaign. It is only a matter of time. Therefore unrolling a generic marketing campaign for natural diamonds is crucial at this stage — before it’s too late.

RM: What about the system of sales of rough? De Beers has a list of sightholders and ALROSA also signs long-term contracts with a list of authorized buyers. Do you see a need for adjustment in this area?
MS: The adjustment that is needed would be for the rough producers to take more responsibility than just doing their part in the diamond pipeline, i.e., producing and selling rough at a profit. Unfortunately, that is not enough if we consider the interests of the entire industry. As I just said, the real market is that of polished diamonds and diamond jewelry — and let’s be honest, diamonds are the only thing that rough can be processed into. Therefore, I believe rough producers need to be more conscious of regulating the sales and rough prices based on a more complete picture of what is going on in the market beyond the rough segment. Without that, the current system of sales undermines the buyers’ flexibility. Competition motivates buyers strongly to stay on the list, and that’s understandable. But the situation backfires on them as they lose the right to reject rough freely and have to take it, even when it’s not cost efficient. And after that, they have to deal with their losses on their own. This isn’t right.

RM: What diamonds are the most profitable for Kristall Smolensk to manufacture at the moment?
MS: There has always been relatively stable demand in the market for diamonds from .30 carats to .90 carats of medium color and clarity characteristics, but even in this category, the demand is weakening and driving the prices down. There are some categories of diamonds that could be very profitable to manufacture because the market consumes them well, but the problem is that with the current rough prices, their production is not cost-efficient and we are missing out on these business opportunities.

RM: Could you give an example of such categories of diamonds?
MS: For instance, melee ranging from .05 carats to .25 carats, or .30-carat to .70-carat diamonds of medium color and clarity. The problem here is that the added value numbers quoted by some experts and circulated around are not true — some quote 25 percent or even 30 percent added value in the polishing business, which is not the case. At the very best, it reaches 5 percent to 6 percent, and it is not enough for us to be driving any major generic diamond marketing campaign, let alone the global campaign that the industry is in need of.

RM: What fancy shapes are in demand now?
MS: There is little demand for fancy shapes now, unfortunately, so we focus on producing round diamonds and make fancy shapes on special orders.

RM: Is your company affected by the sanctions in any way?
MS: Yes, it is — in terms of the funding opportunities, since the sanctions cut off access to the Western funding and that has seriously affected the market. We have been using Western loans through our Belgian branch and now these loans were not renewed. So we simply lost some of our lines of credit. Production itself is not affected by the sanctions, but the financial side has become difficult. It was especially problematic in winter when the domestic banks reacted to the crisis by pulling the plug on some types of funding and raised the interest on the available loans to an unprecedented level.
   Now the banking and financial market is trying to balance itself out, and we have to deal with the situation as it is. Having to pay higher interest drives up our production costs. We certainly do not plan to cut the production volumes, so what we do is try to minimize these extra costs by hedging currency risks, and we are making it work. Although, to be honest, it is very challenging indeed.

RM: If all the major players, as well as relevant government agencies, are willing to come together to support the industry, what future do you see for your company and for the industry?
MS: We are working hard to make a successful future happen for our industry, a future we could look forward to. We are working closely with the Russian Ministry of Finance and the Russian State Precious Metals and Gems Repository (Gokhran) in order to improve the existing legal framework and market environment so that we can keep the polishing business alive and developing in Russia. We want to develop this business to the level where it can generate enough added value and create a lot of jobs. With favorable conditions, we could create a second Surat here, in Smolensk. Just as India has a production center in Surat and a financial center in Mumbai, with its perfect logistics system, developed infrastructure, the Diamond Bourse and overall, a business mechanism that runs like clockwork, we could build the same in Moscow and Smolensk. Smolensk has the advanced production capacities, highly trained professional resources and the unique experience in this business. Even during the hardest times, we never stopped operating for a single day, keeping the production flow going.

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

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