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Russia
By Svetlana Shelest
On December 22, 2015, Russia’s diamond mining giant ALROSA adopted its budget for 2016. The production objective for the year is set at 39 million carats, in line with the company’s approved long-term plan to increase its annual production to 41 million carats of rough by 2021. Previously, however, Ilya Ryashchin, ALROSA first vice president, noted during a phone call with investors and analysts on November 25 that the company might be adjusting this figure: “In case 2016 does not bring the consumption levels back to normal, we would probably reconsider production volumes. We will be monitoring the situation and making decisions as it develops.” ALROSA’s two key operational objectives for the coming year are to drive the company’s flagship Mir underground mine to reach its full design capacity of 1 million tons of ore annually and to successfully launch operations at Udachny’s second underground start-up complex in the second half of the year. Of particular interest and importance for the global diamond pipeline is the adjustment made by the world’s largest diamond miner to its sales plan for the new year. “Taking into account the minimal demand growth,” as the company stated in its press release, ALROSA management has set a target of $3.5 billion in sales for 2016.
The company had revised its budget for 2015, which was originally set at 40 million carats in sales, with 38 million carats planned to be traded from production and two million carats from stock. However, ALROSA sold only 23 million carats of rough over the first nine months of 2015, which is 20 percent less than in the same period in 2014. And while the miner reported a 17 percent revenue increase in the first nine months of 2015, this figure should be viewed in terms of the fact that the reporting currency was originally in rubles and that the revenue represents the total for the ALROSA group of companies and not only rough sales. ALROSA’s rough sales revenue in U.S. dollars has in fact declined by 27 percent year-on-year in the first nine months of 2015, amounting to $2.7 billion. Following the dramatically changing market conditions, ALROSA has pursued a conservative sales policy throughout the past year, cutting down both its sales volumes and prices. According to ALROSA experts, the measures undertaken are expected to be sufficient for the recovery of the rough demand, which would bring about the much-desired market stabilization in 2016. ALROSA President Andrey Zharkov also confirmed that long-term contracts will remain the cornerstone of the company’s trading strategy as an efficient tool protecting both the supplier and its clients from market fluctuations.
Indeed, stability is what all segments of the diamond pipeline — both in Russia and, no doubt, in the world — are hoping for most. Dmitry Baranov, operations director of ADAMAS, one of Russia’s largest jewelry retailers operating 230 stores countrywide, said, “Speaking of trends, December 2014 set one with a dramatic drop of the country’s currency value. However, further currency fluctuations in the course of 2015 were minimal, and the jewelry retail prices, once adjusted, remained more or less stable. Of course, we couldn’t expect end customers to be ready for price adjustments to be made in full proportion to the currency drop; therefore, we contained the retail prices at our own cost, raising them on the average by no more than 15 percent. If we are now to make projections about the possible trend for 2016, the best term we should be looking for is ‘stability.’” Maxim Shkadov, general director of Russia’s number one polished manufacturer Kristall Smolensk, commented on the current state of things. “The situation is still very unstable due to serious trouble in the financial sector. Banks are losing their trust in the industry and the price fluctuations foster their doubt about the companies’ stock. The market is now holding its breath, hoping that Christmas and New Year season sales were good, pushing the merchandise down the pipeline. I believe the trend of the coming year will be reduction of volumes of rough traded by ALROSA and De Beers.” As Shkadov further pointed out, ALROSA has already adopted a new budget with the sales target reduced by about 30 percent, and the troubled state of affairs in Anglo American can also be expected to reflect on De Beers. “I very much hope for the polished price downfall to stop in the first quarter of 2016, because if it doesn’t, this will inevitably prompt further decrease in the rough prices. This, in its turn, will be catastrophic, as it will continue the rough and polished tailspin trend that needs to be stopped. For the sake of stability, it is paramount that the rough suppliers keep their prices fixed,” he concluded.Article from the Rapaport Magazine - January 2016. To subscribe click here.
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