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In an exclusive interview with Rapaport Magazine, Maksim Shkadov, director general of Kristall Smolensk, discusses the firm and the diamond industry.

By Anastasia Serdyukova

Maksim Shkadov
The manufacturer Kristall, based in the old city of Smolensk, is the largest Russian manufacturer and exporter of polished diamonds. The company, which marks its fiftieth anniversary in 2013, is the embodiment of Russian manufacturing and quality. Yet, with the diamond market going through turbulent times, the company has to work hard not to lose its standing. Its Director General Maksim Shkadov, who is also the president of the International Diamond Manufacturers Association (IDMA), talked to Rapaport Magazine about the challenges the industry is facing.

Rapaport Magazine: The situation in the market is rather tense. What is your forecast for the upcoming months?
Maksim Shkadov: Polished diamonds increasingly find themselves between a rock and a hard place because there are more polished diamonds than the jewelry industry consumes and there’s still price pressure from the rough market. At the moment, on the one hand, supply and demand of polished has reached a certain equilibrium; on the other, speculation with rough, which was characteristic of the market in 2012, has ceased. Rough prices have plateaued at a more or less stable level. It’s difficult to talk about any long-term forecast because what is going on in the world has a strong impact on the industry.
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RM: Many are concerned that the industry may start experiencing a shortage of financing and that the overdependence of companies on borrowed funds could have a negative effect on the market.
MS: This is a really serious problem, about which IDMA has frequently expressed its concern. However, we haven’t gotten much acknowledgment from the rest of the industry that it really is a problem, especially from Indian companies. When people are working using predominantly their own money, they perceive the risks better than when they are using mostly borrowed funds because that transfers most of the risks to banks. The banks in turn are often less aware and concerned about the risks involved.
   The system of financing the industry sometimes looks to me more like a game between rough producers and financiers. Financing should serve as a dependable, life-supporting circulatory system for the industry, and not just support speculation. Quite often, loans are given out without sufficient security or a firm economic basis, and the money is used just to cover up cash shortages or gaps and not for real production. Companies borrow money, start buying rough, then resell it or use it as collateral for other borrowing, while using the loan proceeds to invest in other businesses.
   Everyone is calling on financiers to take a closer look at the state of the business and what they are investing in. When people invest their own money, they are cautious with business risks, but when it comes to borrowed money, people just default on the loans. And this affects everybody. That’s what happened in 2008, and when the financial crisis washed out the money from the industry, many companies collapsed. At the moment, there has been no collapse, but we should understand that the problem exists and it should be taken seriously.
   In 2012, the situation in the market was lopsided. Rough was more expensive than polished and jewelry makers were pressuring to lower the prices of polished. There’s no point in manufacturing diamonds in a situation like that. Every segment along the diamond pipeline should have added value, or there is no reasonable basis for developing the business.
   After 2012’s turbulence, the situation has stabilized. There is now a certain logic and balance in the prices for rough and polished.

RM: You recently signed a new long-term contract with ALROSA. Are you satisfied with the conditions of the deal?
MS: ALROSA is establishing new guidelines for dealing with clients, in which the company is targeting only the leaders of the international markets. We regard it as a positive development and our new agreement serves as a good basis for work in the next two years.

RM: What stones are the most profitable for you to manufacture?
MS: We are trying to work in the niche of expensive items, using medium- and large-sized rough stones. We work with clear white stones of a regular shape, out of which a large variety of fancy-shaped stones can be produced. We feel most comfortable working with this range of gems. The company is focusing on the efficiency of its production and increasing the quality of our products.
   In the overall market, demand is high for small stones of .30 carats and less. The growth of this segment is due to jewelers switching to designs that use smaller stones in response to decreased market demand for jewelry. The fashion now is to create an illusion of a 1-carat stone using several small ones. Such items look spectacular, but they cost less. They also use more diamonds, thereby creating the demand and reducing the supply of such stones. Diamonds of .10 carats to .30 carats make up 20 percent of our production, up to 1 carat make up 40 percent to 50 percent, and diamonds of 1 carat and bigger make up 30 percent.

RM: What share do fancy shapes have in your production?
MS: Shapes other than round make up around 30 percent to 35 percent of our products. Princesses are in big demand now, as well as pears and emeralds and other fancy shapes. We make various fancy shapes on demand. With fancy cuts, there is more possibility for maneuvering because we can manufacture any imaginable shape, not only princesses and pears. Our technology allows us to switch quickly to manufacturing the shapes that are most in demand. If the market wants more fancy shapes, we start making more fancy shapes; if round shapes are selling the best, we do those.
   The demand is created by both rough supply and fashion trends. However, fashion has more influence. Shortages occur if stones of a certain size and shape are not delivered to the market for around two years. Demand is especially strong right now for fancy colors, but it is always good because such stones are rare. There are large debates at the moment on how to grade fancy colors and their shades.

RM: What is the Russian cut?
MS: Kristall is indeed closely associated with the Russian cut because we supply the largest share of polished diamonds from Russia. Over the past two years, we’ve been investing a lot of money and effort to get the bulk of our diamonds graded triple excellent. We are revamping our marketing program now to show the world the advantages of buying stones in Smolensk.

RM: Do you foresee the arrival of new technologies that will replace people currently employed in manufacturing diamonds?
MS: The absence of new technologies in the industry is a problem. Of course, new equipment appears but we can’t say that diamond manufacturing is a high-tech business. This business is not very profitable and there are few resources to invest in the development of new equipment. On the other hand, the most essential parts of the diamond manufacturing process are done by hand.

RM: There has been much talk about generic marketing for diamonds. What is being done in this respect?
MS: Generic marketing is an urgent problem to be solved. Diamond bourses have launched the World Diamond Mark, but, in fact, until rough-producing companies reach an agreement among themselves on generic marketing, nothing significant will occur. Jewelry companies are not interested in promoting a diamond as a gem. They are interesting in marketing themselves and their brands and they do it successfully. For them, a diamond is not the only component in a jewelry item. De Beers has launched Forevermark, following its decades-long “diamonds are forever” campaign, but its new program is associated only with De Beers and not the whole industry.
   There is an urgent need to increase the value of diamonds in the luxury market. We need to make diamonds fashionable and a trend — and invest in their marketing. The demand for handbags and other accessories for ladies is growing faster than the demand for diamonds because there’s no fashion emphasis on wearing diamonds. Fashion trends are created by advertising but you need a whole industry-wide advertising campaign.
   I think the industry’s marketing of diamonds should be financed by rough producers because they have the biggest added value. If they came to an agreement, a marketing program would be created. But at the moment, it’s just talking the talk, not walking the walk. My suggestion would be for rough companies to create a fund, which would be financed by their charging their clients a certain percentage of their turnover. The money in the fund would be used to create a joint marketing campaign that could be tailored for every regional market.

RM: The global economic crisis made diamonds more interesting as an investment. How good of an investment is a diamond?
MS: Making money from investing in diamonds is very difficult. You are somewhat limited because you must choose your investments from among the stones that are presently in circulation at the market. Rapaport can show where the prices are going and a financial mechanism can be created that would work as a stock exchange index. This is all more in the realm of financiers than diamond manufacturers.
   If individual buyers want to invest, then a lot depends on the country they live in. In Russia, diamonds can be an attractive investment for storing your money, but buying and selling them is not easy under the law. Diamonds are a good investment long term, and that’s why they became popular during the economic crisis when people stopped trusting money and wanted to move into something else. If one has extra money, why not make diamonds part of your financial portfolio? If we look at historical data, diamonds grew in value in the long run, especially diamonds of 3 carats and more. 

Article from the Rapaport Magazine - July 2013. To subscribe click here.

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