Rapaport Magazine


By Anastasia Serdyukova
Changes for ALROSA

Russia’s largest diamond miner ALROSA is formulating short- and long-term plans that include an increase in its sightholder list, an expansion of its polished sales channels and a reorganization of its manufacturing.

   ALROSA is scheduled to sign contracts with its clients in November for the distribution period of 2015 to 2017. At the moment, the company has agreements with 45 clients who buy jewelry-quality rough, but that number may increase with the new contract period.
   “Some of those clients who showed stable purchases at the spot market are expected to get on the list of long-term partners,” said Andrey Polyakov, ALROSA’s vice president. “The clients who cut down the volume of purchases from the ones initially stated will receive volumes based on their actual consumption over past years,” Polyakov said. He added that the distribution will not change. Around 70 percent of rough will go through long-term contracts, while approximately 10 percent to 15 percent would be sold at spot markets and through tenders.
   Polyakov said that the company would pay much attention to responsible business practices of its clients. The miner established ALROSA Alliance Guidelines this summer, which cover best practices requirements for long-term clients.

Rearranging Manufacturing
   ALROSA is planning to rearrange its manufacturing operations to make them more cost effective. The company currently has polishing facilities in Moscow, in Orel, a town approximately 190 miles from the capital and in Barnaul in West Siberia, which has been part of the company’s manufacturing network since Soviet times. The miner is planning to concentrate its manufacturing in Barnaul, where it is more cost effective due to lower salaries and other expenses. Moscow facilities will focus on the biggest and highest-quality stones.
   “ALROSA’s manufacturing division initially was used to monitor the situation at the market. The plants received the same boxes as other clients, polished the stones and sold them on the open market, which provided them with objective information on market prices,” said Polyakov, noting that the manufacturing division “has never been competitive in market terms.”
   The cost of manufacturing in Russia is around $120 a carat, while in India, where the great majority of the world’s diamonds are polished, the cost is around $40 a carat, according to ALROSA’s data. “Only polishing of expensive and quality stones is profitable in Russia,” said Polyakov. He added that the company has been selling big diamonds at Sotheby’s and Christie’s in an effort to establish and promote the brand ALROSA.
   Polyakov said that ALROSA already has Tiffany & Co. and China’s Chow Tai Fook among its clients buying rough. Now the company is negotiating long-term contracts for polished diamonds with other jewelry companies. “Jewelry retailers are also showing interest in this form of cooperation, although it is new for both us and them,” he said. “It is important for jewelry companies to guarantee the natural origin of the stones in their merchandise.”

The Cheaper, the Better
   Buyers are turning away from expensive polished diamonds, said Nikolay Afanasiev, the head of sales at Russia’s largest manufacturer Kristall Smolensk. The most popular characteristics are VS1 to piqué, in the .30-carat range, and also over 1 carat. These categories are in the biggest demand because they are the easiest to sell.
   “The polished market is under big pressure,” Afanasiev said. “Rough prices are under pressure as well, because there is no need for big volume at the moment since the holidays, including Indian Diwali, are past.” Afanasiev said that if there was a slight fall in prices, it was only because companies needed cash flow and were selling off goods. Yet he sees an upward trend ahead. “We have passed or are about to pass the bottom,” he said. Kristall Smolensk is negotiating contracts for larger amounts of polished with both ALROSA and De Beers.

Pressure on Jewelry
   The Russian jewelry market continues to experience pressure from the fall in the ruble and from a general feeling of instability, caused by the economic stagnation, government sanctions and the continuing conflict in Ukraine. “People have less money and their purchasing power has fallen in all segments, from low end to high end,” said Flun Gumerov, director general of Almaz-Holding, one of the country’s largest retailers and jewelry makers. He said that his company is looking for markets outside the country, especially in Southeast Asia.
   Alexander Kurgansky, director of One Karat, which sells certified stones through the internet, said that polished diamonds are retaining their appeal as an investment. He said that stones of .20 carats to .50 carats are in greatest demand.

Article from the Rapaport Magazine - November 2014. To subscribe click here.

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