ALROSA considers country risks reduction in case of EU sanctions (Interfax)

ALROSA, whose sales system is based on long-term contracts, is getting ready for a new contract period 2015-2017. In September the company will start selecting long-term clients, who in addition to rough diamond purchases will qualify to use the ALROSA Alliance trademark. Vladlen Nogovitsyn, Head of Client relations and marketing department, told Interfax about the company’s approach to the selection process, the benefits of ALROSA Alliance and the situation on the world diamond market.

ALROSA has been building the long-term contracts system since 2009, but it has announced the creation of ALROSA Alliance only recently. What did necessitate this trademark registration? Will ALROSA Alliance Members be privileged in any way as compared to other long-term clients?

Our clients’ requests were among the main reasons to register the trademark. Their official status of ALROSA’s clients is a definite advantage helping them to sell their products. The guarantee of a conflict-free origin of the rough diamonds used for the manufacture of polished diamonds and availability of all the Kimberley Process certificates is of great market value for consumers.

A few years ago we faced a situation when one of our clients was opening a store in China and mentioned in his advertising campaign that he was purchasing rough diamonds from ALROSA. As a reaction the companies that were not our clients deemed it a strong competitive advantage and appealed to a local equivalent of the Antimonopoly Service to prevent the distribution of this information. At that moment ALROSA Alliance did not exist, and we were not able to help our client.

Today our long-term clients are granted the right to use the ALROSA Alliance trademark for the positioning on the market. First, as I have already mentioned, it proves that the client buys conflict-free diamonds. Second, all ALROSA’s long-term clients go through quite a rigorous qualification based on a number of criteria, including financial solvency and responsible business practices. Therefore, by using the ALROSA Alliance mark our client demonstrates to the market his reliability and trustworthiness as a partner. It is sort of a quality mark.

– What are the criteria ALROSA uses to determine the range of long-term clients? Will any new selection procedures be introduced for the new contract period?

The basic set of criteria was stated in the Regulations on the Procedure and Terms of Sales of Natural Rough Diamonds that ALROSA developed together with the Federal Antimonopoly Service of Russia in 2012. The Regulations ensure equal conditions of access to rough diamonds for all the clients and application of uniform criteria–they are officially published and available for everyone. First of all these criteria include the requirements to have all the permits and certificates to trade in rough diamonds, there must be no criminal prosecution for bankruptcy fraud or criminal proceedings on the grounds of crimes stipulated by the Criminal Code. Companies should also prove a sufficient sales volume of rough or polished diamonds, not less than USD 50 million per year, and a positive liquidity.

However, these criteria evaluate customers’ activities only from the legal and financial point of view. Therefore, in the summer 2014, we have approved the ALROSA Alliance Guidelines on Responsible Business Practices to be accepted by our long-term clients. In our vision participants of the diamond market need to understand their common responsibility for its reputation and conduct business in full compliance with the best industry practices. These Guidelines state that all ALROSA Alliance Members share the objectives and principles of the Kimberley Process, operate in accordance with the principles of lawful and fair competition, anti-corruption and anti-money laundering, financial transparency and information disclosure, observe human and labor rights and avoid discrimination. No doubt it is more laborious to monitor business practices than to read financial documents provided by companies. Nevertheless, a failure to meet any of these requirements can be regarded as a basis for terminating a long-term contract.

– The adherence to the principles of the Kimberley Process and human rights is perfectly clear. But, for instance, the document states that a client should “adhere to responsible trading practices on the diamond market.” What do you mean by responsible practices and how will you monitor this indicator? It seems rather abstract.

We want our customers to understand the common responsibility of the market participants for its reputation and integrity. Accordingly, we are opposed to the fact that individual market participants destabilize the diamond market to serve their immediate interests. For example, dumping a single range of diamonds during a period of weak market activity. In fact, such actions are detrimental not only to diamond market participants, but to diamond manufacturers as well, their products also fall in price. Some of our clients are able to influence the market conditions, as they buy large volumes of diamonds of certain assortment groups. And these are not just theoretical considerations. We witnessed such acts and had to react, we had to endeavor to stabilize the market by taking up additional costs.

– Probably responsible trading practices also imply the prevention of a situation when your partners abuse the resale of rough diamonds to the detriment of the cutting and polishing...

Exactly–in the cases when it destabilizes the market. But we should understand that nowadays there are fewer of the so-called net dealers and the so-called net manufacturers on the market. In any case polishers do not treat the whole spectrum as they are specialized in a particular segment where they have the maximum efficiency. They sell the remaining part of rough diamonds to other specialized companies.

In an attempt to regulate this flow, De Beers launched the Supplier of Choice program, which declared the supply of a certain assortment directly to specialized companies. However, this attempt failed. De Beers did not take into account, first, the role of dealers in terms of bringing in additional funds to the diamond market, and second, the market volatility. The fact is that one and the same company can get the maximum efficiency in different assortments in different periods of time. Such client is drifting from one segment to another during one contract period. Rigid fixity, which De Beers tried to introduce in the Supplier of Choice, reflected some ideal scheme that could not be implemented in practice. Therefore, De Beers was forced to move to a more flexible system.

From the very beginning ALROSA has been working in such conditions, selling rough diamonds to both diamond manufacturers and dealers. Our goal is a balanced client portfolio and stable sales that create a potential for the diamond market development.

– Talking about De Beers. De Beers is introducing a category of the so-called accredited buyers–buyers whose activity in spot purchases throughout the year will be a key to qualify as Sightholders in future. Does it have anything in common with ALROSA’s practices?

When I was reading the De Beers documents–they are quite free to circulate on the market–I had a feeling that they are our Regulations on the Procedure and Terms of Sales translated into English. In fact, the ideas of strengthening the spot component and creating a layer of pre-contract clients that would have an opportunity to come out as reliable buyers lie at the heart thereof.

Indeed, such borrowing is quite natural, we also studied and generalized the experience of other companies at developing the ALROSA’s trading policy. There are a limited number of diamond market participants, and they all are in search of tools to increase our product value and maintain market stability. The most successful practices are gradually spreading to the entire market.

For example, we find some elements of the BHP Billiton auction system very interesting. Right now we are not practicing electronic trading, as in our reality it is not very convenient, but it does not mean that we have completely abandoned it given that our goal is to improve the sale process.

– Despite the fact that there are interesting features in the BHP Billiton system, as you have mentioned, the new owner of BHP diamonds moves to work under long-term contracts, by analogy with ALROSA and De Beers...

 Yes. It is because they used to hold auctions only. The system where the price was set only at the auctions did not produce the effect that could be obtained by combining various sales procedures. Moreover, this system gave rise to complaints from all market participants, since the information published about the auction influenced the market conditions. Diamonds are not an exchange commodity and have no uniform price index. Therefore, any information about the results of an auction held by any manufacturer has a profound emotional impact on the customer behavior, and sometimes it has a negative impact on the market. This was the case in 2008 and in 2011. When the market is high, auctions are successful and provide additional ‘fuel’. But when the price drops, the results of failed auctions pour down on the shocked market like a bucket of cold water.

– What information do you want to derive from this system?

They used an interesting formula to calculate the price. Goods were sold not at the highest tendered price, but at the second or third offer. It means that the system allowed cutting off artificially ‘marked up’ offers. Our task is to minimize the peak dumping of rough diamonds motivated by a variety of situations, including the desire to declare oneself or influence the market conditions. In order to minimize the peak dumping and determine the fair market value of goods, such a scheme is perfect, but of course needs to be improved.

– Does it evidence that ALROSA wants to increase the share of rough diamonds sold at auctions and through spot sales?

We are trying to maintain the model where about 70% of rough diamonds are sold under long-term contracts, 10-15%–at auctions, and another 10-15% on spot. I think the volume we sell at auctions and on spot today is comfortable enough for the company. It allows us to determine the market price, and gives us practical tools to support the market. If you sell all rough diamonds at the auction, you can get the most value for money in a good market, but when the price drops we will have no sales. Therefore, we must be very balanced towards all the changes.

– At the same time, the company’s clients say that in the recent months the supply of ALROSA’s diamonds to the spot market has shrunk...

It is caused by the production processes that are underway in the company–the transition to underground mining and the shutdown of the processing plants at Udachny and Aikhal Mining and Processing Divisions. We were forced to cut down the supply to the spot market, which, of course, affected the overall situation on the market.

– An effect in the form of uplift in prices?

It surely has some effect on the price increase and underpinning the market. But if we talk about the market in a whole, the situation in 2014 is more positive compared with the previous years. In fact, there has been a change in trend. Three years in a row there was a uniform pattern–the market prices whirled upward in March and April, a stagnation followed, and then there was a drop in the market until autumn, in autumn the market revived, and thereafter the cycle repeated. The situation has changed this year in response to several underlying factors. We forecasted a price increase of about 5% during the year, and, it has been already exceeded following the results of the first six months. In general, we observe a stable enough demand for all categories of rough diamonds, especially those used to manufacture polished diamonds for the American market. The second intensively growing market is India. China has somewhat slowed down, though it was expected. Consumption in China is still sizeable. The European market is not very active.

What are the key factors distinguishing the diamond market in 2014 from the previous year?

First is the increased load on the certification system, in particular the GIA. Following a barrage of reports about synthetic diamonds, people have become concerned with certification and authentication of precious stones. The GIA, for its part, has been trying to reduce the volume subject to certification, but the certification period still takes 3-4 months. At the same time, the GIA is deliberately extending the certification procedure for a certain group of goods, especially for smaller categories of diamonds–0.2 and 0.3, and is trying to encourage customers not to pass these diamonds for certification.

The second factor is financial. The situation has improved for clients, banks have become more willing to grant loans. Banks see that the market is profitable and its activity has increased, loans are being repaid. Banks have eased their pressure on the market and begun targeting large amounts of liquidity for crediting of the customers from the diamond industry. Although there used to be serious restrictions on loans and clients were obliged to finance a part of diamond purchases by attracting their own equity capital.

– Talking about synthetic diamonds. Judging from the materials posted on the Ministry of Finance website, ALROSA has initiated some amendments to the legislation related to synthetic diamonds. What amendments exactly are in question and what stage is the discussion at?

Last year ALROSA initiated interaction with the global industry organizations on the major issues of the diamond market, including the problem of circulation of synthetic diamonds, which many experts believe is very important. Examining the existing experience, we have found that today there is no concept of synthetic rough or polished diamonds in the Russian legislation. Accordingly, vendors can theoretically sell anything and call it a diamond, while buyers will not be able to prove that they were misled. This situation, on the one hand, is not directly related to the company, but on the other hand, it is detrimental to the reputation of the industry. It is no secret that people fear buying defective goods on the Russian market and prefer buying jewelry abroad, thus making a great contribution to the purchase of jewelry in Europe, China, etc.

ALROSA initiated a working group to study the issue. We stand for the definition of a concept of synthetic diamonds and for the mandatory informing of consumers about a synthetic stone in a jewelry item. We have nothing against the fact that natural and synthetic polished diamonds would be placed together in a showcase, but it is necessary to specify that particular goods are synthetic. There is a discussion about the term to refer to this product. There is even a radical opinion that the word ‘diamond’ should not even appear. For example, it will be called ‘a synthetic crystal’ or something else. Together with the Ministry of Finance and the Assay Chamber we are discussing these issues, and I hope that the law will be accordingly amended soon.

– And what stage will include control?

The export-import stage, the certification stage, or the sales stage. It is a complex work, which will require amending not only the law on precious metals, but the consumer protection and other laws as well.

– Is the segment of synthetic diamonds large in Russia?

 It is difficult to estimate, as no such information is available. People engaged in it understand that it is not ethical to pass off one product as another and ask the same price for it. But the fact that a significant number of companies with a controversial reputation are interested in the Russian domestic market and demand to facilitate the import regime for jewelry and loose diamonds evidences that this big segment is large.

– It is for the collaboration on the issue of ‘synthetic diamonds’ that these memoranda of cooperation were signed with AWDC, GJEPC, DDC and other industry organizations?

It is a matter of multilevel cooperation. We want to be represented in all diamond centers, develop this partnership, deeper understand the processes that take place there. Such agreements provide some basis for building relationship with the diamond sectors in these countries, they also allow indirect effect on certain processes that are underway in these countries. If we talk about synthetics, we see great interest of Indian diamantaires to deal with this problem. India manufactures about 90% of polished diamonds in the world. There are entire regions whose budget is directly dependent on polished diamond sales. They will be the first to fight with synthetics, provide the information that no one could find for us, and suggest the solutions that nobody could suggest, neither lawyers nor diplomats or politicians.

But our cooperation is not limited to it. We are generally advocating a broader exchange of information among the industry participants at various stages of the diamond pipeline. The diamond market has a very wide geographic spread: the bulk of rough diamonds is produced in Russia and Africa, diamonds are sold in Antwerp, Israel and Dubai, cut and polished in India, and the main markets are the United States and Europe. Without interaction it is difficult for the market participants to understand the situation in each segment, how things are with the supply and demand, how prices are formed.

– Can this partnership help ALROSA in the light of possible sanctions from the EU or the United States?

Any talk about sanctions is purely speculative now, although there has been a great deal of such talk. If we talk about sanctions, of course, a memorandum of cooperation between ALROSA and the Antwerp World Diamond Centre (AWDC) does not imply such obligations, the more so because it was concluded last year. But any possible consequences of sanctions, and, accordingly, the attitude of the market participants to sanctions, lie in the picture of the today’s world diamond market. ALROSA today holds more than 25% of the world diamond market, and about half of its rough diamonds are supplied to Antwerp. The history of Antwerp as the world center of diamond trade dates back to several hundred years, and ALROSA is one of the main trading partners for Antwerp today. Of course, Belgian diamantaires openly opposed and are opposing any sanctions on the import of Russian rough diamonds to the EU because they protect their established business. There are other diamond centers in the world through which Russian rough diamonds can be sold, but the turnover of Antwerp will slump in this case. Belgian diamantaires defend their interests, and their opinion affects the situation much more than we could influence it ourselves.

– Nevertheless you said that clients from Antwerp account for about half of ALROSA’s sales. And should any sanctions be imposed, the company will somehow face difficulties in the performance of the existing contracts for the supply of rough diamonds. Are you going to take it into account in the new contract period?

 As a public company, we must take into account all the risks in our work, including the country risks. Possible sanctions are the risk not only for the company but for buyers who can be left without rough diamonds. In preparing for the new contract period, we are working out some options to reduce this risk. For example, we will give priority to the clients whose structures include subdivisions registered in other jurisdictions–Israel, Dubai, etc., so that in the event of possible difficulties these customers could keep purchasing. Today it is a standard trading practice for the majority of our clients who have offices worldwide to ensure that they have sufficient volumes of rough diamonds. So I do not think it would be a problem.

– At concluding long-term agreements in the new contract period, ALROSA is planning to focus on large cutting and polishing businesses and jewelry retailers as the most stable and predictable clients. What steps have already been taken? Are there enough of these new ‘major cutting and polishing businesses and jewelry retailers’, as many of them have already become ALROSA’s clients?

It is still incorrect to say we are focused on large retailers, we are focused on the creation of a balanced client base represented by all market participants. It is impossible for us to create a retailers’ client base only: there are not so many jewelry companies in the world capable of cutting and polishing and using the whole assortment presented in a box.

But, of course, we will also take into account the projects we have already launched with our clients who have retail chains–Tiffany, Chow Tai Fook. We are actively cooperating with a number of other major network companies. I think we will reach a new level of relationship with these clients in the near future. Cooperation with major jewelry companies is possible not only in the sphere of rough diamonds, but in the sale of polished diamonds or the creation of any joint projects as well.

– The company has announced that the number of ALROSA’s long-term clients is to increase in the new contract period. Apparently, it will happen mainly due to foreign companies, because the share of ALROSA’s sales to the domestic market has been notably reduced.

In 2012-2013 the segment of the domestic market of the Russian Federation has shrunk. There are a lot of reasons thereof, including the taxation factor. First of all, it is a matter of charging the VAT that is a great burden on the purchasing power of our Russian clients. They are in a less advantageous position compared with our overseas clients who have no need to pay the VAT. At the same time, there has been quite a major change in the specifics of the diamond manufacturers’ work. Domestic companies are shifting towards the processing of large goods, as it was in Belgium, Israel and other countries when the production costs grew. That is, we follow almost the same track–when the total cost of manufacture of polished diamonds in the country increases and the average wage grows, the clients are forced to manufacture more expensive goods.

At the same time, since the beginning of the year the consumption of the domestic market has grown 10-15% compared to the last year against the background of the positive market conditions. Nowadays Russian companies buy much more than they used to, especially in comparison with 2012.

– How will ALROSA ensure stock for an increasing number of clients? First of all, what role will the planned reduction of stock, which the company has repeatedly mentioned, play? According to the estimates, ALROSA’ stock accounted for 18 million carats at the beginning of the year.

First of all, the company’s strategy provides for a stage-by-stage increase in diamond production up to over 41 million carats. Due to the launch of the second stage of Severalmaz and underground mines in Yakutia, we are gradually coming to it. Of course, when we discuss and conclude contracts we proceed from the planned production volumes.

As to the stock, here we have mixed concepts. The company has two types of stock. We have a stock ready for sale, assessed, sorted, packed in boxes, stored at a warehouse and ready to be offered for a client. There are no goods ready for sale right now. The goods were sold to clients during the first half of the year due to high demand.

There is also a technological stock, i.e. rough diamonds moving along the process chain from the production to sales. The whole process takes several months, from mining to sorting and the stage when diamonds are ready for sale rough diamonds go through processing, cleaning, washing, shipment and preliminary assessment. We want to cut down this technological period. In fact we want to speed up the passage of rough diamonds from their processing to sorting in the United Selling Organization. It is a standard improvement of a technological process that will allow the company to enhance its efficiency. This year, we need to reduce the stock, with certain reservations, by 2 million carats.

There is not only the technology that complicates the process, but also the fact that we still divide rough diamonds by different owners: there is a parent company, and there are subsidiaries–separate legal entities. And up to a certain point we cannot mix rough diamonds produced by these companies.

– As far as I know, the company has also discussed with the Finance Ministry the ability to simplify the work with subsidiaries...

Not only with the Ministry of Finance, but with the tax and customs authorities as well. It is a complex work. And it yields: ALROSA has been recently permitted to obtain a ‘general’ license for the export of rough diamonds for the whole group, whereas previously each company from the group had to obtain such licenses separately. In addition, ALROSA has been granted a permission to sort rough diamonds from the subsidiaries at our facilities, formerly, according to the law, the companies that did not have their own sorting facilities had to do it in Gokhran by default.

– So now ALROSA can mix rough diamonds of the parent company and its subsidiaries in one box?

Yes, in theory, but not in practice. A general export license gives us such a right, but some difficulties arise at the sales stage. First of all, there is an issue of determining a taxable base for subsidiaries, how to calculate their shares, for example, the share of Almazy Anabara or ALROSA-Nyurba in each sold box. Each box has only a fixed total cost, but a set of diamonds therein varies, even within the same assortment group. We have not found such a formula yet, but we continue the discussion with the relevant agencies.

This page was last updated on 22 August 2014 at 11.49