Interview on HKJM website
DESPITE the barely satisfactory 2017 with revenue declined by 14 percent, the year of 2018 shows some encouraging signs for Alrosa, the world’s leading diamond mining company accounting for over 29 percent of global diamond production in volume.
At this year’s International Diamond Week in Israel, Alrosa’s international auction for special size rough diamonds (over 10.8 carats) ended on a high note with the overall revenue amounted to US$13.7 million. A total of 105 diamonds weighing 1,665 carats were sold to bidders from 39 companies. In February, the company’s sales soared 35 percent to US$541.9 million including the sale of roughs which jumped 37 percent year-on-year to US$532.8 million.
More recently, during the March Hong Kong International Diamond, Gem & Pearl Show, Alrosa’s two auctions of rough and polished diamonds closed with good results. The rough auction sold 112 special size diamonds with the total weight of 1,787carats, securing a total of US$13.5 million, and the other auction sold 67 polished stones totalled US$2.8 million.
On the half way of 2018, Hong Kong Jewellery talks to Evgeniy Agureev, Alrosa’s sales director over the most concerned issues of the diamond producer. From plans of production and sales to marketing and promotion, all you aspire to know is here.
How do you foresee Alrosa’s production and sales in 2018 with such a good start?
In 2017, we saw a growth of global rough diamond production. Alrosa also performed well and demonstrated the peak production – 39.6 million carats, the record for the post-Soviet period. According to some figures, rough diamond output in 2017 has likely reached its peak level of about 146 million carats. In the future, if nothing changes, diamond mining will gradually decline due to the depletion of existing fields and the difficulty of finding new kimberlite pipes.
This year, we expect our production of about 36.6 million carats, which will increase to 38 million carats in 2019 thanks to project ramping up. Despite the upcoming decrease in output, we have rather optimistic and ambitious sales plans for 2018 – to manage the inventories more effectively and provide the market with required volume of rough diamonds of about 40 million carats.
We see a positive trend in diamond and diamond jewellery demand. Diamond jewellery becomes more desirable, which has a favourable impact on the market in general. According to experts’ estimations, the global demand for diamond jewellery will grow by one to four percent per year roughly. In spite of the strong demand for rough diamonds in early 2018, we do not expect this performance of the first quarter to last throughout the year. We foresee it will be a stable year with some seasonal fluctuations, which is normal.
How would Alrosa stimulate sales in 2018?
Russian laws stipulate that large rough diamonds at over 10.8 carats can only be sold at auctions. Therefore, every year we hold auctions for large rough diamonds. The demand of this category is always strong. In 2018, we plan to hold 30 international auctions for large stones including the just-finished one in Hong Kong where we will plan two more this year. We also sell smaller sizes on tenders through our United Selling Organization and representative offices in the world’s major diamond trading centres. This year in Hong Kong, we will hold four tenders, together with another seven tenders and auctions held in Vladivostok.
Besides the above, since 2009, our sales policy has been based on long-term contracts with major market participants. We sell about 70 percent of diamonds under such contracts. This January, we formed a list of clients for the new contract period 2018-2022, comprising 55 companies for the sale of gem-quality rough diamonds. Among them, 48 are from foreign countries of which 22 from Belgium, 14 from India, six from China including Chow Tai Fook, five from Israel and one from the UK.
Since last year, we have been actively working to make our sales more transparent and efficient. We introduced an electronic rating system which monitors the activity of customers, purchase volumes and prices, and the efficiency of work in different product segments. This system is very helpful in forming a sales plan for the next contract period and guarantees the transparency of our sales distribution.
How would Alrosa build and maintain more solid partnerships with clients from China through the new long-term diamond supply agreements signed in January?
Our first long-term agreement with a Chinese company was signed in 2010, and the number of Chinese clients began to rise only in the end of 2012. Due to this late start, the amount of trade with China is not very large now. In the last three years, the trade amount with Chinese companies under long-term contracts increased by 18 percent. China is the fastest growing market for jewellery consumption. This year, we have some candidates from China for inclusion in the list of long-term contracts, and we seek to create trusted relationships with representatives from this market.
Last year, companies from mainland China and Hong Kong bought our diamonds worth about US$180 million, and we hope this volume will gradually increase. We are also interested in selling polished diamonds to Chinese companies, as today Alrosa is the only diamond miner with its own polishing branch – Diamonds Alrosa. We see it as our competitive advantage, because we can provide origin guarantee, skills, centuries’ traditions of Russian diamond cutting techniques, and stories behind every stone we mine.
Marketing is one of Alrosa’s focuses nowadays. What is the direction of Alrosa’s marketing initiatives?
Our marketing initiatives are implemented in two directions. First is generic marketing. Alrosa co-established the Diamond Producers Association (DPA) in 2015 with another six diamond producers, under the purpose of strengthening consumer demand for diamonds, shedding the market’s old stereotypes, and recalling that the diamond is an expression of emotions, at any time, for any situation. I think the market will soon see positive results of our work.
Another direction is the marketing of Alrosa itself. Previously, we acted only as a mining company, but today we understand that we need to be more active, because consumers aspire for stories behind diamonds, the origin of diamonds for the reason of social responsibility. In view of this, we are working on several marketing initiatives, which can be implemented both independently and in cooperation with retailers. We will propose some initiatives to Chinese retailers in future.
What are the development plans for Alrosa in the short-term future?
Alrosa’s business model is aimed at strengthening the leading position in the diamond market, ensuring a stable long-term production and revenues, and increasing shareholder value. The mining industry is facing a problem of reserve depletion. Most of the current diamond deposits have been opened long ago and gradually exhaust their resources. It is becoming harder and harder to find new mines, and the economic effectiveness is moving to the foreground. Therefore, the industry seeks for new technologies to reduce and optimise the costs.
Alrosa is now the world leader not only in mining but also in the mineral resource base. To date, we have more than one billion carats of resources in the subsoil, which means even if we do not look for anything else and continue to produce the same volume as now, we will have enough resources for another 25-30 years ahead. But of course, we are constantly conducting geological exploration, mainly in Russia, spending over US$100 million per year on it.
Our long-term contracts will also remain our principle and basis for future work. This form of cooperation is convenient, as it provides our clients with stable supply of rough diamonds, and protects them against the volatility in diamond price.
Moreover, as an advocator of enterprise social responsibility, we spend three percent of our revenue annually on social programmes. In 2016, the amount was about US$180 million. We will maintain a high level of business development in accordance with the principles of sustainable development and social responsibility.