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Russia's largest diamond supplier: this is only a temporary phenomenon
It is not yet clear whether the trade war between the US and China is coming, but the market has already faced certain problems in the field of import and export trade. The same problems have also affected the market of luxury goods. A correspondent of HK01 arrived in Russia to learn about the process of diamond mining and cutting on the spot, as well as to talk to representatives of Russia's largest diamond producer, ALROSA, which produces 26% of the world's diamonds, about the situation in this business. The company said that despite the negative impact of the trade war between China and America on jewelry buyers' plans and the decline in orders, there had been no major changes in the long term and demand remained stable.
The Russian diamond producer accounts for 95% of domestic production; however, the cost of doing business and labor (per carat of cut diamonds) in Russia is quite high and 2-3 times higher than similar indicators, for example, in India. Therefore, the main activity of the company is the sale of rough diamonds. The company manufactures only large stones for subsequent auction sale. In 2017, for example, a 27.85-carat pink diamond was mined, which turned out to be the largest pink diamond in the history of Russian mining (pink diamonds are the rarest of the colored ones, and they are also sold at auctions for the highest price). ALROSA’s cutting division manufactured a 14.83-carat diamond called Magnificent Pink.
In the first half of this year, ALROSA's total sales (rough and polished diamonds) amounted to $1.8 billion. The share of rough diamond sales amounted to 98.51%. According to Evgeny Agureev, director of sales, ALROSA has signed 3-year long-term agreements with seven companies from Hong Kong and China, including Chow Tai Fook and Chow Sang Sang.
The Chinese market is halfway up the sky
Today, ALROSA’s trade volumes with China stand at approximately 5%. In 2018, the value of rough diamonds sold to China amounted to $180 million. In 2018, the value of rough diamonds sold to china amounted to $180 million. Evgeny Agureev notes that the prospects for growth in the Chinese market are huge: consumers from China buy diamond jewelry in the domestic market or travel abroad, there are many manufacturing bases in China owned by jewelry brands, and ALROSA is currently negotiating with several companies from China and Hong Kong. Agureev is confident that trade with China will continue to grow in the future.
He also added that in order to develop the Chinese market, the company intends to strengthen its advertising presence in China and Hong Kong so that more people can get to know the company's products. In addition to the existing rough diamond sales procedure in China, this year ALROSA planned to hold three large-carat (over 10.8 carats) rough diamond auctions in Hong Kong. Two of these auctions have already been completed, and have brought in $22 million to the company. Hong Kong is an international financial center, where many jewelry brands, including diamond miner ALROSA, have opened a representative office. The company also has an office for auctions in the Far East of Russia (in Vladivostok, which is practically on the border of Russia and China).
The Chinese-American trade war led to a decline in orders
Negative indicators of economic growth around the world, as well as unclear prospects for the Sino-American trade situation make consumers more cautious. Evgeny Agureev believes that the already introduced and potential sanctions within the framework of the Chinese-American trade war have also influenced the purchasing plans of jewelry companies. The volume of orders is decreasing and prices have been lowered to avoid unnecessary stocks. According to Agureev, the company is now working to maintain its rough diamond output at an appropriate level to ensure a balance between supply and demand for polished diamonds.
He added that despite the current lack of agreement between China and the U.S., the company, relying on media reports, sees a positive trend in the withdrawal of these countries from the new sanctions, which will help stabilize the market situation. The current recession at the macroeconomic level is a short-term issue and is not related to global trends. Demand for diamond jewelry has not changed significantly and remains stable.
ALROSA's sales director predicts that over the next 20 years, following the development of science and technology, the cost of artificial diamonds will decrease and the share of sales will increase from less than 1% (current value) to 7%.
Artificial or natural stones?
Artificial diamonds have recently become increasingly popular: compared to natural diamonds, their value is 3-4 times lower, which attracts some consumers. Agureev said the production of synthetic diamonds is about $1.9 billion. According to forecasts, annual growth in this indicator could reach 22% (about $520 million) by 2023. Currently, the share of the market occupied by synthetic diamonds is about 1%, but it is expected that following the development of science and technology, the cost of synthetic diamonds will decline and over the next 20 years, this figure may rise to 7%.
Agureev noted that the company considers natural and artificial diamonds to be different products. Artificial diamonds will never be able to replace natural stones, so ALROSA never intended to enter into operations with artificial rough. In addition, all diamonds, regardless of origin, consist of carbon atoms arranged in a certain way, and it is impossible to distinguish between the two with the naked eye. According to Agureev, currently only 20% of artificial diamonds are sold openly in the market, and many manufacturers and dealers sell them mixed with natural stones. In order to provide customers with an indication of the source and guarantee of authenticity of the stones, ALROSA entered the pilot blockchain project Tracr of De Beers, the largest diamond supplier by value. Blockchain-protected nodes track diamonds from the extraction stage to the finished jewelry for each stone.
Evgeny Agureev mentioned that more and more young consumers are paying attention to the history of their own diamonds and the social responsibility of the companies. For example, they are interested in the place of diamond mining, how the diamond was cut, whether it came from military conflicts, what are the working conditions of miners, whether the development leads to environmental pollution and other issues.
Therefore, the company has also created a platform where the client can specify the diamond number, and view the location of the diamond mining, as well as photographs of the cutting process. In addition, the purchase of diamond jewellery has become common among young people. Agureev believes that people used to buy diamonds only during big life events, and a generation of millennials could buy jewellery to celebrate their own success. He is confident that the younger generation will become a new driver of growth for the diamond market.