RAPAPORT... In an interview with Rapaport Diamond Report, Maxim Shkadov, vice president of the International Diamond Manufacturers Association (IDMA) and general director of Kristall Smolensk, sums up the diamond industry in 2007 and analyzes the prospects for 2008.
Rapaport Diamond Report: How do you evaluate the world diamond market in 2007?
Maxim Shkadov: Compared to 2006, 2007 was much better, although it is obvious that the polished diamond market is facing, if not a crisis, then at least a tense situation. Of course, everything depends on the American market. In the American market, diamond orders by retailers didn’t go down by 20 percent in 2007, as was expected, which means that the retail chains are stuffed with goods. Even if U.S. sales volume doesn’t fall, retailers are going to sell the old stuff first, so we can’t expect normal goods movement in the pipeline, especially considering the current state of the U.S. economy, until that inventory is gone.
RDR: What influences movement in the diamond market?
MS: What has been happening in the market was caused to a certain extent by the aggressive policies of Indians, who heated up the prices in the rough market and caused a wave of speculation so that the price of rough lost any connection with the price of polished. We can say that in 2007 we saw stratification of the market and we saw the prices of rough live their own life. If, in previous years, we could calculate prices at various stages of the diamond pipeline, today it is difficult to foretell anything, because the market of polished is stuffed by what are called “Indian diamonds” or “commercial diamonds.” In the high-end segment we specialize in, we feel the pressure of the market, but in terms of sales, I look ahead with optimism. The high-end segment has stable sales and loyal customers. But the relationship between the prices of rough and polished creates a liquidity problem. Labor and raw market resources are relocated to India and China from traditional cutting centers. This gives us an impetus or even confidence because our competitors are moving away from the high-end niche as it is not profitable for them to work there.
There also is a certain amount of optimism for us because we are developing the new markets. The Russian market is growing. The South East, China and the Middle East have very high potential for us.
RDR: What can 2008 bring?
MS: The new year is not expected to be easy due to lower sales expectations in the United States, which will affect negatively the supplies in the first quarter of 2008. The market’s survival will depend on the extent of this negative effect.
It is unclear how long the Indian government will support its manufacturers. The first wave of money infusion from the government ended in a crisis when rough prices went sharply up in the middle of 2006. There was a second wave of money infusion in the middle of 2007. We don’t know if there will be a third and a fourth one, but these government infusions of capital are very dangerous for the industry.
The rough diamonds still need to be turned into polished and find their customers. The whole pipeline needs to work properly and the suppliers of rough are interested in this, first and foremost. When prices increase due to speculation, it benefits suppliers to a certain point, but then speculation ends and prices drop in a big fall.
RDR: Have there been any changes in the assortment of rough diamonds in recent years?
MS: There is a shortage of high-quality raw in the market that is connected to the changes in the assortment of rough and to the depletion of deposits. Of course, the main supplier of diamonds is ALROSA and Yakutia, and whatever happens there is reflected in the market. ALROSA’s Mir deposit hasn’t functioned to full capacity for more than five years and that area is moving now to underground excavation. The situation will change when that happens. The current deposits do not yield diamonds of such good quality — it is all connected with the depletion of the tube. When they move to underground exploration, production will smooth out but the process will take at least three years.
RDR: How will Russia’s entrance into the World Trade Organization (WTO) affect Russian cutters if it happens this year?
MS: Joining the WTO doesn’t involve immediate changes in the law or cancellation of import duties that exist to protect domestic producers. Of course, if we talk about rough diamond export duties, they are designed to protect domestic producers and canceling them makes no sense. The U.S., for instance, introduced import duty on jewelry and that was okay.
WTO suggests normal internationally accepted rules of trade, and if our legislation changes in a way that it will protect local producers and give them an opportunity to compete in other markets, we will welcome it. We are ready for WTO. We have been in the international market for more than 15 years and we have worked in accordance with international rules. WTO is not about the duties; it is about principles of international trade. This will involve lots of changes in Russia’s legislation, its tax code, etc. It is a huge job and impossible to accomplish in one year. First, we need to change laws, then open our borders. Our current legislation creates many obstacles for the cutters. First of all, we talk about free trade relations, but our trade relations are not that free. We lose to the world centers like Hong Kong, Israel, New York because of the time it takes us to process all the customs documents.
There are many customs limitations. We can’t freely import and export raw; it’s difficult for us to get diamonds into the country. For us, customs procedures can take a month, while goods can be processed in Antwerp in one day. The rough producers have more opportunities for free trade, but the manufacturers are still limited.
Article from the Rapaport Magazine - February 2008. To subscribe click here.