RAPAPORT...Russia’s largest manufacturer ALROSA has announced it will be cutting back on supplies to the market by as much as 30 percent in an effort to help stabilize prices. “This is the only possible decision in the current situation,” said a company source. In 2007, ALROSA sold $2.79 billion worth of rough. The company’s sales forecast for 2008 is more than $3 billion, but that could be adjusted by the end of the year since ALROSA announced its expectations as the financial crisis was approaching its peak.
“ALROSA may cut back on some of its noncore activities; however, spending on exploration and development will remain intact,” company sources said. So far in 2008, ALROSA’s net profit is estimated to be around $400 million, 27 percent less than at the comparable point in 2007.
The company’s financial standing took a major hit in October. Standard & Poor’s changed ALROSA’s credit rating to BB — defined as “prone to changes in the economy” — and placed it on CreditWatch status following ALROSA’s investment in Kit Finance, an investment bank that almost went bust in the first weeks of the crisis. ALROSA and Russian Railways had each purchased 45 percent of the bank.
A Standard & Poor’s analyst told Interfax that the CreditWatch placement reflected the credit rating company’s concerns about the potential future exposure for ALROSA in taking on an investment bank at a time when the company’s own liquidity and cash flow had deteriorated.
Market participants suggested that the Russian Ministry of Finance’s purchase of some of ALROSA’s supply would be one of the best possible solutions to maintain the company’s liquidity.
Manufacturers’ Costs UpManufacturers reported that they are much concerned by the U.S. market situation and are hoping that polished prices will go up. “We buy only the stuff that we are sure we will sell,” said Valery Morozov, chief executive of Ruiz Diamonds.
This year has been very hard for manufacturers. “Our costs have risen 30 percent due to the price increases by both De Beers and ALROSA this summer and because of the value-added tax (VAT),” said Ararat Evoyan, vice president of the Russian Diamond Manufacturers Association. Although manufacturers are reimbursed by the government for the tax payments,
Evoyan said actually collecting the reimbursement takes approximately nine months for big companies and even longer for smaller companies.
“Sales in the past months have been worse than we expected before the crisis,” said Nikolay Zhuravlev from Smolensk Kristall. Yet, with ALROSA maintaining rough prices at the same level, manufacturers say they are eyeing cheaper options than home for new supplies.
Jewelers Reevaluate“Everyone tries not to panic and to do their best in the current situation,” said Dmitry Gavrilenko from Moscow-based Estet. Most jewelers say they are not ready to revise their revenue and profit projections for 2008. Staying composed, however, is more difficult by the day as everyone starts to feel the shortage of cash.
Small jewelers have been hit the hardest as many were getting their credit from small banks. “Some companies can’t get money from their accounts because the banks do not have enough cash,” said Svetlana Maksimova, general director of Casting House. Bigger companies that work with large banks feel more certain, but even they admit they have to be more cautious than ever.
“Our suppliers remind us three days before it is due that we have to cover the advance, where they used to give us a three-day delay,” said Aleksandr Andrushkevich from Juwelland Holding, a St. Petersburg-based retailer.
The crisis not only has made money less available, it has also made it more expensive, with interest rates exceeding 20 percent in some cases. “If prices go up, then inflation will go even higher,” said Gavrilenko. Jewelers are predicting that the prices — especially for premium-class items — will go up, as jewelers are forced to cover their increased expenses.
Another perspective on the economic crisis is that it drove customers to the shops who see jewelry as a last remaining stable investment. Andrushkevich said that there was a considerable increase in demand for expensive jewelry in October. Maksimova added that gold nuggets have been in great demand, as well as certified diamonds. “It’s more a psychological factor. People are in a hurry to buy what they’ve been longing for and to invest money,” said
Vladimir Stankevich from Adamas. Zhuravlev said the number of stones sold in the shops affiliated with Smolensk Kristall and over the internet has grown.
Fewer of the middle-class customers, however, go to jewelry shops. According to Andrushkevich, his chain had only 5 percent growth in September against the same month in 2007, while the company had been seeing growth rates of 10 percent a month. Anna Ivanova, commercial director of Moscow-based Elit, said that demand in the shops has been stable, although the number of wholesale clients has fallen.
The Marketplace• ALROSA sold 80 percent of the 148 lots at its 31st international auction in Moscow. The prices were on average 16 percent above the starting price, with the auction proceeds totaling more than $15 million.
• The 37 buyers bid on 482 stones weighing more than 7,700 carats.
• The biggest stone was 39.93 carats.
Article from the Rapaport Magazine - November 2008. To subscribe click here.