RAPAPORT... “Sit and wait” is the strategy chosen by most of the companies along the diamond pipeline, from producers to retailers. “Practically no one sells and no one buys,” said Andrei Polyakov, the spokesperson of Russia’s largest diamond miner ALROSA. “Everyone needs some time to take a breath.”
It is estimated that companies currently have approximately three months of stock in inventory. “All serious players are sitting on their stock and none of them is planning to cut the prices of polished diamonds,” said Nikolai Zhuravlev, spokesperson for Kristall Smolensk, the country’s largest manufacturer.
“A fall in the price of diamonds during the crisis period will seriously undermine the whole purpose of our business,” ALROSA President Sergey Vybornov told the audience at the November 17 diamond industry symposium in Antwerp. He said the miner plans to reduce rough supplies to the market by 40 percent, more than it had announced previously. “We will take this opportunity to consider our future sales strategies, assess our sales assortments and pricing systems and continue the review of our client list,” Vybornov later said, in India. “This will ensure that we are in the best possible position for long-term sustainable growth for the company, our partners and the industry.”
Retailers are using a similar strategy. “We are closing the orders for November, but we won’t place any new orders until we see how December sales go,” said Rajesh Gandhi, director general of Choron Diamond.
Yet, there is concern that small players will start dumping their stocks. “When dealers who bought diamonds for fly-by-night operations start selling off their stocks, it will send the market into chaos,” Maksim Shkadov, director general of Kristall Smolensk, said in an interview with Russian television network Vesti.
Market participants are also concerned with India, which has been consuming large amounts of rough supported by cheap loans. “It is similar to the situation with mortgages in the U.S.,” said Shkadov. “The jewelry sector was so inflated to the extent that American jewelers stopped paying for goods. Now the Indian ‘bubble’ is starting to burst and it will cause a chain reaction.”
Christmas Outlook Positive
On the retail side, Christmas expectations are surprisingly positive. “Diamond jewelry is a traditional present for the New Year in Russia,” said Denis Adamskiy, director general of the Moscow Jewellery Factory, a company with almost 200 shops throughout Russia and Ukraine. Most companies expect sales in 2008 to remain at least at the level of 2007.
“The sales fluctuate throughout the country, depending on how deeply this or that region was affected by the crisis and the intensity of the local media coverage of the turmoil,” said Pavel Sidorenko, financial director of Adamas, a Moscow-based jewelry maker with more than 200 shops.
The fear remains that sales will fall dramatically after the New Year. “Many companies have delayed laying off staff until 2009, so when it happens, it will be a harsh blow because this will be our customers losing their jobs,” said Adamskiy.
Staying AfloatBoth De Beers and ALROSA have pledged to launch marketing campaigns to boost diamond sales. “Diamond presents ‘eternal value’ and this image has been formed over centuries and must not be devalued or ruined for the sake of any short-term benefit,” said Vybornov. ALROSA has yet to reveal the details of its advertising, but Zhuravlev said the “New marketing efforts will benefit everyone.”
Hoarding cash has become essential for all companies. ALROSA is currently finalizing negotiations to sell some of its stock to Gokhran. “It’s a right move for the government to have diamond reserves, as it can sell them later on,” said Aleksandr Boguslavsky, chairman of the Grace group of companies, which is engaged in both manufacturing and jewelry making.
Companies say they will form new assortments of items most in demand. “We are doing additional work with our clients to meet their demands in the best possible way,” said Zhuravlev. Many jewelry companies report they will start cutting back production in 2009 if sales are still falling and focus only on items that are in demand.
Bright SpotMany market participants say that the crisis will have a healing effect on the diamond industry. “Some of the companies will be wiped out and only serious players will remain,” said Polyakov. Gandhi pointed out that “Many production facilities will be available in the course of the crisis as companies go out of business.”
In recent months, the Russian ruble lost approximately 10 percent against the U.S. dollar. “Many of our sales are linked to the dollar, so the weakening of the ruble brings companies extra revenues,” said Boguslavsky.
Since Russians still have the ability — and cash —to purchase, an increasing number of foreign companies are eager to sell product to the domestic Russian market. “Before the crisis, many foreign companies looked down at Russian retailers. Now we can dictate our terms because they are so eager to sell their product,” said Adamskiy.
The Marketplace• ALROSA reported a 2.6 percent fall in its revenue in the first nine months of 2008 against the same period of 2007.
• The company’s net profit fell 62.3 percent in the same nine-month period. The miner explained that the sharp decline had been expected in its financial forecast and that it was caused by the falling dollar rate against the ruble in the first nine months of 2008 and the worsening of geological conditions at its mining sites.
• ALROSA’s net profit was $4.2 million in the third quarter of 2008 against $143 million in the first half of 2008.
Article from the Rapaport Magazine - December 2008. To subscribe click here.