November marks 25 years since Kristall Smolensk opened its
Antwerp office, which was its first international branch. In 2016, the office
channeled over 50% of Russia’s largest diamond producer’s total turnover,
roughly $100 million, according to general director Maxim Shkadov.
In an exclusive interview with Rapaport Magazine, Shkadov
talked about the challenges facing the industry. One notable — and worrying —
trend on the global polished market, he said, was a dip in demand for gems
weighing between 1 and 3 carats over the past 18 months.
“In my 25 years of experience working in the industry, I’ve
never seen anything like this,” he observed. Demand has also weakened for 0.30-
to 0.99-carat diamonds, another popular category, he added.
“The market has already reached saturation point,” he explained,
pointing out that India’s active production policy had resulted in oversupply
in many categories of polished diamonds. This has made it no longer
economically viable for Kristall Smolensk to produce princess- and Asscher-cut
diamonds.
Adding to the pressure from India are problems Russian
polishers face on the domestic front. Regulations that Russia introduced to
comply with World Trade Organization (WTO) requirements delivered a serious
blow to the country’s diamond-polishing industry, effectively abolishing the
6.5% export tax on Russian-produced rough in September 2016. The tax used to
give domestic polishers an edge over Alrosa’s international buyers,
compensating for higher production costs and onerous customs regulations. Many smaller
Russian polishing companies had to close down in the aftermath.
“This decimated the polishing industry in Russia,
effectively leaving only Kristall Smolensk, Diamonds Alrosa and India’s KGK
branch here,” Shkadov remarked.
However, the economic and administrative hurdles in Russia
are not, in Shkadov’s opinion, the main problem. Because Russia’s diamond
jewelry market share is miniscule on a global scale, Kristall Smolensk’s
diamonds have traditionally been traded abroad, with only about 2% staying in
the country, making the company sensitive to the global industry’s challenges.
Of these, Shkadov believes, the biggest two are the growing
financial bubble and the increasing disparity between rising rough prices and
sliding polished ones.
“India has not only taken over 90% of the world’s polishing
business over the past decades, it has also secured a massive
government-sponsored line of credit from the country’s banks. As a result, the
industry’s debt burden and risks are increasing, as the recent bankruptcy of
two Indian companies clearly indicates,” he said. “The total amount of credit
in the global polishing industry has reached about $15 billion, with India
accounting for $10 billion. And as India keeps producing more stock, it only increases
pressure on the falling diamond prices. Contributing to the problem is that
demand for rough is perceived as high by miners, while it is in fact dictated
by the system of sights and long-term contract sales, which adds to the
pressure on the polishing segment.”
Salvation, according to Shkadov, lies in two solutions: The
first is global-scale market management that could be undertaken by “a
regulatory council of rough producers, similar to OPEC in the oil industry,”
which would keep rough prices under control for the greater good of the entire
pipeline, and the second is large-scale promotion of diamond jewelry, which is
the ultimate driver of demand for both rough and polished.
Article from the Rapaport Magazine - November 2017. To subscribe click here.