Mirny Pipe

Don’t bother enquiring if you’re not a client - Alrosa’s Mirny pipe

Russian diamond mining major Alrosa announced that it will give up its tender-based sales system for long-term contracts. Alrosa CEO Sergey Vybornov told the World Diamond Council meeting in Jerusalem a few days ago that “a stable sales system designed for long-term relations with customers would help to secure future stability of the global market.” He indicated that these sales would be Russia-based and that his country would “develop the necessary infrastructure “including ensuring an efficient customs clearing service, trade finance.”

Alrosa’s announcement also means that over 80 per cent of the world’s rough diamond will now be to selected clients – much like the old days when De Beers practically owned the entire diamond supply market. What long-term implications does this have for the ‘open market’ and those diamantaires who aren’t among the lucky few to be clients of one or more of the mining majors? Are we going back to the way it was?

Many industry experts have said that the diamond market had in a sense opened up too much and that like the old farm owned by the De Beer brothers, it had led to something of a diamond rush. Almost anybody with a little capital wanted to jump into the diamond cutting business. The result has been the development of a huge overcapacity in the cutting and polishing industry. And now, there isn’t enough rough to go around for everyone. The industry really does have to go through a shakeout to improve conditions for the long-term players.

Long-term sales contracts with a set clientele trade higher profits for long-term stability. Sale by tender is by far more profitable. But it is clear that long-term stability is a priority as now.

Alrosa’s announcement is a signal that all the major mining companies have realised that the diamond processing pipeline is in fragile health and they can’t expect to necessarily even maintain current prices, let alone institute the regular increases they have enjoyed in the recent past. They need to impose long-term stability first if the diamond pipeline is to be nurtured back to robust health. Tender sales have the effect of triggering cut-throat bidding wars by rough-starved diamond cutters desperate for raw material to keep their factories open. Those price wars have encouraged even the mining companies with long-term clients to hike their own prices “to keep in line with the market”.

In the recent past, this sort of crazy buy-rough-at-any-price mentality has led to an almost complete disconnect between the price of rough and polished diamonds. The situation became so absurd that a couple of years ago, in some categories, the rough was actually more expensive than the polished!

Diamond manufacturers who had been burnt then began to refuse to buy rough. Better to go out of business than to get into even more debt. Even De Beers’ clients refused to take goods they felt were overpriced. To add to all this, the growth in diamond jewellery sales worldwide has sagged. In fact, April US retail sales were so poor that one analysis referred to them as wretched. The overall outlook for the industry is not so great, as Chaim Even-Zohar states in his analysis of the diamond processing pipeline.

Selling only to select clients is one way of bringing about the shakeout. Interestingly, while Alrosa, the last remaining mining major, has now decided to do this, there are extremely strong forces at work in the producing nations in Africa as well as in Canada that want to ensure the very opposite. So much so, the long-term survival of De Beers’ vaunted sightholder client system is now being questioned by many. The chaos might not end all that easily.