Yesterday’s ruling by the European Court allowing state-owned Russian mining giant Alrosa to continue selling rough diamonds to De Beers after 2009 has huge implications for the global diamond industry. The biggest is that De Beers will now control in excess of 50% of the world’s rough diamond supply after having dropped to around 40% – with the looming threat that it might drop even below that.

As it is, between them De Beers and Alrosa currently control some 65 per cent of the world’s rough diamond output – or about $8.5 billion in dollar terms.

The ruling also has implications for the way De Beers does business. First of all, the De Beers exclusive client system just got a reprieve. With rough from Russia cut off, De Beers was under further pressure as the world’s biggest rough producer Botswana as well as South Africa and Namibia, both significant producers, demanded that more of the rough mined in their countries be cut and polished locally – local beneficiation as it is known. That left very little rough for its exclusive clients, the sightholders. What’s the use of being an exclusive client if the supplier can’t give you enough raw material? The $400 million in rough from Alrosa with no beneficiation strings attached will provide some welcome relief.

Also, with shrinking raw material supplies, De Beers had no option but to resort to forced hikes in the price of rough to keep revenues growing. An unsustainable policy as polished markets refused to pay more. The market reaction had it quickly bringing prices down and changing focus to try and boost prices by branding the polished goods that came out of its production with its proprietary ForeverMark. But the ForeverMark, though it has been successfully launched around the world – Antwerp, Hong Kong and India – has pretty limited value if rough supplies continued shrinking. BHP Billiton was pushing its own CanadaMark and Alrosa was making noises about launching its own brand.

A quick bit of background to fill you in. An initial European Commission ruling found that rough diamond sales by Alrosa to De Beers would be anti-competition and directed that sales be gradually reduced from their peak of $800 million to around $220 million by 2010. A subsequent anti-monopoly ruling had De Beers volunteering to cease buying altogether by 2009 after a reduction to $400 million in purchases in 2008.

Yesterday’s decision means Alrosa can continue to sell at least $400 million a year in rough diamonds – just a shade under 14% of its total 2006 production of $2.87 billion – to De Beers. It means De Beers itself will now be able to sell closer to $7 billion a year in rough diamonds to its clients. See what Cutting Remarks has to say on the subject.

De Beers suddenly got a massive infusion of clout in the world diamond market.