By John Helmer in Moscow
Russian diamond manufacturers have reacted critically towards Alrosa chief executive, Sergei Vybornov, attacking key proposals he made at last week’s Antwerp Diamond Conference.
Vybornov ousted Alexander Nichiporuk from the top spot at Alrosa in February. But after a string of misstatements drew fire from domestic policymakers, he has limited his appearances, and declined requests for public interviews.
Last week, at the Antwerp Diamond Conference, Vybornov took aim at African governments for establishing domestic diamond cutting centres and local beneficiation to add profitability to diamond mining.
“One of the tendencies to watch, “Vybornov said, “is the development of diamond cutting and polishing industry in the diamond mining countries of Africa. Botswana, Namibia, Angola, South Africa and Democratic Republic of Congo contemplate setting up large cutting and polishing facilities that will consume rough diamonds in volumes equivalent to those being currently processed by traditional diamond processing centres – Israel, Belgium and India. This most recent tendency has some serious flaws,” he said.
Referring to Alrosa’s experience in polishing its own rough, Vybornov said; “the reality of the modern cutting and polishing business is that it operates at the very low margins. Alrosa’s operations clearly demonstrate that the processing industry is and has always been an extremely poor instrument boosting state revenues with insignificant social effects. More than that- two of those factories were close to bankruptcy when I was appointed in February.”
The profitability of one of Alrosa’s cutting ventures, “Diamond World,” according to Vybornov,” amounts to 2,06% of their full cost price. This is less than the interest rate in Russian banks and far below the annual inflation rate. This is typical for Russian diamond processing factories.”
“Those in the African diamond mining countries who decide to set up large national processing facilities should by all means reject their populist argumentation. They should focus entirely on the economic side of such projects.”
The head of the Russian Diamond Manufacturers Association, Ararat Evoyan, told PolishedPrices: “I don’t want to comment on Africa. I think it is improper for a company’s president to give advice to these countries. Besides, the Russian experience is not negative. It is unique and positive. If Diamond World received 2% in the last year, which was a very bad year for cutting, the overall result is good. The main problem of cutting in Russia is the price of rough diamonds – they are too expensive.”
Evoyan also attacked Vybornov’s proposal to end US dollar pricing for diamonds as nonsense.
Vybornov said during the Conference; “is there anything in common between the Russian ruble, South African rand, Canadian and Namibian dollars? You know the answer – their exchange rates against the US dollar keep rising. I think the time is coming to look out for another currency, which is less dependent to global economic and political trends.”
According to Evoyan, most rough ends up in the US market. “His proposal is nonsense, because the price is fixed in dollars because of supply markets, not because of somebody’s will,” he said.
Valery Morozov, head of Ruis Diamonds and Lev Leviev’s Moscow representative, said Vybornov was reacting to Alrosa’s rising cost burden, and squeezed margins, that follow the firming of the rouble against the dollar.
“I understand very well Vybornov’s position – for Alrosa, this situation creates additional pressure. But diamonds are not only a Russian market commodity. Take, for example, the commodity which is more important for world markets – oil. The price there is fixed in dollars with the same problems, so why should diamonds be traded in another currency? Rough diamond prices are also dependent on polished diamonds, and they can’t be separated. Europe is an important market for polished, but not the main one.”
Morozov said Vybornov was mistaken on the profitability of cutting enterprises in Russia other than Alrosa’s.
“Of course, cutting doesn’t make such profits as mining, but it is not correct to say that in Russia it is loss-making. This is an issue for each individual enterprise. Based on our experience, we show nice profit,” Morozov said. Pointing the finger at Alrosa’s rough supply policies, he said: “If we could solve the question of rough supply, the profit would be even bigger.”
He added that beneficiation programmes in Africa serve the important political function of enabling governments to value mined diamonds more accurately. “The issue there is not purely about profit. Besides, a company whose core business is mining, like Alrosa, can expect difficulties in cutting. Cutting for them is not so profitable.”
Evoyan and Morozov, along with other sector experts in Moscow, were sceptical of Vybornov’s announcement that he is negotiating a long-term rough supply agreement with Tiffany’s.
“The diamond’s path from the mine to the jewellery store should be shortened to the maximum extent possible,” Vybornov said. “We believe the ideal structure would be direct sales of rough diamonds to established globally jewellery brands. Alrosa started direct sales to Tiffany & Co., and we are confident that such sales will breathe a new life into the jewellery trade.”
Evoyan: “He thinks that if he would sell to Tiffany, they would share with him the profit and will pay him a higher price – they will not. Besides, this (Tiffany purchase) is at maximum 5% of his sales, so where he will put the rest?”