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Divination for 2019

21 january 2019

In Russia, there is a remarkable tradition, an amazing symbiosis of Orthodoxy and pagan rites. Everyone knows that Orthodox Christmas comes after the celebration of New Year’s Day, since the Orthodox Church, unlike other Christian churches, lives according to the Julian calendar. The Russian Empire lived in line with this calendar until 1917. Correspondingly, New Year’s Day itself was then celebrated starting on the night from January 13 to January 14 (according to the Gregorian calendar). Therefore, nowadays Russia has an unofficial and popular holiday with a completely unthinkable name - Old New Year. After the celebration of Orthodox Christmas and on the eve of this Old New Year in Russia, it was customary to try and guess the future. This was done in any exotic ways – everyone was doing whatever he or she could. I decided to follow this tradition on Old New Year's Eve on Monday, January 14th and see what the coming year has in store for us.

Let's start, probably, with a forecast for the market as a whole - that is, the most ungrateful occupation. I think that in 2019 the issues, predictions and anxieties about the future tormenting the market after the end of the monopoly era will take on the form of a new reality. The end of 2018, as well as the previous years after the crisis of a decade ago generally showed more or less positive results of Christmas sales reflecting the growth of jewelry consumption. The only question is what exactly is growing there?

The growth of mass-market sales via the Internet is obviously exacerbating the tendency to focus on design as the main consumer driver and to minimize the cost of producing the jewelry itself, including the materials from which it is made. This opens up a multi-lane road to the consumer market for synthetics and refined stones. Good design is expensive, but it is worth it if it removes unnecessary nonsense from the consumer’s thoughts regarding what such jewelry is made of. There is not much to say in this regard – it is just a designer innovative product of new or the newest technologies.

The premium segment remains in its own right, but it is even more isolated in its “exclusivity” from the mass consumer. Forevermark’s sales growth, when you pay first for “exclusivity” and then for a diamond, is an example to this effect.

In other words, this year the existing consumer stereotype that a diamond is valuable as a diamond, be it 0.5 or 2 carats, will pass the point of no return. No, the diamond itself is no longer valuable. Its intrinsic value will finally give way to the value of a brand and design.

We should also not forget the anything but simple situation involving the middle-class consumer wallet being under aggressive pressure from the so-called “ethical consumption,” which in practice is expressed in promoting the rejection of a product requiring serious efforts to manufacture in favor of an outright fake for the same money.

The marketing efforts of the Diamond Producers Association (DPA) are surprising in this regard. The DPA’s multimillion-dollar budgets more than sufficient for a global marketing campaign and its not the first year of existence suggested much more aggressive and visible actions in 2017 and 2018. However, this did not happen. Instead, the “Lightbox” occurred.

No matter what De Beers has to say about this initiative trying to prove that it is a tool for restraining the growth of prices for synthetics and labelling it as casual jewelry, all this is not quite so, because they will sell something bearing the name of "diamond" despite the preceding "synthetic" identifier. And this means another and not at all a weak “effort” to destroy the value of the very concept of diamond.

It is surprising that De Beers' DPA partners, and above all ALROSA, even assuming the unbelievable that they took the arguments of their colleagues at face value, did not propose to discuss the equity participation in “Lightbox.” Indeed, if it is a marketing tool to protect the value of natural stones by fixing the maximum value of synthetics, then this is in the interests of the entire diamond industry. The arguments that this project is the brainchild behind investments in the innovative technologies of Element Six are not insurmountable, if the task is precisely how it is declared - to flood the market with cheap “disclosed” synthetics.

I think that 2019 will see the issue of generic marketing efficiency rising with all its unpleasant obviousness both for the DPA and for the entire market. The efforts to promote the value of a natural polished diamond as such appear to be beneath any comparison with the efforts to promote the “right” polished diamonds (having guarantees of origin, certificates and electronic identifiers), which makes sense for stones from one carat and above, and also for synthetics. And this means only one thing - erosion of the symbolic value of a diamond in favor of brands that are already avidly looking at cheap substitutes. The only question is who will discuss this in the DPA itself. One real counterpart for De Beers there is ALROSA, being an equal investor in the project. But what is going on with ALROSA?

I think 2019 will bring another staff update to this company. This can already be viewed upon with humor, as upon hastily changing Soviet leaders on the eve of Perestroika — and for ALROSA it became a sullen management “tradition” to change one top management team with a new one faster than the previous team will be able to understand hands-on how the diamond business works, and then repeat this again and again with perseverance worthy of another use. Exceptions only confirm the rules. In addition, ALROSA is still not a full-fledged commercial company with all the attendant business risks and ambitions. This is a state-owned enterprise with a fairly strict directive management by the government and control over all possible controllers, which in fact turns it into a quasi-ministry. And the ministerial logic in any business is simple and based on two main motivators, as it is now fashionable to say, the first being “What if something goes wrong?” often modified to “It's not me, it's them,” and the second being associated with some “positive upside” or the vital need for a continuous stream of positive reporting "to the top," because key decisions are made there. However, the time of positive reports is gone for objective and subjective reasons, and ALROSA is ceasing to be a successful step on a career ladder (see the article “The ‘Jubilee’ Speeches”).

No promotional hits like “She Said Yes” or “Innovation Contests” or other important happenings having nothing to do with business will be able to dissolve the incredibly complex challenges that the company is facing due to the depletion of commercially viable mineral resources, incompatibility of its business and social role in Yakutia and global changes in the market itself.

And this concerns not only ALROSA: the diamond-mining sector is rapidly moving into the low-margin business segment due to the changing consumer value of mined goods. The situation is developing in such a way that the sightholders or the diamond consumption sector are less and less dependent on a particular mining company - just the opposite.

2019 is the last year of the 10-year agreement between Botswana and De Beers. Botswana has already said that it wants more in 2020.

It seems to me that the government of this country is not at all delighted seeing the already apparent contradictions between De Beers as a mining company being part of Anglo American and abiding to the appropriate logic and De Beers as a jewelry brand and manufacturer of synthetics. I think De Beers, to smooth out the contradictions, will substantially increase investments in marketing diamonds by their territorial origin, namely focusing on Botswana and Namibia, and this will add to the pressure on the symbolic value of polished diamonds themselves.

In 2019, another African “diamond” country, namely Angola, will certainly remain in the spotlight. Accustomed to the very peculiar, but highly predictable trade policy of this country, the diamond market was literally stunned by the changes in 2018. The only question is: What was it? Starting very rapidly, these changes have not yet taken the form of a sustainable system. Quite obvious contradictions arose between Sodiam, a state-owned diamond trader and Endiama, a state-owned diamond mining company after they were turned into separate business units having the right to sell produced goods. The sharp rise in prices for goods produced by Angola’s major diamond miner Catoca on the backdrop of preserved practice of selling large parcels of diamonds following the rule “Buy it or leave it”, changed the mood in the market from hope to disappointment. However, ALROSA chose this occasion - for the first time in 10 years - to buy goods from Catoca, being the latter’s largest shareholder and having paid by 10 or even 15 percent more compared with prices offered in the secondary market. The company can probably try to separate +10 goods from the purchased amount and sell them at some tender, making the remaining part of goods absorb the losses and then announce its “African expansion” a success, without going into the details of this “expansion,” but this is certainly not about business.

Large-scale police operations to combat the illegal buying of alluvial rough carried out in 2018 had long been due, but, as you know, "you can't make an omelet without breaking eggs." Dealers having official licenses also fell under the police rink, and the seized goods “headed off” to the diamond centers following various and often inconceivable routes, which, to put it mildly, did not add transparency.

Any changes are painful and full of mistakes. Angola is still a terra nova for most market stakeholder, but nevertheless the country has every chance this year to declare its full-fledged leadership in the diamond sector, along with Botswana and Namibia. And here the question is no longer focused on the strategic choice that the new government made a year ago, but on correct tactical patterns permitting to systematize the daily activities of the country's diamond industry based on the decisions taken.

While I was immersed in divination, ALROSA was reported to be set on starting a business venture in Zimbabwe.

According to Sergey Ivanov, CEO of ALROSA the company is always happy to share its rich experience with partners. Meanwhile, ALROSA has no specific plans for work in this country for the time being, since it is necessary to understand what Zimbabwe has to offer. It is reported that ALROSA established a subsidiary in Harare last December apparently to evaluate geological prospects and share its rich experience. At the same time, however, ALROSA left an active African project in Botswana just one month ago.

As it follows from a report to this effect, ALROSA made this decision due to the fact that "changes at the top management level of ALROSA led to a "change of emphasis" and early stage exploration was no longer a priority for ALROSA as the company focused instead on production and marketing." However, the company’s business activity in Zimbabwe will involve preeminently early-stage exploration, because the notorious Marange diamond field is already empty as a drum. And here it should be noted that political and legislative guarantees for investments in Zimbabwe and Botswana appear to be two big differences. Russia and Botswana produce one half of the world's diamond output. And Botswana is now facing negotiations on a new trade agreement with De Beers... In general, there are a lot of things to consider.

However, given that this announcement was made during the visit of Zimbabwe’s President to Russia, we will leave this news without further comments.

2019 in the mining sector is the year to be dominated by private companies belonging to the “second echelon.” Flexible in decision-making and motivated by business, they are able to adapt to the market that has changed forever, the market, which requires less “diamonds in general” and is no longer willing to carry the enormous production and social costs incurred by the monsters from the monopoly era. Deep sorting of goods for a specific client, which increases added value; management of production costs, where you are motivated not by the procedure and “administrative agenda,” but by the desire not to “go bust”; and geographical diversification into paying projects - this is the future of diamond mining in the evidently coming “low-margin times."

But in general, the year 2019 will finally draw a line under the era of “A diamond is forever” replacing it with “This particular diamond may be forever if you pay more, but that one is definitely not.”

Sergey Goryainov, Rough&Polished