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Why ALROSA should not go in for synthetic diamonds

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When cobblers take to making pies,

And cook his hand at cobbling tries,

You’ll look for useful work in vain.

A hundred times it has been plain.


From the fable "The Pike and the Cat" by Ivan Krylov


Not so long ago, speaking at the Russia – Africa Summit held in Sochi, Yury Trutnev, Deputy Prime Minister and Plenipotentiary Presidential Envoy to the Far Eastern Federal District suggested that ALROSA should possibly get engaged in the production of artificial diamonds and mentioned the successful experience of De Beers in this field. According to him, "this is a close competitive market, new technologies, and taking into account that today synthetic diamonds are already beginning to surpass natural ones by a number of characteristics, it is not very far-sighted to avoid taking part in this market and wait for new jolts."

According to the Interfax news agency, he added, “Diamond has always been sold as a legend. Not as a physical object, but as a standard of the highest value. When there emerged an artificial stone of the same quality, the pedestal under this legend turned shaky, and we must take this into account.”

1. About the value and prices of natural and synthetic diamonds

The pedestal under the natural diamond as a legend perhaps is really facing problems, though most likely temporary. But is its synthetic analog the real question at issue in this regard? Well, if synthetic diamonds are in some way harmful to the market of natural diamonds, they contest it as a physical object, a commodity position, but not at all like a legend.

Synthetic diamonds are turning more attractive than natural diamonds as a raw material for the global diamond manufacturing industry and mass-consumption jewelers due to lower prices at equal quality and greater affordability. But on one important condition - if synthetic stones are favorably accepted by the consumer community. Let us view the advantages of natural and synthetic diamonds in comparable aspects (Table 1).

Table 1. Comparable advantages of natural and synthetic diamonds

analyt_11112019_tbl_eng.png

Comparing consumer value, that is the possible practical utility of natural and synthetic diamonds, it is necessary to state the obvious - their practical utility is very close, which is not surprising, as both are diamonds. The investment attractiveness of a polished diamond, although it is doubtful today in terms of liquidity and confidence in rising prices, should there be a need to sell it, is still present.

But the status value of possessing (that is demonstrating one’s position in society to others) a synthetic diamond is not high for its owner: although it is a diamond, but it is not real, it is artificial. However, one doesn’t of course have to tell this to others and may boldly wear it in jewelry - anyway, no one will be able to spot its artificial origin “by eye.” But this is no longer a status, but its imitation. True, synthetic diamonds are also not a cheap pleasure, but still they are more likely meant for the middle-class customers who want to save money.

The emotional values of natural and synthetic diamonds do not intersect anywhere. Comparing the virtues of natural and synthetic stones in terms of emotional perception, we have to compare, so to say, "long with red." How will you evaluate and compare in metrics the emotional value of a natural diamond as a rare gift of nature with the value of a synthetic diamond which came to being due to innovative technology?

Yes, the “morality” and especially “environmental friendliness” of producing synthetic diamonds is controversial, but for young people there are no questions - young consumers already have this conviction.

Not everything is clear when we start to compare future prices for natural and synthetic diamonds. If prices for artificial stones will almost certainly continue to fall, we are not that sure if the trend forecasting higher prices for natural diamonds will be restored.

As a result of comparing the value of natural and synthetic diamonds, it can be said that it were definitely not synthetic diamonds that shook the pedestal of natural diamonds as a legend, and the laurels of the highest-value standard are still possessed by natural diamonds and most likely will belong to them in the future. But here it should be said that synthetic diamonds proved to be a tough competitor to natural diamonds as a physical object, that is as a raw material for manufacturing polished goods for the mass jewelry market. And it seems that synthetic diamonds on this playing ground are beating their natural competitors with a crushing score. This is obvious to everyone. But synthetic diamonds have not the slightest chance to beat their natural rivals in the “big league.”

2. About ALROSA, De Beers and their competencies

ALROSA is a national project for Russia and it makes sense to tell about it only to people staying far outside the industry and beyond this country. Diamond exploration and mining has been the company’s core business throughout the years of its existence. It is in the diamond exploration and mining that ALROSA has gained tremendous experience, and it is in this field that ALROSA has leading competencies.

 Is it possible to say that synthetic diamonds have a competitive market close to natural diamonds? Of course, it is possible from the point of view of ALROSA’s customers consuming its products - the diamond-cutting industry and diamond powder manufacturers. This is to say that the consumption markets of natural and synthetic diamonds intersect almost everywhere.

But from the point of view of the company’s competencies everything looks otherwise. The competencies of companies that explore for diamond deposits and mine for natural diamonds and the competencies of companies that produce synthetic stones are completely independent and different. The intersection is only in their experience of determining the value of their products and in the availability of a customer base. And even then, there are reservations. But these final stages of activity pursued by any company do not define the key competencies of these companies.

ALROSA does not have high competencies in mastering the HPHT and CVD technological processes. Among other things, it is dangerous to have them for a diamond mining company – it may well be accused of secretly treating natural rough using some newest and undetectable method that has not yet been studied by gemologists. Politics is always present in everything, so it’s better to avoid possible risks or it may happen something resembling the situation in modern sports and you will never be able to figure it out whether there was state support behind doping cases or not...

And what will happen to the employment rate among the local population and to the budget of Yakutia, if ALROSA will be predominantly re-focused on a "more promising" way to get diamonds? After all, it is better to produce synthetic diamonds in places where there are enough engineering personnel specifically trained to use such technologies, where there is cheap electric power and convenient logistics. This kind of production will not at all be “anchored” to diamond mining sites. And what about the foreign mining assets of ALROSA? Will they be considered to have been futile efforts, which incurred fruitless expenses? Even a partially significant diversion of funds for the production of synthetic diamonds would be a wrong step for ALROSA.

It is clear that ALROSA is a truly state-owned company. And by sovereign will, its activities can be diversified in any way. But it would be better if the state showed concern for the product market in which the key national company operates. Unfortunately, De Beers is no longer pulling the entire cart of generic advertising required to support natural diamonds. The company is now even pro-active in doing business “in the enemy’s camp” seizing a share in the market of synthetic diamonds and showing a bad example to ALROSA. Perhaps I’m mistaken, but it seems that the reason behind all this is that the main assets of De Beers are its existing market and the company’s brand. With such an emphasis on the corporate value structure, De Beers will develop without any problems even abandoning diamond mining. De Beers will not be too busy to replenish the budgets of Botswana, Namibia or Tanzania. But the Russian Federation should, perhaps, have given ALROSA significant preferences for financing a powerful generic advertising campaign around the world in support of natural diamonds - in the country’s national interests.

And, of course, the authorities should give complete freedom to the circulation of polished diamonds in Russia - without mandatory certificates in retail and without the need to register at the Assay Chamber, if someone will want to use diamonds in non-traditional diamond products, as for example in gifts, in the decoration of expensive household items, etc. This niche is not developed today, including because of the special procedure for working with precious stones.

And, of course, we should take care of increasing ALROSA's profitability by removing all its optional costs. This is already being done little by little. Thus, the Ministry of Finance of Russia prepared a bill allowing ALROSA not to transport diamonds for state control to the Gokhran of Russia and instead conduct it locally in rented private premises. It is surprising that this was decided to do only now.

3. About "synthetic precious stones"

Currently, the state is seeking to increase revenues coming to the treasury from all fields of business, and the business involving precious stones, of course, is not left outside this trend. And since law enforcement agencies appear to be the main consultants to the country’s authorities on all matters concerning precious stones, the recommendations coming for this area boil down to tighter control over everything and where such control is difficult the recommendation is to ban it altogether. The authorities, as a rule, agree - according to their opinion, the business in the field of precious stones should be if not under the state itself, then at least in the hands of “right people” and not in the hands of “unknown someone.” This kind of situation with natural precious stones has always been observed in this country.

But what about synthetic diamonds? Although they are cheaper than natural diamonds, they are quite expensive. And what a customs office is to do when someone is trying to take diamonds across the border claiming they are synthetic – take it on trust? What if they are natural diamonds? This is why the authorities are so interested to reach guaranteed identification of diamond origin.

However, in the understanding of the authorities, identifying synthetics does not seem to mean it will be given complete freedom of circulation. More precisely, the authorities would like to curtail this freedom, but so far the current legislation prevents them from taking synthetics under full state control. According to Federal Law 41-ФЗ “On Precious Metals and Precious Stones,” only natural stones are considered to be precious in Russia.

And as if by accident, but almost simultaneously, the documents of a number of ministries started to include the first dangerous signs of a possible “bright future” for synthetic stones (I would like to be mistaken).

The Department of Metallurgy and Materials of the Ministry of Industry and Trade of the Russian Federation began a detailed analysis of the current state and development prospects of the industry for the production of artificial (synthetic) stones. But for some reason, the document flow on this topic mentions “synthetic precious stones”! Of course, a typo is also possible...

In another document, which is a draft update of Article 191 of the Criminal Code of the Russian Federation, the Ministry of Finance of Russia proposes to replace the existing formulation of “natural precious stones” with simply “precious stones.” It seems to be logical: why mention “oily oil” in the Criminal Code of the Russian Federation, if Law 41-ФЗ already states that precious stones are natural. It’s just strange that this article in the Criminal Code has been repeatedly corrected during the past twenty years, but nobody paid attention to the excessive repetition of the word “natural” in it. But this time it came into view...

May it be that this possibly planned elimination of the word “natural” from Article 1 of Law 41-ФЗ (God forbid!) will result in new amendments to Article 191 of the Criminal Code of the Russian Federation?

It is hoped that synthetic stones, even diamonds, will remain free to use. Otherwise, the Russian Federation will never live to see their domestic production.

I want to end my thoughts with the hope that the erroneous initiative of the authorities to propose ALROSA this kind of diversification will not give rise to the situation described by Ivan Krylov in his fable quoted in the epigraph.

Vladimir Zboikov for Rough&Polished