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So, is there any way to protect polished diamonds?

30 march 2020

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Image credit: Gerd Altmann (Pixabay)

In April 2019, ALROSA lobbied for the development of a RF government draft regulation by the Russian Ministry of Finance, according to which the jewellery studded with man-made materials featuring the characteristics (properties) of precious stones should be displayed in separate showcases in a store or other point of sale. Moreover, the showcase where the above mentioned goods are displayed should be marked as ‘jewellery containing inserts made from man-made materials’.

Jewellers opposed such an initiative and put forward a number of arguments.

First, small natural polished diamonds are very often used as part of jewellery only as ‘surrounding diamonds’, and the central stone is a colour synthetic one. In what showcase should such jewellery be displayed?

Second, many jewellery stores have small retail space and sometimes, it is not easy to find a place to display their goods in different showcases. This is a problem especially for jewellery ‘islands’ or ‘corners’ in large department stores. The current regulatory framework requires to group the jewellery pieces put up for sale by their intended purpose. At the same time, in the face of a decreased consumer demand, affordable jewellery with synthetic stones is mainly sold in Russia today. So, if you force retailers to place additional showcases in stores, and there is no place to put them, most likely, retailers would refuse to sell diamond jewellery at all. That is, ALROSA would get a result directly opposite to the expected one - not an increased demand in the domestic diamond jewellery market, but on the contrary, a decrease in sales!

Third, jewellery pieces put up for sale should have sealed labels indicating the type and characteristics of the inserts, including the processing method that has changed their quality and colour, and the gem’s price characteristics. When using the studs from man-made materials possessing a precious stone’s characteristics (properties), it should be specified in the labels that the stone is not precious. ALROSA also previously lobbied for these requirements.

Finally, fourth, cut and polished synthetic diamonds have a real consumer advantage - while looking the same and having the same consumer properties they have a significantly lower price. That is, the price/consumer quality ratio is higher. So, why does ALROSA tell consumers how to save money on buying jewellery without losing the quality of the goods? “Everything is expensive in any showcase, but the jewellery in this one is just as beautiful, but cheaper!”

The discussions of the ALROSA’s initiative of last year on the separate selling of natural diamond jewellery and the jewellery with synthetic stones resulted in the withdrawal of the RF government draft regulation as the authorities were convinced by the jewellers’ arguments.

However, at present, as part of the activities on the so-called ‘regulatory guillotine’, ALROSA has again returned to the idea of ​​introducing the requirements for the separate selling of jewellery with natural precious stones and that with synthetic ones into the Russian regulatory framework, but now - directly into the main industry law, the Federal Law ‘On Precious Metals and Precious Stones’.

ALROSA's persistence in this matter is surprising. The regulator considers ALROSA primarily as the main raw material exporter in the field of precious metals and precious stones (PMPS), and not at all as the main polished diamond supplier to the domestic market. It is no secret that Russian jewellers prefer less expensive small polished diamonds supplied by the Indian manufacturers, and the market for large polished diamonds in Russia is extremely small.

So, why should a new burden be created for the Russian jewellery retail forcing it to start complying with additional costly requirements (renting an additional floor space for new showcases is expensive) if ALROSA does not get a positive return from this anyway?

The author of this article has already expressed his opinion that simply dividing the natural diamond and synthetic diamond flows can play a cruel joke and shift a part of economic and less affluent shoppers from polished diamonds to less expensive but no less beautiful cut and polished synthetic diamonds.

But this does not mean that diamond miners should not struggle to maintain the market share of their goods. A natural diamond has, of course, its own strength - its natural origin; its relative rarity in nature, high production costs, and etc., which ultimately creates a limited natural diamonds supply in the market, it means it gives an investment attractiveness to diamonds. It is true if the global demand continues. The investment attractiveness is the main and, perhaps, the only thing that diamond miners can rely upon today. The slogans about the diamonds being ‘beautiful and forever’ can be left in the past - today, these slogans (and markets) have to be ‘shared’ with synthetics ...

However, maintaining the investment attractiveness of polished diamonds is impossible without their absolutely free speculative market. A polished diamond speculator should be able to make a profit on both growing and declining markets. This is the case in the world. But not in Russia! That's what ALROSA should do through improving the industry legislation to the benefit of developing the domestic market for its own goods.

There is no tradition in Russia that a diamond wedding ring is a must. In Russia, there is generally no mass admiration of diamonds so that they would be a priority purchase compared to other discretionary goods. And young people would be more likely to spend their spare money to buy a new gadget or make a trip somewhere, than buy diamond jewellery. However, there are a lot of people in Russia seeking to earn money and ready to take risks to get a potential income. That is, the mentality of our population is suitable for the relatively wide spread of the idea of ​​a speculative play on anything. However, people find it more dangerous to speculate in stocks and shares than to speculate in certain tangible assets. At the very least, some profit is always made.

So, maybe, ALROSA needs to deal more actively in the certified diamond speculative market? It is clear that one cannot speak of any market volumes if there is no proper liquidity of the goods used for speculation. And what is the situation in Russia? A Russian can buy a certified diamond in a sealed box, but what can he or she do with it? Nothing but store it or use it as part of a customized jewellery piece. But it is not possible to sell it at a reasonable price. You can take it to a pawnshop losing about 90% of the money spent on its purchase. Unfortunately, no one provides for the polished diamond buyback ... ALROSA, the only powerful player in the Russian diamond market, is interested in selling its own goods. Making next to nothing on purchasing diamonds in the secondary market is not an interesting business at all. Although, in principle, ALROSA has technological capabilities, the company has recently increased its cutting and polishing capabilities with the Kristall Smolensk factory.

In Russia, there is an official regularly updated price list giving estimated diamond prices, which largely correlates with the Rapaport price list. The latest edition dated September 12, 2019 is presented on the website of Russia’s Gokhran. But it is applied only when exercising the state control over the quality of polished diamond sorting and grading as well as in cases when the Gokhran of Russia pays for the polished diamonds purchased and released from the Russian State Depository for Precious Metals and Gems, as well as when polished diamonds become the property of the Russian Federation ‘on other grounds’, i. e., in fact when the state interacts with legal entities to acquire polished diamonds.

These price lists are rather relatively applicable to the certified diamond retail price and, especially, the diamond jewellery due to the trade markup - that is different in size, but always very large, which is applied in addition to a 20% VAT that is, of course, not refundable when individuals sell the stones purchased earlier. Who and why may need such polished diamonds is a question of pure interest, but the fact is that such polished diamonds at such a price - and taking into account the absence of the secondary market (almost zero liquidity, even in case of a substantial discount) - can by no means be considered as investment assets today.

Thus, the investment attractiveness of polished diamonds as a whole is equal to zero in Russia. And only people who are very far from understanding the true value of diamonds would continue to purchase natural diamond jewellery if it would be possible to purchase similar jewellery studded with much less expensive synthetic stones. In the nearest future, diamond jewellery, at least in Russia, could be almost completely replaced with synthetic diamond jewellery. This has already happened in Russia to the jewellery studded with alexandrite, rubies and sapphires. There are few jewellery stores in Russia where the sellers have ever seen a real, natural alexandrite. And the issue of ‘separate showcases’ for jewellery with natural stones and the synthetic ones will collapse by itself - no separation of the natural stone and the synthetic stone flows would be required due to the lack of demand for natural stones...

So, how to save the natural stone market, including polished diamonds? I think, there is only one way - by returning the status of a real ‘jewel’ to them, the status of an attractive investment asset that can stop having this status immediately, if necessary, with reasonable losses. This means creating liquidity at a price that at that moment differs from the purchasing price by a spread of 5-10 percent only.

In 2017, the Indian Commodity Exchange (https://www.icexindia.com/) started trading in diamond futures, which partially allowed us to consider diamonds as investment assets. A number of projects are known in Russia, for example, at the end of last year, Vladislav Dokuchayev, associate professor of the Department of Investments and Innovations of the Financial University under the Government of the Russian Federation, together with Pavel Barannikov (Diamond Moscow Club) launched a project, the purpose of which is to consider diamonds also as investment assets. The idea of ​​the project - that is in its initial stage - is that a financially capacious and not too volatile market for depersonalized polished diamonds of certain sizes and characteristics could be used as underlying assets. Even earlier, there were attempts to create a hybrid instrument based on polished diamonds and blockchain technologies. By and large, all these projects have nothing to do with the polished diamonds that are already in civil circulation, as part of jewellery. Yes, they bring polished diamonds closer to the ‘commodities’ status, but as primary market goods, which does not increase the polished diamond liquidity in the secondary, consumer market.

However, the misconception is that today, diamond jewellery is purchased by retail customers to wear it or give it as a gift only. At least in Russia, this is not the case. Certainly, a modern retail buyer normally understands that in the secondary market, one can only profit from the sale of polished diamonds or diamond jewellery if there is an exponential price growth in the world. But anyone needs help when selling a polished diamond, if necessary, with minimal losses at any time.

I am convinced that the continued interest in natural polished diamonds is only possible through creating a real liquidity at a price close to that in the Rapaport Price List for their secondary market. I believe, this should be done by the companies like ALROSA that combine mining and cutting and polishing capacities. Undoubtedly, the costly purchasing of polished diamonds from the population in the secondary market at the prices close to the world ones is not a business suitable for ALROSA. But this would be a campaign to support the population’s interest in diamond jewellery. Of course, Russia is not a sufficient market for ALROSA. Then, why the Russian jewellery retail is offered to carry the additional burden of separate showcases?

Vladimir Zboikov for Rough&Polished