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ALROSA will fight the monopoly of Indian buyers assisted by those Chinese

25 october 2012

ALROSA is firmly set on geographical diversification of its diamond sales. The Kommersant Daily found out that the Russian diamond monopoly is close to signing a trade agreement with the Chow Tai Fook Jewellery Group, which is developing the largest jewelry brand in China, Hong Kong and Macau. Based in Hong Kong, this company plans to buy diamonds from Russia for at least $100 million annually. In the long term, it may turn into a serious rival for Indian diamond cutters, currently processing one half of Russia’s diamond output.

The fact that ALROSA is preparing to sign a trade agreement with the Chow Tai Fook Jewellery Group Ltd was disclosed to the Kommersant by a source close to ALROSA. “This is a long-term trade contract. From the Chinese point of view, the present format of cooperation with ALROSA is quite modest. Chow Tai Fook is ready to buy diamonds worth more than $100 million a year, whereas ALROSA would actually like to work in a test mode on this initial stage. But in this situation, the important aspect is the start of relationship with China's largest producer of diamonds and diamond goods," he told the Kommersant, but refused to clarify possible amounts of diamonds to be supplied to China and other details of the upcoming contract.

The Kommersant Daily was also informed about the preparation of a large-scale diamond contract with the Chinese by a source in the Supervisory Board of ALROSA. "On Friday, the Board’s meeting will discuss the current situation in the company’s sales policy, including, among other things, geographic diversification of diamond sales," the source said. According to the source, the contract with Chow Tai Fook Jewellery Group could be signed in early November. Yesterday, ALROSA declined any official comments. Chow Tai Fook’s spokespersons were unavailable for comment.

In 2013, nearly one half of three-year contracts signed by ALROSA with its regular customers will come to an end (according to the information from the company website, there are 24 such clients), the Kommersant’s source familiar with the situation said. The source did not rule out that some contracts may be revised to reduce deliveries. "One of the priorities pursued by ALROSA in concluding new long-term contracts will be geographic diversification and sales practices developed in the period of ‘heavy market,’" the source noted. According to the latter, a company such as Chow Tai Fook is able to process the amount of rough comparable to what is supplied by ALROSA to its Indian customers.

According to various estimates, Indian companies are processing up to one half of the rough output annually produced in Russia (in carats). In particular, this country is polishing the entire amount of the so-called ‘Indian goods’ (very small diamonds weighing from 0.1 carat to 0.15 carat), which account for a quarter of ALROSA’s total production. According to ALROSA, the company’s rough sales to Indian buyers in 2009 exceeded $500 million, which was one half of the Russian miner’s export sales. In March 2010, ALROSA signed three-year agreements with Indian diamond manufacturers - Rosy Blue, Diamond India Ltd and Ratilal Becharlal and Sons - for the supply of rough diamonds worth about $490 million. In 2011, ALROSA produced 34.6 million carats of diamonds for a total of 125.3 billion rubles (about $4 billion).

Chow Tai Fook Jewellery Group Ltd is the largest jewelry company in China, Hong Kong and Macau. It was established in 1929 and its shares were distributed among the members of the Cheng family. In late 2011, the company completed an IPO in Hong Kong attracting about $2 billion through the placement of 10.5% of its capital. Chow Tai Fook Jewellery Group Ltd employs 13,000 people. Its other activities include construction, public transportation, hydropower, sea port logistics, engineering, financial services, and telecommunications. In 2011, the Group’s turnover reached $4.49 billion, net profit - $1.27 billion, net assets - $1.496 billion. By the end of yesterday's trading on the Hong Kong stock exchange Chow Tai Fook’s capitalization hit $13.2 billion.

Chow Tai Fook is one of the best known and most popular jewelry brands in China, Hong Kong and Macau. Since 1993, the company is a regular customer (sightholder) of De Beers; since 2009 it is a member of the Select Diamantaire Program run by Rio Tinto, a British-Australian corporation; Chow Tai Fook is an active buyer of rough on the open market, including Belgium, Hong Kong and Russia. In the jewelry segment it is a vertically integrated company with interests in all segments of the market - from acquisition of rough to design, production and sale of own jewelry. Production is concentrated in three diamond cutting and nine jewelry factories, the largest of which is located in Shunde in the Guangdong Province (about 5,000 employees). The two other diamond manufacturing factories are located in Johannesburg (South Africa), employing over 300 people. However, only 40% of the diamonds used by the company are produced in-house. In 2010, Chow Tai Fook turned into a leader in the retail jewelry market in China with a share of 12.6%, as well as in Hong Kong and Macau, with a market share of 20.1%. The company has its own distribution network - more than 1 400 jewelry stores and 85 stores selling watches in China and South East Asia.

Sergei Goryainov, an expert of the Rough&Polished industry news agency, believes that the contract right now in the works with the Chinese is an attempt to secure the sustainability of ALROSA’s trade policy. "Currently, this market is characterized by quite a high level of competition between Israeli and Indian diamantaires. The Indians aim to monopolize the market of polished diamonds and try to achieve this including political leverage on mining companies, particularly on ALROSA", the expert said. According to him, a number of major Israeli companies are already trying to establish manufacturing facilities in China, as opposed to the expansion of India's cutting industry. From this point of view, the conclusion of a contract with China's largest jewelry company will give ALROSA a chance to secure the sustainability of its trade policy, Mr. Goryainov summarized.