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ALROSA urges Finance Ministry to suspend diamond sales from Gokhran to retain the prices

15 april 2009

Diamond miner ALROSA offered the Ministry of Finance to suspend sales of rough diamonds from Gokhran with the view of stabilization and retaining market diamond prices.
As it is stated in a letter by ALROSA CEO Sergey Vybornov addressed to Minister of Finance Alexey Kudryn, which came to Interfax hand, the company offers suspension of rough diamond sales from Gokhran of Russia as well as stop competitive bidding events (CPE) for special sized diamonds (over 10.8 cts) sale.” 
Moreover, ALROSA proposed “to avoid alterations in calculative price list for rough diamonds of the Ministry of Finance of Russia.”
In ALROSA’s judgment, should calculative price list for rough diamonds be reconsidered downward, this to “enhance dip vector of global prices and therefore unlikely to be accepted by diamond community; it can lead to diamond devaluation, whereas most diamonds being pledged at financial institutions.”
The practicability of suspension of CPE for special sized diamonds is argued with the fact that particular commodity market has relatively low capacity thereby will rapidly be influenced by any additional supply. “The specificity of large sized diamonds market requires strictly proportioned supplies even in the period of growing demand, consequently it is strongly recommended to minimize large diamond supplies up to entire suspension of sales,” the letter says.
ALROSA notes that “the value of large-sized rough and polished diamonds having apparent investment potential should never be called in question, which may be caused by extension of diamond supply to the market.”  
“In confirmation of its responsibility for securing stability of global price level, the company is ready to undertake to selling diamonds bought by Gokhran during the period of recession at procurement prices within three years from 2010,” according to the letter.
At the same time, Gokhran holds suspension of rough sales to be unacceptable.
“Suspension of the above transactions on gems sale from State Fund of Russia, contracts having been concluded either pending upon some transactions, may lead to lawsuits in respect of compensation of losses due to cancellation of contracts. And the values of such lawsuits may be rather large,” as it was stated in the response letter by both Ministry of Finance and Gokhran.
The Ministry assumes that continuation of gems sales from the State Fund will contribute to preservation of jobs at Russian concentration plants and stabilization of state economy potential.
On the 31st of March Gokhran conducted its first auction on large-sized diamonds for the 9-month period, 43 lots of 197 to be sold, comprising 2,160 and 12,136 carats accordingly, for worth $4.56M. A source from Gokhran then told Interfax that “it had been the worst Gokhran’s auction for the 5-years period” stating “slight rise in activity in the market.”
Besides, on 13th of April Gokhran started displays of rough diamonds 570,000 worth of carats destined to further sale at domestic market. 320,000 carats of diamonds (137 lots) are prepared for display to be further sold at foreign market. In March Gokhran also started displays of polished diamonds and emeralds (either rough or polished).
ALROSA representative has not commented on the essence of the documents expressing his amazement with the fact that “an official letter addressed to the Minister of Finance goes public.”
“Generally, amid the current hard market it’s important to be cautious when offering rough diamonds. The clients who are going to sign long-term contracts with ALROSA, shall be sure that their market competitors won’t get the same rough stock at lower prices. We are striving to shift ALROSA distribution to long-term relationship basis in order to exclude the profiteering criterion from the market environment and to get opportunity of advanced planning of investment programs,” – he added.
In opinion of Rough&Polished expert Sergey Goryainov, rough diamond trading is now unreasonable due to the absence of demand. “The demand is very low at present. The last Gokhran auction was losing – only 9% of the volume offered was sold at the price equal or less than pre-estimate. Few players such as Lev Leviev and Graff expressed their interest having bought the best lots. The aggregate demand at the moment is 60% (according to some estimates – 70-80%) lower compared to the level before the recession,” – he said.
S. Goryainov supposes that trading suspension would not cause legal conflicts for Gokhran as it operates on the basis of auctions per one-time agreements, not long-term ones. “The lawsuits would have appeared should long-term contract conditions be violated, but Gokhran does not and cannot have the latter concluded,” – he said.
Moreover, Goryainov stressed that Gokhran previously practiced rough sales with discounts at domestic market. Nowadays, in his opinion, “such sales must not be conducted as they contradict the very logic of long-term contracts and provoke profiteering transactions.” 
He points that extreme caution shall be exercised during rough sales. “There is a perception that prices may rise in several months. And it’s important to avoid beating the market with excessive supply,” – Goryainov says.