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ALROSA Introduces Supply Limits for Regular Customers

12 august 2014

ALROSA has approved guidelines to be used in its client policy for the next three-year contract period, the Kommersant Daily was told by a source close to the company. According to this source, the document was approved by the Market Council of ALROSA last week. Its highlight is that the miner has introduced maximum limits for diamond sales under long-term contracts for each customer (or a group of associated customers). Since the start of 2015, each of them will be able to buy no more than $ 20 million worth of rough on a monthly basis at current prices, which does not exceed 5% of the average monthly sales scheduled by ALROSA Group. “The aim is to reduce the level of dependence on major customers,” the above mentioned source told the daily.
ALROSA’s sales reached almost $ 4.8 billion in 2013. The miner closed deals with buyers from more than 300 companies. Of those, only 42 had three-year contracts, which will expire at the end of this year. However, ALROSA Alliance is used to sell about 70% of its rough output through such contracts. One-time spot market transactions account for 10-15% of its diamond sales and a similar amount of sales falls on public auctions. Stones weighing over 10 carats are sold only at auctions.
The majority of the ALROSA Alliance participants polled by the Kommersant refused to discuss their contracts with ALROSA officially. But one of them said on condition of anonymity that ALROSA had only two or three customers, whose average monthly ticket may exceed $ 20 million. Overall, the company’s top five customers account for about 14% of sales, and the amount of rough purchased by them is growing. Thus, one of the largest customers used to buy almost $ 22 million worth of diamonds on a monthly basis in 2013 driving the amount to more than $ 28 million in the first half of 2014. “But generally, regulars acquire rough for amounts ranging fr om $ 5 million to $ 15 million per month, so most of them will not even notice the introduction of this limit,” the source said confidently. ALROSA refused to discuss regular customers, but acknowledged the approval of the guidelines for its client policy. Soon the company will send invitations to potential customers in order to conduct trade negotiations.
While tying up long-term contracts for 2015-2017, ALROSA will sel ect candidates “based on geographic diversification,” said another client of the miner familiar with the document. According to this client, the list will be extended by including companies fr om India, UAE, Israel and China. “This will permit to avoid the effect of increased country risks, in particular associated with the EU market. Most diamond manufacturers working in Antwerp have businesses in other jurisdictions, with which it will be possible to renegotiate long-term contracts,” said the Kommersant’s source. Right now, the share of customers resident in jurisdictions with higher country risks is 45%.
In addition, ALROSA formed a separate group of clients fr om jewelry retail calling the presence in the retail market to be one of the important criteria for selecting prospect buyers. The emphasis is put on global brands like Tiffany, with which ALROSA signed a contract in the autumn of 2012. Two years ago, ALROSA signed a contract with Chow Tai Fook Jewellery Group (the largest jewelry brand in China, Hong Kong and Macau). According to the Kommersant Daily, rough diamonds produced by ALROSA are bought on the spot market by Signet Jewellers, the largest jewelry retail network in the United States and Great Britain in terms of sales. Both companies discuss a long-term contract since 2013.
According to Sergey Goryainov, an expert of Rough&Polished, cooperation with retailers will allow ALROSA to develop its own diamond-cutting business. “For retail, it is important to have a predictable amount of diamonds with transparent background to safeguard against synthetics. If ALROSA will conclude a long-term contract for the supply of diamonds, it will permit to provide a workload for its Kristall subsidiary in Barnaul, which is competitive even compared with Indian diamond manufacturers,” Sergey Goryainov said. According to the Rough&Polished expert, the introduction of the diamond supply limit is “consistent with international practice.” He says that the biggest players, such as De Beers, also create additional competition among their customers for rough in order to prevent collusion between the largest buyers and avoid pressure on the producer.