With production of 34.438 million carats...

ALROSA this week implied that it will again claim the title as the world’s largest diamond miner in 2010. The Russian company expects production to reach 34.438 million carats for the year, which will probably beat De Beers for the second year running.

In the greater scheme of things, being the biggest is not particularly relevant to the market although certainly a public relations talking point for ALROSA. De Beers, in fact, would probably be quite happy to relinquish the title as it continues to fight off the image of being the quintessential monopolist. What better proof to skeptics than for De Beers to point to ALROSA and say that its competitor is bigger than it is.

Given its past, De Beers has been quite conscious of its status as industry custodian over the past five years, leading it to focus on enhancing profits rather than market share. The company made the business decision to cut production when demand fell in 2009 and ramp up cautiously as the markets recover. The result was that the company’s production basically halved to 24.6 million carats in 2009 and will rise to about 33 million carats in 2010. Conversely, ALROSA maintained production levels throughout the crisis as it had the security of selling to the Russian government’s repository Gokhran.

As a growth indicator, sales, profits and debt levels provide a far stronger measure than production in the current economic environment and in terms of rough sales, at least, De Beers is expected to pip ALROSA to the post. Projections indicate that Diamond Trading Company (DTC) rough sales will reach around $4.9 billion to ALROSA’s forecasted $3.4 billion in 2010. Earnings and debt levels at both companies are expected to be significantly improved from last year.

However, while the two companies adopted vastly different production strategies to navigate the recession, in reality, De Beers and ALROSA have aligned themselves towards similar approaches regarding their respective business plans.

The first area in which their strategies lined up was in their distribution methods. ALROSA spent much of 2010 negotiating long-term supply deals with customers and expects to soon sell about 70 percent of its output in this way, while the rest will be distributed via its traditional auctions. De Beers, meanwhile, has stressed that it will continue to sell the bulk of its output to DTC sightholders but indicated it may shift more goods via its Diamdel online auctions. The result is a similar mix of supplying long-term clients while keeping a foot in the open market from which to garner price and demand signals.

Secondly, ALROSA dropped its initiative to spearhead the industry’s generic marketing campaign through the International Diamond Board, while after years and millions of marketing dollars invested to advertise on behalf of the industry, De Beers is now clearly focused on its own brands. Neither company, it appears, wants to play the role of industry spokesperson.

Finally, and perhaps most significantly from a macro-industry view point, both companies – in ALROSA’s case, via Gokhran - displayed caution in bringing too much rough to the market. While De Beers maintained a slow and steady ramp-up of production, keeping its stockpile of potentially mined diamonds in the ground, Gokhran kept its stockpile off the market in the vaults of the Russian government.

Both strategies ensured that the level of rough supplied was sufficient to satisfy demand prevalent in the market, allowing for some equilibrium to be maintained. While cutters and dealers report shortages in the market and appeared to have an insatiable desire to buy rough, De Beers and Gokhran resisted the temptation to bring more goods to the market from their respective stashes. Despite the strong demand for rough seen through the year, the threat of an over-supply, which could have brought downward pressure on prices, hung in the balance through 2010.

This may change in 2011. Even as the industry waits out the Christmas holiday to better assess its near-term prospects, there is a sense of growing confidence throughout the pipeline. De Beers will be looking to further increase production (beyond ALROSA levels), while it is likely that the Russians will start to release some of the Gokhran stockpile.

While both will take a number of factors into account when assessing the pace of this release, from global economic trends to the extent to which Zimbabwe’s rough supply will impact the market, De Beers and ALROSA will feel in a stronger position to do so than before. It is hoped they will both display the same sense of responsibility in the process.

Whereas the recession produced a new production champion, albeit a temporary one, the two companies appear to have come out in better financial positions. What is certain is that their respective production decisions in 2011 will have a profound impact on, and continue to set the mood for the diamond industry. Despite their different strategies, De Beers and ALROSA may have emerged on an equal footing, and as joint custodians of the industry, whether they want it or not.

By: Avi Krawitz

‹ Prev Next › ‹ View All News ›