By John Helmer in Moscow
Alice’s Adventures in Wonderland – chapter 7 – A Mad Tea-Party There was a table set out under a tree in front of the house, and the March Hare and the Hatter were having tea at it: a Dormouse was sitting between them, fast asleep, and the other two were using it as a cushion, resting their elbows on it, and the talking over its head. `Very uncomfortable for the Dormouse,’ thought Alice; `only, as it’s asleep, I suppose it doesn’t mind.’ The table was a large one, but the three were all crowded together at one corner of it: `No room! No room!’ they cried out when they saw Alice coming. `There’s PLENTY of room!’ said Alice indignantly, and she sat down in a large arm-chair at one end of the table. `Have some wine,’ the March Hare said in an encouraging tone. Alice looked all round the table, but there was nothing on it but tea. `I don’t see any wine,’ she remarked. `There isn’t any,’ said the March Hare. `Then it wasn’t very civil of you to offer it,’ said Alice angrily. `It wasn’t very civil of you to sit down without being invited,’ said the March Hare. `I didn’t know it was YOUR table,’ said Alice; `it’s laid for a great many more than three.’ |
Alrosa chief executive Fyodor Andreyev said in his address to the 34th World Diamond Congress on Monday that supply and demand in the rough diamond market are out of alignment, and there is a danger of an unsustainable bubble in prices.
He intimated that Russia’s state-owned diamond stockpile may be operated in the fashion that was used in the past by the De Beers diamond stockpile – to regulate volatility in the market, counter supply shortages, stabilize profit margins, and neutralize price speculators by selling stones below their prices.
“Now you all see,” said Andreyev, “that as a result of the crisis and the reduction of global production, there is a deficit on the market, which we estimate to be [worth] between $800 million and $1 billion, and today this is one of the most powerful drivers of growth in prices.”
Andreyev followed Russia’s Finance Minister Alexei Kudrin, who is also the Alrosa board chairman, in addressing the congress, which commenced on Sunday in a downtown Moscow hotel. Alrosa’s head of foreign relations, Sergei Uhlin, also participated in the Congress’s session on Monday. During an organizational session Uhlin was elected to the six-man board of directors of the World Federation of Diamond Bourses. This is the first time in the 63-year history of the biennial congress that Russia has hosted the event.
After summarizing the state support measures for Alrosa’s production last year, which have been well publicized, Andreyev revealed that Alrosa and the state stockpile agency Gokhran are now considering the sale out of Gokhran stocks of “$500 million to $800 million worth of rough…by the end of the year in order to stop supporting the speculative demand from the market.”
Andreyev claimed that the current demand in the market is for 120 million carats, compared to 150 million carats before the 2008 crisis. According to Andreyev, this is causing a price bubble to emerge in the international diamond market. He told delegates that long-term contracting is one way of combating it, and using Gokhran stock sales is another.
“Prices are already close to the price level of 2008,” Andreyev is quoted as saying, “and the situation begins to repeat itself. So we are once again faced with the question of how to regulate this market. Stable, predictable market transparency is the keyword today,” he reportedly claimed. “The state is now becoming an active player in the market. There is currently in discussion with the Finance Ministry [the idea] that one source of price-fixing deficiency and protection against ‘bubble’ could be those [stockpile] reserves that are accumulated by the State.”
Although Russia’s diamond stockpile volumes, values, and operations have always been classified a state secret, Andreyev told delegates that operations with the Gokhran stockpile would add transparency to the market, and to bank lenders to diamond miners like Alrosa. “At the peak of the crisis,” said Andreyev, “the main issue that arose from the banks – this was the opacity of the industry, its pricing mechanisms, the capacity of production. And all this we have to change. Now we have become more open, to give information to the market, and interact with manufacturers.”
In the 1990s, after the collapse of the Soviet Union, De Beers bought Russian diamonds for its stockpile as security for a $1 billion loan to the Soviet government. The loan agreement allowed De Beers to sell from that stock if Russia failed to deliver timely instalment payments of the loan. De Beers also claimed that its exclusive sales contract for Alrosa’s rough exports precluded competing sales of stones from the stockpile in Moscow. Termed “leakage” by De Beers at the time, several million carats of diamonds were sold by Komdragmet, the state committee for precious metals and gemstones, to a number of international diamantaires De Beers considered commercial rivals. De Beers also accused Komdragmet of undercutting the price levels De Beers was trying to maintain.
As De Beers delisted from the Johannesburg stock exchange and became the private company of the Oppenheimer family, its management decided it should liquidate its stockpile, and avoid other claims and charges from the anti-trust authorities of the US, in order to realize more profitability at the diamond jewellery end of the mine production pipeline. This, plus the anti-crisis stockpiling by Gokhran in 2009, have now placed the Russians in the sole position of maintaining a diamond stockpile large enough to have impact globally. Andreyev’s announcement to the World Diamond Congress is the first public acknowledgement of the intention to use the stockpile in this way.
“My personal opinion –” added the Alrosa executive, formerly financial advisor to the Russian Railways Company, “I am opposed to the classical ‘invisible hand’ of the market, when we say that all the diamonds must be sold at auction. This is not acceptable to the industry, since only long-term contracts allow, firstly, cutters to predict their production [and their] workers’ numbers; and secondly, to obtain credit resources, and ultimately provide a correct relationship with the market.”
It is unclear what exactly Andreyev means to do, as he refuses to answer questions. He is quoted by one news service as saying that Alrosa might buy back some of the diamonds it sold last year to Gokhran in “some kind of swap”; or that Gokhran may opt to sell the stones into the market on its own. He claimed that compared to the prices Gokhran paid for the diamonds when they were bought from Alrosa last year, at current prices Gokhran has earned 15% to 18%.
According to public announcements from Alrosa and the Finance Ministry, the average price Alrosa realized from its sales of rough diamonds last year to Gokhran was about $71 per carat. If the estimated percentage gain is based on this figure, Andreyev may be suggesting that last year’s deliveries to Gokhran are now being priced or re-valued between $82/ct and $$84/ct.
The head of Gokhran, Vladimir Rybkin, has previously announced that there will be no selling from alrosa’s diamond stockpile this year or next. “They will probably reach the market in 2012 or 2013.” according to Rybkin, who is a ranking official of the Finance Ministry under Kudrin.
Other Congress speakers are reported to have denied that the current trend in the rough diamond market is a price bubble. They insisted that while global supply continues to fall short of demand, there is sustainability in the current rise of diamond prices that is not speculative. De Beers issued a statement to this effect after Andreyev had made his speech.
Note: Authority to issue credentials for attendance at the 34th World Congress belongs to the two organizing bodies of the congress since its inception in 1947 — the World Federation of Diamond Bourses and the International Diamond Manufacturers Association. When their representatives proposed to issue an attendance pass for John Helmer, they were informed that Alrosa refused to allow it. Compilation of Kudrin’s and Andreyev’s speeches to the congress has been made with the assistance of the Russian reporters who were allowed to attend, and other sources.
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