Diamond in the eye

The European Commission wants to speed up the “divorce” of ALROSA and De Beers

It seems that a new stage is beginning in the relations between the two largest diamond mining companies in the world - South African De Beers and Russian ALROSA. According to Interfax, the European Commission intends to demand that the companies terminate their trade agreement on the supply of Russian rough diamonds to De Beers as early as 2009. This meets ALROSA’s strategic interests in strengthening its independence in the global market. The chairman of the company's supervisory board, Finance Minister Alexei Kudrin is ready to remove the obstacles set by the Russian authorities. He announced that the government had sent to the Kremlin an agreed draft of a presidential decree on the abolition of diamond export quotas.

The companies, which together actually occupy more than two-thirds of the world diamond market, have already been placed in a strict relationship framework by the government of the united Europe. In January 2003, the European Commission officially notified De Beers and ALROSA of claims to their trade agreement on the supply of diamonds from Russia. From the perspective of European antimonopoly legislation, this agreement between the two diamond mining leaders essentially deprived the South African company of a competitor in the person of ALROSA. At the same time, the main claims of the EU concerned, in fact, De Beers, which controls more than half of the world trade in rough diamonds. But in fact, ALROSA came under attack, which, having established trade agreements for the supply of diamonds to the world market through De Beers back in 1959, did not develop its own dealer network. Then, in 2003, following the instructions of the European Commission, a decision was made to gradually reduce direct supplies of rough diamonds from ALROSA to De Beers. The new agreement limited the volume of diamond supplies from Russia in 2005 - $700 million, in 2006 - $625 million, in 2007 - $550 million, in 2008 - $475 million, in 2009 year - $400 million, and from 2010 onwards, the amount of supplies of Yakut diamonds to De Beers should not exceed $275 million. An agreement on a phased reduction in supplies of Yakut diamonds to De Beers was approved by the European Commission in December last year. But at the beginning of June this year, the European Commission again appealed to everyone who might be affected by the agreement between ALROSA and De Beers to express their complaints within a month.

And it seems that Brussels has decided to speed up the “divorce” of the two diamond mining giants. This could create some problems for both companies. De Beers' turnover will decrease (a significant share of it was occupied by the resale of Russian diamonds), which will have to be replenished by increasing its own production. And this will require additional expenses, but at the same time it is unlikely to quickly bring the volumes closer to those provided by permanent contracts with ALROSA.

The Russian company will have to look for buyers for the entire volume of its diamonds (until now, about a quarter of it was sold through De Beers), and also develop its own processing. However, this fully meets the strategic goals of ALROSA.

Speaking to reporters on Friday, company president Alexander Nichiporuk said that ALROSA already has its own strategy for the development of trading operations. In the medium term, the company expects to sell about 65% of mined diamonds under long-term contracts to regular partners, the rest will be sold on a tender basis, which will allow the company to “feel” the market.

Starting this year, the company is opening sales offices around the world. In 2006, it is planned to open a sales office in Ramat Gan (Israel) and Dubai (UAE), through which regular diamond sales will be carried out. “If previously almost everything was sold through De Beers, now the company began to trade more independently,” explained Mr. Nichiporuk. According to him, the company has already established contact with a number of regular customers, with whom the company expects to conclude long-term contracts in the near future, in which sales volumes, assortment, and pricing principles will be predetermined.

However, the company will be able to fully operate through its own sales system only after the abolition of diamond export quotas. “The decree was prepared in the government and sent to the presidential administration,” Alexei Kudrin said on Friday. “It’s hard to say whether they will have time to sign it now in December. At least the government has done its job, agreed on the decree in all instances.” Mr. Kudrin noted that “the decision to abolish quotas on the export of diamonds abroad is a serious strategic decision to liberalize the market.” “This means that ALROSA will not wait for permission when and how much to export raw materials. That is, this will give the company independence and freedom in its actions,” he said. The draft decree also provides for the abolition of quotas on the export of platinum group metals.

Anna LANDER