Results 2015: ALROSA – worse than usual, but better than De Beers

Moscow. December 29. “I headed the company at the time of a sharp decline in prices. Looking at what is happening, I thought: why all this? But, as much as I upset Philip méliès worse,” the joke of the President of ALROSA Andrey Zharkov at the meeting with long-term clients in December 2015 eloquently describes the situation on the diamond market. Zharkov became the head of “ALROSA” at the end of April, when only the most pessimistic experts could foresee that this year will mark the most significant decline since the 2008-09 year. And although it was painful to everyone – from small production companies to thousands of gem cutters and jewelry retailers, while the most affected looks like De Beers.

And at the end of last year, nothing – at least explicitly – does not Bode sad for the industry result. ALROSA started 2015 on the wave of success after a record-breaking revenue growth in 2014 caused by rising prices and sales volumes. The fears of some representatives of the middle link of the “diamond pipeline” – diamond cutters and diamond manufacturers about the increase of sales scale miners and lack of correlation between prices for rough diamonds and the diamonds are not exactly ignored, but being a regular, was perceived as an element of struggle for more comfortable pricing. Key indicators of the market of diamonds promised, though not explosive, but steady growth, the demand for jewelry with diamonds in the United States was sustained, China’s economy did not inspire anxiety.

Based on this, ALROSA planned 3% increase in prices. The forecast is quite modest, compared to 7% for FY 2014. But made from a high base and promising implementation embedded in the strategy of “ALROSA” scenario long-term growth, which was based on two pillars – supply reduction due to the depletion of existing fields and the constant increase in the demand for jewelry because of the improvement of the welfare of the middle class of China and India.

As shown by the year 2015, the main catalyst for the shedding tub of ice water on the diamond market is not even in macroeconomics, in particular, the situation in China. Moreover, anti-corruption policy of the Communist party of China, which then led to drop in sales of luxury in this country, not news 2015, its effect was noted two years previously and did not prevent growth in 2014.

Those affected the most fundamental excesses, about which so long spoke cutters. The increase in raw material prices in 2013-2014 at the time of the “bubble inflation” undermined their profitability, and the accumulated stocks of finished but unsold products in warehouses – has limited the appetite for new purchases. “In 2013-14, the market was thrown a significant amount of diamonds, pererabotchiki, created pressure on the diamond market and will lead to an absolute mismatch between demand and supply. As a result we see a long downward trend the prices of diamonds, which continues to move down. He raised and raw materials”, – explained the head of the Smolensk “Kristall” Maxim Shkadov. Finally, the deceleration of economies of the countries leaders in the luxury consumption, excluding the US boosted demand for jewelry with diamonds.

As a result, elastolytic, primarily De Beers and ALROSA, each of which controls about 25% of the world’s supply of raw materials, expertly removing the cream with a growing market earlier, in 2015 faced with a growing scarcity of their clients. And, as direct clients of a narrow circle of long-term customers-the sightholders, and the secondary market, which, in turn, skillfully removed the cream of the sightholders.

The market is “the battle for the remaining cache” between the largest suppliers, ALROSA and De Beers, and ALROSA succeeds more celebrated in September all the same Shkadov. “ALROSA” works more flexibly with their customers, so a Russian company at a cost 15% lower prices, compared with 18% correction De Beers. The system is implementing the largest-scale miners are virtually identical: more than 70% of sales revenue accounted for long-term clients (sightholders) receiving in the pits of their own selected categories of diamonds, and what you need to sell to suppliers. Clients they are the same, the only difference is in the number of trading sessions: the “ALROSA” they are monthly, De Beers – 10 times per year, and also in conditions of failure of the product and sorting, i.e., the overfill boxes. As it turned out, the devil is in the details.

The preponderance in number of sessions allowed ALROSA to carry out a more flexible adaptation to market realities, taking into account time lag and often as possible to adjust the range, said the analyst of branch Agency Rough&Polished Sergey Goryainov.

An important role was played by the fact that “ALROSA” has allowed the clients in particularly difficult times (for example, “quiet” third quarter) to abandon part of the monthly purchases, loading their surplus raw materials. In August, for example, the limit of selection was 20% and in November and December 30%, i.e. clients can withdraw 80% and 70% respectively of their obligations. Until recently De Beers was not allowed such liberties are trying to burden customers. In the form of indulgences was allowed to transfer its obligations to future one or two months. Strict discipline played a cruel joke. Already in the middle of the year trade media were full of messages about broken contracts on the initiative of customers, and in November, De Beers had to allow sightholders not to buy anything. November site De Beers brought in just $70 million, in December it sold $150 million is a grossly small number. “The General attitude of sightholders – not to take, if they will see the damage or to take minimum”, – said the representative of one of its clients. De Beers is not a monopoly in the diamond supply, and it is possible that clients could have gone to a more loyal “ALROSA”. Moreover, for some signals, especially in the second half of the year, customer preference shifted towards the small diamond of the mass segment, which ALROSA had more.

“De Beers had to let the customers drop boxes at 100% and ALROSA managed to avoid it by making the boxes more attractive to customers by performing the re-sort. Apparently, there was added raw materials, based on customer needs, was removed less liquid varieties. Despite the fact that the clients are the same, the requirements still differ, especially on such a volatile market,” – says Sergei Goryainov. “ALROSA is more flexible and, if I may say so, more market-oriented policy, the company managed to negotiate better with customers. ALROSA was able to properly handle a pool of customers,” he concluded.

In this case due to the higher diamond price and relatively good (compared with the second half-year) sales in the first half of De Beers has received for this period revenues of $3 billion (a drop of 21% in annual terms). “ALROSA” following the results of half-year lagged behind, having received about $2.3 billion (calculated at the average exchange rate for the period of 57.2 RUB/$), the dynamics in revenue and EBITDA has been positive due to the devaluation. De Beers data for 9 months not, and any comparison of the Russian public company that reports in rubles, with Anglo American the figures are slightly stretched. But there is reason to believe that given the weak sales at the end of the year the difference could be offset. “Theoretically “ALROSA” may be ahead of De Beers this year, given that ALROSA was less than the permitted ratio of cancelled sales. For example, in November, De Beers was the level of failure of 100%, while ALROSA – 70%. ALROSA had to sell more,” – says Oleg Petropavlovsky from the BCS.

With all the conventions of comparison, it should be noted that at stake is a loud title of “largest diamond mining company by revenue”, which, following the leader by volumes, aims to “ALROSA”. And most importantly, the lack of flexibility in sales has already forced De Beers to hurry up with the manifestations of flexibility in production.

In response to the drop in demand, De Beers three times in 2015, reduced its production landmark – with a total of 32 to 34 million carats to 29 million carats, and at the end of the year announced the closure of the least cost-effective mine – canadian Snap Lake. At the end of December, the main company De Beers Debswana announced the preservation of mine Damtshaa, as well as the reduction of ore processing at the mine Orapa. Similar processes take place or are all diamond-producing companies – such as Rio Tinto, Dominion and Petra. ALROSA, a leading industrial activity in the permafrost of Yakutia, the harder the manipulation of prey due to climatic and social characteristics. The possibility of adjusting production is seen in the first quarter. By the way, the optimism of analysts does not cause not only the first quarter, but the whole next year. But a competent sales policy allowed, at least in the past year to create a “canopy”, which, as more will become excess to ALROSA and to the market.