Alrosa Nearing Inventory Deal with Govt.

RAPAPORT... Alrosa expects to finalize a sale of rough to Gokhran in the next two months, aiming to reduce its stockpiles while ensuring the diamond industry doesn't receive a flood of goods.Gokhran - Russia's state gem and precious-metal depository - would store the diamonds until the market stabilizes, Alrosa deputy CEO Evgeny Agureev said Monday. The parties are currently negotiating the sale terms."It will be very important for our industry, because [it] will also provide the confidence to [the] midstream that [excesses of diamond stocks will be] limited," the executive told Rapaport News. "The government will not try to sell these goods in [the] short term."Gokhran often buys from Alrosa to help it during downturns, mostly notably in 2009, when it purchased an estimated $1 billion worth of inventory.Last year, the governor of Yakutia, which owns Alrosa shares, proposed that the miner sell $500 million to $1 billion of goods to the state. The current talks are about a transaction in that range, Agureev confirmed."It's a question of state-government support to our company," he noted. "And not only to our company, but to the whole industry."Growing stockpilesThe discussions follow a collapse in Alrosa's performance during the pandemic, with rough sales down 91% year on year to $74.1 million in April to June - the lowest in more than a decade.Its rough inventories rose 25% to 26.3 million carats during the period as the sales drop outpaced production cutbacks. The company is scheduled to report July sales next Monday and its second-quarter profit on August 14. Alrosa's contract customers delayed buying goods during Covid-19, leading to a shift in the location of inventory. While Indian cutting firms bore the brunt of a diamond oversupply last year, considerable stockpiles are now sitting in safes at Alrosa and rival De Beers.Efforts to rebalance inventories following the 2019 crisis put the cutting and trading sectors on a strong footing at the start of 2020, helping ease the impact of Covid-19, Agureev said. Manufacturers' stock levels have been relatively stable during the pandemic, he observed, as they have avoided purchases while their factories were shut or operating below capacity. "At this moment, the midstream has about one-and-a-half months' available rough stocks," he estimated. "We also see that the midstream has started to receive new orders from the US."Long-term planThe Russian miner has allowed contract customers to renege on purchase obligations despite the buildup of its own inventories. It has also frozen prices since February to help maintain the value of manufacturers' and dealers' diamond stocks, and will continue with both these policies until the situation improves, Agureev insisted. "We will not try to sell or to push...purchases...because we are responsible and a long-term player in our industry, and we need long-term stability and not short-term gains," he said.At monthly sales from April to June, the company let long-term customers defer 100% of their contracted allocations to later in the year. It expanded this flexibility in July, allowing them to refuse all goods entirely without accumulating a pile of purchase obligations at the end of 2020.From August, the company is reducing allocations by 50%, though clients will be able to buy more if they want. It has yet to decide what deferrals and refusals it will permit."We have to understand what kind of new contracts the midstream [has] received from the US, from retail, and what the midstream's current needs are," the executive elaborated. "Are they ready to start [buying rough]? Based on this we will take the decision."Price discrepancyThe two largest miners have priced their contract goods up to 25% higher than tender houses and smaller producers during Covid-19, according to buyers. Most clients want the rough to be cheaper, as weak polished prices have squashed their profit margins. But offering discounts during the unprecedented slowdown would have damaged the market by devaluing clients' inventories, Agureev argued.Alrosa will reconsider its approach if there's a sustained improvement in polished demand, the deputy CEO said. The miner held tender viewings in Belgium in the past two weeks, offering a comprehensive range of rough goods, and is due to receive bids this week. The results will help the miner determine true market prices, he explained."If we see that there is real demand, based on end consumers' demand and new orders coming from the US and from the major markets, we will prepare the right decision regarding our sales conditions," he indicated. "Prices will be a part of this proposal. I see that it's necessary to provide some air for the midstream, but we will not [take] any speculative steps."Main image: Rough-diamond sorting at Alrosa. Inset: Evgeny Agureev. (Alrosa)