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(Bloomberg) -- Russia wants its biggest diamond miner to work more closely with the country’s top gem cutters so the industry can better compete in a market that’s dominated by Indian manufacturers.
As part of a plan to boost the competitiveness of Russian diamonds, the government wants Alrosa PJSC to offer more favorable terms to cutters including Kristall Production Corp., Russia’s largest, according to Deputy Finance Minister Alexey Moiseev. The producer is mostly state owned.
“Cooperation currently is rather limited and it has to expand,” Moiseev said in an interview in Moscow.
Alrosa, which mines more gems than any other firm, has largely shunned cutting and polishing to focus on mining, where it can get bigger margins. Kristall and other Russian cutters currently buy stones from Alrosa at similar terms to overseas companies, and are struggling to compete with much larger polishing centers like in India. At the same time, there’s concern about stagnant demand and falling prices as young shoppers spend more cash on other luxury items such as electronics.
Read more: Historic gem hub feels the brunt as Americans buy fewer stones
The plan may lead to Alrosa selling about 10 percent of its gems domestically, Moiseev said, adding that there are no plans for Alrosa to invest in Kristall.
Although Alrosa would sell diamonds at market prices, it would be able to offer local cutters some benefits, such as allowing them not to buy the whole contracted volume or only choosing certain stones and returning the rest back to the miner, Moiseev said. The government is also mulling more cooperation between Kristall and Alrosa’s own small, but unprofitable polishing unit.
The country isn’t the only major producer to try to encourage more domestic manufacturing. No. 2 producer Botswana, as well as Namibia and South Africa, have pushed De Beers to sell more diamonds to be cut and polished locally. Canada has also spent years trying to boost its cutting and polishing industry.
Most of those ventures have struggled somewhat as the stones can be manufactured much more cheaply in India. About 90 percent of the world’s diamonds pass through the nation where as many as 1 million people are employed in the industry.
“It’s challenging to compete with India, but you can argue there’s a better chance of success now than before,” said Anish Aggarwal, a partner at consultant Gemdax in Antwerp. “The labor cost differential is shrinking as India becomes more expensive and there’s increased use of technology. For larger, more expensive rough diamonds, labor cost is a less important factor – expertise is the main thing.”
Russia also plans to ease excessive controls for importing and exporting stones, as well introducing regulation identifying origins of diamonds to make the market more transparent, Moiseev said. This includes special passports for gems by year-end and may eventually lead to special nano marks on gems.
"The ultimate goal is to get a person to be able to scan a code in the shop and find out where the stone in coming from," Moiseev said, adding that more jewelers will use devices to help them detect synthetic stones.
Still, Alrosa will need to spend more on marketing to support demand, according to Moiseev.
“Millennials still understand what diamonds are and do not deny them, and will grow to buy them,” he said. “The question is if the next generation will.”
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