Alrosa (RTS: ALRS), which controls a quarter  of  the world diamond market, wants to increase direct sales to
world jewelry brands.

     "The  path  from  mine  to  jewelry  store  should  be  as short as possible.  We  believe  the  best  plan  would be to sell uncut diamonds directly  to  famous  world  brands.  Alrosa  has  begun direct sales to Tiffany  &  Co and we're sure these sales will breathe new life into the jewelry  industry," company head Sergei Vybornov said at a conference in Antwerp earlier this week.

     The  sales network in the diamond industry has grown much longer in the past  15  years  and  the  number of speculative transactions on the market has reached unprecedented highs, he said. "Dealing  is a common element of the diamond market. However, under certain  circumstances  this  classic  business  of weights and balances could become  an  instrument  of chaos. We remember the situation in the mid-1990s  when  bad  decisions deposited diamond reserves that had been accumulated  in the State Reserve over many years on the market, causing a free fall in prices," Vybornov said.

     Alrosa  believes  the major world diamond producers and produces of end products should devise measures to eliminate speculation or at least reduce it to a minimum, he said.  He  also  called  for  a  replacement  for  the  dollar and using a currency  less dependent on global economic and political trends to sell diamond products.

     Vybornov  said  over  the  past decade no large diamond fields have been discovered and most of the existing ones can no longer be developed using open pits, so the company has had to build underground mines.

As a result, the market is not getting enough diamonds. Demand  for  diamonds will grow to $18 billion by 2012 but supplies will be  about  $9 billion, he said. "Thus we can easily see that prices will hit  unprecedented  levels. This will rattle the very foundation of the diamond market," he said. He  said the cutting industry is growing in African countries where diamonds  are produced. Botswana, Namibia, Angola, South Africa, and the Congo plan  to  build  cutting  plants that will need the same amount of diamonds  currently  processed  in  the traditional cutting centers like Israel, Belgium, and India.

     "There are serious flaws in that tendency," he said. Profit  in  the modern cutting industry is extremely small. He said two Russian  cutting  enterprises were on the verge of bankruptcy at the start of the year. "One  billion  dollars invested in the cutting industry creates new jobs and  brings  tax  revenue  of $100 million at best. That is four to five times less than investment in construction, he said.

     Vybornov said the small investment potential of the diamond cutting industry, low profitability, and strong competition from the traditional world centers  have reduced the number of cutting enterprises in Russia.
The diamond  purchases by Russian cutting enterprises dropped nearly 50% in the past two years in weight and 20% in cost.

     Most   Russian   cutting  enterprises  are  controlled  by  foreign companies (in ownership and financing), he said. "The formation of a cutting industry in Africa will use hundreds of billions  of  dollars  from  the  budgets and stabilization funds of the diamond   producing  countries  and  borrowed  funds  to  build  cutting enterprises  with  high  commercial risk and minimal social and economic returns," he said.

     Problems  with  financing  these enterprises could arise due to the lack of specialized banks, he said. "We  saw  a  similar  problem  in  Russia.  The lack of specialized financing  and small investment opportunities for the cutting business forced Alrosa to provide  credits for producers.  This has proved ineffective.  It  hurt the diamond industry and many cutting enterprises were unable to withstand free competition," he said.

     "We  have  stopped  subsidizing  the  cutting business. We feel the market is the only regulator of our business," he said. Vybornov  said  the  outlook  for  moving  the diamond business and cutting sector to the Middle East would create more problems from shadow business.

     "The  quality  of  cut  diamonds produced at the new enterprises in Africa might  not  meet  industry standards due to the lack of tradition and cutting  schools.  Their sales and marketing could have problems due
to the lack  of local dealer networks and blockades by competitors - the traditional players on this fragile market," he said.

     "This  could  result  in the bankruptcy of the new national cutting enterprises  and  obvious  social  consequences,"  he  said. "We've been through that in Russia," he said.