Today’s Presenter: Monika Nowotnik Functional Expertise • 7 months of expertise in the division for Economic Research and Analytics, and over 1 year in the division for Metals, Minerals and Mining for Russia, CIS and CEE • Particular expertise in: - Analyzing macroeconomic trends, PESTLE analysis and global forecasting - SWOT analysis, drivers and restraints analysis, competitiveness analysis, risk analysis - Industry specified analysis and forecasts Industry Expertise Experience base covering broad range of sectors, leveraging long-standing working relationships with leading industry participants’ Senior Executives in: - ICT, Energy, Healthcare, Defense and Chemicals in Russia - More specific knowledge about Metals, Minerals and Mining industries in Russia What I bring to the TeamMonika Nowotnik • Extensive economic knowledgeResearch Analyst • Wide knowledge about the CEE region (especially Russia and Poland) • High analytical skillsFrost & Sullivan • Ability to manage the project (June 2010 - Certificate Prince 2)Central and EasternEurope Career HighlightsWarsaw, Poland • 3 years of business experience in: - Asseco Poland S.A. (Warsaw, Poland) Division for Cooperation with International Organizations and Solutions for Uniformed Services – Sales Support - NATO HQ (Mons, Belgium) – Engineering Branch and Canadian Support - Intern - ABG Ster Projekt S.A. (Warsaw, Poland) Center for Design of IT Solutions - Intern Education • Postgraduate Studies in Project Management, WWSI, Poland • MA from Warsaw School of Economics, Poland • Exchange (during MA) on University of Tartu, Estonia
Briefly Discuss Occasion for the Analyst Briefing In 2010, Russia has become the world’s largest diamond miner. Will it be able to remain the market leader? Mining of rough diamonds is well-developed in Russia due to government support. How it is affecting the other market participants? What about the IPO of Russian largest diamond miner - Alrosa? Cut diamonds segment is underdeveloped due to the policy of state-owned companies, low price competitiveness, and shortages of skilled labor force. How to survive in these challenging market conditions?
Definitionns and Scope Mining Mining Segment - Rough Diamonds Sorting Cutting and Polishing Cutting Segment - Brilliants Manufacture of Jewelry or Industrial Use Retail End-Use Source: Frost & Sullivan analysis.
Key Facts About Global Diamond Market Among the world’s rarest minerals Symbol of love, fidelity, and purity They cannot be standarised DIAMONDS Gem quality diamonds are used in jewelry Industrial diamonds are used as abrasives
Global Hot Spots Diamond Market: Key Manufacturers and Processing Centers (Global), 2010 In 2010,As of 2010, Russia wasthe second the largestlargest diamondsworld’s manufacturerdiamond 1 in the world.manufacturer 2 The country iswas Canada. Netherla expected toSimilar to nds, Antwerp China increase itsRussia, it productionpossesses India, and to holdrich kimberlite The United Mumbai the leadingreserves. States, position in the New York Israel, Johann diamond Tel Aviv esburg, market. SouthLegend: 3 Africa Diamond Miners Thailand The third world’s largest diamond Processing Centers - Cutting producer in 2010 was Botswana. The Source: Frost & Sullivan analysis and Polishing country has limited resources, but Key Diamonds conducts intense mining activities Manufacturers - Mining and because of inexpensive labor force Sorting resources.
Today and Tomorrow… RUSSIAN DIAMOND MARKET Export-driven marketAlrosa - global leader Rich resources Underdeveloped cutting segment Domestic market is growing, but exportFierce competition will remain importantbetween the threeworld’s major Steady depletion of Demand for brilliants isdiamond miners: resources, searching increasing, cutting segment isAlrosa, De Beers, for resources all likely to gain importanceand Rio Tinto. around the world Source: Frost & Sullivan analysis.
PESTLE Analysis Diamond Market: PESTLE Analysis (Russia), 2010 • Mining activities endanger the • Diamonds in Russia are believed to be a environment. Hence, in order to protect state wealth. Hence, the government the environment, these activities should strictly controls the market through a be carefully planned, including the long- state-owned monopoly in the mining lasting rehabilitation process. segment.• The backbone of the regulatory • Economic growth has the strongest framework is federal law on impact on every industry, an increase in Precious Metals and Precious revenues and salaries means higher Stones (41-FZ, 26th March 1998) spending, propelling the economy. As a and law on Natural Resources result of the increasing wealth of society, (2395-1, 21st February 1992). demand on luxurious goods, including• It needs to be modernised to diamond jewelry is growing. ensure efficient quality control and trade relations. • The society in Russia is characterised by • The mining sector is under emerging middle class and increasing transformation due to modern urbanisation. These trends are enhancing the technologies enabling efficient growing spending on luxurious goods. underground and low-ore mining. Rating indicates level of impact of PESTLE factors on growth. Scale = 0 to 10, where 0 is low impact and 10 is high impact. Source: Frost & Sullivan analysis.
Major Drivers and RestraintsDiamond Market: Key Market Drivers and Restraints (Russia), 2011-2015 1-2 years 3-4 years 5 years Increasing demand for diamonds drives the market revenuesMarket Drivers Development of mining technologies enables to increase productivity Governmental support helps during the times of economic instability Synthetic diamonds might to some extent become the substitutes of natural diamondsMarket Restraints Environmental and safety concerns slow the pace of development Lack of high-grade discoveries limits the market supply Impact: High Medium Low Source: Frost & Sullivan analysis.
Diamond Market Forecast The total market embracing sales of rough, as well as cut diamonds is forecast at 3.7 percent growth annually to reach $5.74 billion in 2015. Diamond Market: Real GDP Growth and Inflation (Russia), 2008-2011 and 2015 16.0 8.0 14.0 6.0 Inflation Growth (%) Real GDP Growth (%) 12.0 4.0 10.0 2.0 0.0 8.0 (2.0) 6.0 (4.0) 4.0 (6.0) 2.0 (8.0) 0.0 (10.0) 2008 2009 2010 2011 2015Average Inflation (%) 14.1 11.7 6.8 8.9 6.5Real GDP (%) 5.6 (7.9) 4.0 4.3 4.0 RUSSIA Note: All figures are rounded. The base year is 2010. Source: IMF and Frost & Sullivan analysis.
Growth by Market SegmentCutting segment is expected to grow at 4.4 percent annually. It is able to generate higher margins and bring higher revenues. It presents potential due to developing jewelry industry in Russia.Mining one is already well-developed, however still it presents potential for growth due to the rich kimberlite deposits. It is expected to witness CAGR of 3.4 percent between 2010 and 2015. Diamond Market: Total Market Revenues (Russia), 2007-2015 7.00 6.00 5.00 Revenues ($ Billion) 4.00 3.00 70% 68% 2.00 1.00 32% 30% 0.00 2007 2008 2009 2010 2011 2012 2013 2014 2015 Mining Segment Revenues 2.99 2.99 2.19 3.33 3.43 3.53 3.64 3.78 3.93 Cutting Segment Revenues 1.37 1.40 1.00 1.46 1.54 1.62 1.67 1.74 1.81 Note: All figures are rounded. The base year is 2010. Source: Frost & Sullivan analysis.
Monopoly or Real Competition CUTTING SEGMENT MINING SEGMENT• Kristall Production Corporation (Kristall) is the • Alrosa controls all the richest kimberlite largest cutting and polishing centre in Russia, deposits in Russia. founded in 1963 in Smolensk, and belonging to • Alrosa was considering cooperation with the state. foreign companies and plans IPO. • Ruis Diamonds is vertically integrated with • The other local companies are extracting diamond miner CJSC Uralalmaz. diamonds from alluvial deposits. Diamond Market: Market Share Analysis by Diamond Market: Market Share Analysis by Volume for Cutting Segment (Russia), 2010 Volume for Mining Segment (Russia), 2010 Kristall Others Production OJSC Nizhne CJSC 43.3% Corporation Lenskoye Uralalmaz 27.6% 3.0% 0.2% Brillianty Ruis Alrosa Diamonds CJSC Alrosa 8.6% Ltd. 96.8% 20.5% Medium Competitive Market State Monopoly
The Richest Diamonds Deposits Diamond Market: Key Mining Areas (Russia), 2010 Sakha Republic (Yakutia) - 82.0 percent* Arkhangelsk Oblast - 17.0 percent* 8 10 9 2 3 1 4,5 7 6 ALROSAAlrosa operates on four large kimberlite mines: Diamond Mines -1. Mirny Alrosa Krasnovishersky2. Udachny District - 2.0 percent* Diamond Mines - Nizhne Lenskoye3. Aikhalsky *Percentage out of the total proved Russian reserves. Diamond Mines -4. Nyubrinsky Source: Frost & Sullivan UralalmazAlrosa’s subsidiaries owns 15 smaller mines: URALALMAZ NIZHNE LENSKOYE5. Alrosa Nyurba - alluvial deposits Nizhne Lenskoye operates on five Uralalmaz belonging to the Ruis Nyubrinsky, Butoobinsky alluvial deposits: Group operates on a few alluvial6. Almazy Anabara – six smaller 8. Byllyakh, Tyglykyt and Hara-Mas deposits in Anabar area deposits in the Urals region, in 9. Molodo7. Severalmaz - Lomonosov Mine Krasnovishersky District. 10. Talahtah
Diamonds are the Girl’s Best Friends Machinery Jewelry• The market of diamonds instruments is growing due to their increasing • The Russian jewelery popularity and industry has grown by 20.0 unquestionable durability percent in 2010 to reach $5.30 and precision. billion.• It is represented by four key • The largest Russian participants: OJSC jewellery manufactureres are Terekalmaz (Terekalmaz), Adamas, Almaz Holding, JSC Daimnitech, OJSC Yashma, and MIUZ (Ruis 5.8 million carats VeAl, and JSC Tomal. Group). Note: Other Industries include felectronics, medicine and chemistry. Note: All figures are rounded; the base year is 2010. Source: Frost & Sullivan analysis. The machinery industry is creating the largest demand for diamonds in volume terms. However, in value terms, it accounted for only 1.0 percent of revenues in 2010 due to a gap in prices between gem stones and industrial diamonds.
The Last Word 1 Russia possesses rich kimberlite deposits, which still need geological exploration. Retailers are optimistic about diamonds sale in the future as a result of the 2 increasing popularity of diamonds as a capital investment. Higher growth is expected in the cutting segment as opposed to mining. Russia’s 3 two largest cutting companies (Kristall and Ruis Diamonds) are well positioned to push exports. The mining segment is likely to become slightly more competitive, however the 4 supply is not likely to grow as the largest miners want to keep prices high. Modern equipment and automated systems are likely to facilitate growth in the 5 market due to increasing efficiency and productivity.
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