MOSCOW (Reuters) - Russia's Alrosa ALRS.MM, the world's largest diamond producer by output, plans to boost revenue from selling rare, colored stones where demand is stable, although it is a niche business.

Polished diamonds are pictured at the polishing affiliate of Russian diamond producer Alrosa in Moscow, Russia February 12, 2018. Picture taken February 12, 2018. REUTERS/Sergei Karpukhin

Nature gives fancy colors to about one in every 10,000 rough diamonds of gem quality that are mined around the world.

The stones that can be blue, pink or green form a special asset class, relying on a consumer passion for something exotic and unusual. This also means they are less affected by other factors driving supply and demand in the main diamond market.

The global market for polished colored diamonds is now dominated by Rio Tinto RIO.L and Anglo American's AAL.L De Beers. But state-controlled Alrosa aims to compete.

“We hope that ... Alrosa will become one of the global leaders in sales of polished colored diamonds,” Evgeny Agureev, the head of Alrosa sales division, told Reuters.

He said the stones would come straight from the producer, ensuring “transparent origin” in an industry that has been working hard to prevent stones that have been mined in areas that could fuel conflict from reaching the market.

Alrosa and De Beers produce about half of the world’s rough diamonds of all types, white or colored.

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But Alrosa’s marketing system can sometimes lack the more sophisticated image of its rivals, given the firm’s Soviet past. It has tended to sell rough diamonds in bulk, without sifting out the colored gems that can earn a premium.

Till now, its diamond polishing business of clear and colored stones has been modest, generating just 2 percent of its total $4.6 billion revenue in 2017.

Agureev said that, starting from 2018, Alrosa would sort its diamonds into 19 categories of stones and would aim to polish most of these to secure higher prices.

While profit margins are lower in the global polishing industry than the rough diamond business, Alrosa is confident it can earn more from selling cut and polished colored gems.

“The polished diamond should be more expensive because it is a ready-made final product for which there is a demand, and we have taken all the production risks on ourselves,” said Pavel Vinikhin, the head of Alrosa’s polishing division.

Those risks include the challenge of cutting and polishing colored gems, which can crack more easily than clear stones.

Alrosa plans to process colored diamonds that are mined from its remote Russian regions in its Moscow cutting and polishing facility. It also has another facility in Siberia.

Last year, the company mined a 27.85-carat pink diamond and a 34.17-carat yellow one. The number, size and shape of polished gems to be produced from these stones has yet to be determined.

Prices for diamonds depend on their color, size and cut quality. In 2017, a huge 59.6-carat pink polished diamond, the “Pink Star”, was sold for a record $71.2 million in Hong Kong.

“The market for fancy diamonds is relatively small given the inherent limited supply and the end-demand is primarily a relatively small group of wealthy individual buyers that are less sensitive to price,” said diamond analyst Paul Zimnisky.

“Selling fancy diamonds through a separate channel could allow for more price efficiency as it would attract a more competitive niche group of industry buyers,” he added.