African firms may finally share the glittering rewards

From The Economist:

Diamonds_1 DIAMONDS are back on the big screen. The stones serenaded by Marilyn Monroe as a girl’s best friend are now, however, portrayed by Hollywood as Africa’s worst enemies. Leonardo DiCaprio may win an Academy Award for his performance in “Blood Diamond”, as a mercenary hunting for the precious rocks during the war in Sierra Leone in the 1990s. But in reality, the shape of the industry—which produces an estimated $13 billion of rough stones and over $62 billion of diamond jewellery—has greatly changed since then.

Most of this transformation is due to the fact that De Beers, the company that once controlled much of the supply of rough diamonds, has loosened its grip, and a host of smaller producers are emerging. Regulators in Europe and America and governments in Africa have also promoted change, and “blood” diamonds have almost disappeared. As a result, the diamond trade is starting to look more like any other ordinary industry.

The shift, says Gareth Penny, De Beers’ managing director, has been “from a supply-controlled business to a demand-driven one.” In the early 1990s the diamond giant was producing 45% of the world’s rough diamonds, but selling about 80% of the total supply from its London marketing outfit, regulating the market through the careful management of a large stockpile. But sitting on a big inventory was not good for financial returns. At the same time regulators in America and Europe were calling for more competition and stories abounded about atrocities committed by diamond-financed rebels in Africa. …

What is certain is that Africa, which produces 60% of the world’s diamonds (see chart), wants to do more than just supply rough stones. “De Beers has failed to properly appraise the aspirations of African governments,” says Chaim Even-Zohar, a prominent diamond specialist. “Now it is payback time.” Gone will be the days when African diamonds were shipped to London to be sorted and aggregated in lots before being sold.

In January the firm agreed with Namibia’s government that all diamonds produced by their joint venture would be sorted at home, and about $300m worth of gems, just under half the output, would also be sold locally. Last week De Beers, which has already sold 26% of its South African arm to a black-owned consortium, said it would merge its Namaqualand mine with a state-owned diamond firm to create a new independent local producer. And by 2009, all De Beers stones from around the world will be sent to a swanky glass building in Botswana’s capital to be aggregated. All this shows that mineral resources need not always be a curse.

African producers are also keen to cut and polish their own diamonds, which adds 50% or so to the value of rough stones, and even move into the jewellery business. Although it remains a big trading hub, Antwerp is no longer the world’s cutting and polishing centre, and Israel has suffered as well. Almost all diamonds are now cut and polished in India or China, but African producers hope to get a share of the business.

More here.