The cartel’s pricing system and the state valuator’s job are at stake as De Beers and the government square up, reports Mungo Soggot
The row between the government and De Beers escalated this week as diamond industry players plotted to oust the state diamond valuator while the government prepared to challenge the way the diamond giant controls worldwide gem prices.
A government task team, probing the way exported diamonds are evaluated, is believed to recommend that the state abandon the diamond pricing system De Beers uses for its worldwide diamond cartel. Sources close to the investigation said it recommends diamonds be valued according to higher “market-related prices” instead.
If implemented, the recommendation could justify hitting De Beers with an extra tax bill. Some diamond officials argue South Africa’s diamond production has been consistently undervalued.
By challenging De Beers’s price lists, the government is implicitly questioning the operation of the company’s cartel.
De Beers, through its London-based marketing arm, the Central Selling Organisation (CSO), controls between 60% and 70% of the world’s diamonds, and regulates diamond prices by restricting the supply of gems to the market. Its response to criticism of its manipulation of the diamond market – which has made the company’s directors personae non gratae in the United States – is that without the CSO there would be a glut of diamonds and prices would plummet. And therefore, it argues, it is pointless to talk of “market-related prices”.
Tension between the state and De Beers broke into the public domain three weeks ago when the government’s new diamond valuator took the unprecedented decision of rejecting De Beers’s evaluation of a consignment of diamonds due to be exported to the CSO. The valuator rejected the CSO-price analysis of the diamonds, saying they should instead be valued according to market value. Industry talk is that the valuator said the gems were worth about 15% more.
The valuator’s approach has had a frosty reception. After the valuator rejected the diamond giant’s prices, De Beers initially signalled it would challenge the validity of the valuator’s appointment. But the company backed down after a meeting with the Minister of Minerals and Energy, Penuell Maduna, who announced the appointment of a task team to investigate.
Maduna is expected to make an announcement on May 4 about the team’s interim findings on valuation and on the validity of the valuator’s appointment. The team that has reportedly endorsed the valuator’s approach includes the Department of Finance’s chief tax policy adviser and officials from the South African Revenue Service and the Department of Customs and Excise.
The battle against the valuator is now being fought by diamond industry players close to De Beers who sit on the government’s Diamond Board – the institution that appointed the new valuator last November. This week, these board members threatened to go to court to challenge the valuator’s contract. There are also murmurings that they want to oust the board’s CEO, Victor Sibiya, perceived as one of the masterminds behind the government’s new-found assertiveness where the diamond business is concerned.
Chair of the Diamond Board, Gibson Thula, on Wednesday blocked an attempt by board members to state their case against the valuator’s appointment, saying he would only sanction discussion of it after Maduna’s announcement. Maduna is expected to back the valuator, but a court action could take place before he does so.
The valuator’s job was put out to tender last year. There were complaints by other contenders that they were given little notice to present their bids, but there was no other concrete evidence of impropriety. The valuator company, DVIC, is headed by Belgian Claude Nobels, an adviser to the Russian government and one of the diamond valuators used by insurance giant Lloyds. The valuator has political clout: its locally registered company is chaired by the former head of the Truth and Reconciliation Commission’s reparations committee, Hlengiwe Mkhize.
Despite the inclusion of the tax officials in the government probe, De Beers’s chair Nicky Oppenheimer has played down the dispute, telling Reuters in London it had no tax implications as South Africa no longer levied export duties on diamonds.
Oppenheimer skirted other tax implications stemming from the dispute, the most obvious being the taxable profits of De Beers’s local operations. The value of diamonds signed off by the government diamond valuator is the value that is used to calculate the tax De Beers pays on its South African operations. It is also the value that is used to calculate the portion of profits De Beers pays to its various joint venture partners in South Africa.
The export tax exemption to which Oppenheimer referred is not permanent. It is granted to De Beers in terms of an annual agreement with the government, the core of the arcane regulations governing the local diamond industry – regulations which bolster De Beers’s control of the diamond market.
The agreement obliges De Beers to give local diamond cutters first choice on diamonds suitable for the local industry before they are exported to the CSO. In return, De Beers gets its export tax exemption. In practice, a committee appointed by the Diamond Board selects the diamonds suitable for the local industry. Then the diamonds are shipped to the CSO in London and De Beers brings back to South Africa, carat for carat, the type of diamonds desired by the local industry. De Beers runs this process, which is understood to be an area of concern for some state diamond officials. The South African government diamond valuator has traditionally been tasked with checking the process in London.
At the heart of the clash between the government and De Beers is the way De Beers’s South African operation relates to its London and Swiss bases. Some government officials suspect De Beers has been limiting its exposure to the South African taxman, shifting its tax burden to the more lenient Swiss, British and other tax regimes such as the Cayman Islands. All its South African diamonds are shipped to the CSO. De Beers listed in Switzerland in 1990.
Local analysts have generally been sceptical about the government’s moves. One stock exchange analyst said: “If they [the government] have evidence that De Beers has committed impropriety, then put it in court and let us see a summons. It smacks of harassment.” He added that De Beers’s trump card was that the CSO price book was a “lighthouse in a very unstable [diamond] market”.
But it is also easy to grasp why the government is so suspicious of De Beers, considering the relationship between De Beers and the previous diamond valuator, whose contract even stipulated how De Beers could meddle with it. It is also arguable that the legislation governing the diamond industry in South Africa is geared to supporting De Beers’s restrictive diamond cartel at the expense of the local diamond cutting industry, which is about a fifth the size it was 10 years ago.
Officials are mindful that it is not in De Beers’s interests to have a thriving beneficiation industry in producing countries as this provides diamond producers opportunities with which to trade outside the CSO. There is also political kudos to be had in gunning for De Beers.
The government’s biggest problem will be rebutting De Beers’s contention that there is no diamond market other than its empire – a hurdle which could cut short any justification for a full probe into De Beers’s local affairs. There are nevertheless whisperings in the industry that despite Oppenheimer’s sanguine public stance on the matter De Beers is bracing itself for a troublesome – and possibly expensive -fight.