Pundits have delighted in predicting the death of De Beers. For most of last century, De Beers headed up a world diamond cartel that regulated rough diamond supply and kept prices high. It sold between 80% and 90% of the world’s diamonds. Then things changed. The cartel broke up, the group sold its shares in Anglo American and de-listed, announcing a new strategy. Now De Beers is adapting to being just another company in the luxury goods industry, even though it is still the dominant player in diamonds.
One thing hasn’t changed. It’s still chaired by an Oppenheimer, the third to occupy the position, and the family is still one of the group’s three main shareholders. Ernest cemented the group’s financial dominance while his son Harry supervised the cartel’s operations and global marketing. Now Nicky is in charge of bringing De Beers into the next phase of its existence. It is still very much a family business (the Oppenheimers own 40%) and still very much about diamonds.
Edward Zwick’s film Blood Diamond, starring Leonardo DiCaprio as a South African mercenary and set in war-torn 1990s Sierra Leone, is only set to open internationally on December 15. But the publicity war has already begun. Diamond advocates are taking out full-page adverts in American newspapers and a website, www.diamondfacts.org, has been launched.
“We welcome the opportunity this film presents to talk about the steps the diamond industry has taken to prevent the trade in conflict diamonds. De Beers finds it unacceptable that revenue from the sale of rough diamonds has been used in the past to fund the activities of rebels and believes that one conflict diamond is one too many; 100% of diamonds from De Beers Group are from conflict-free sources,” said company spokesperson Tom Tweedy.
“It [the film] is absolutely a concern for us,” Guy Leymarie, CEO of De Beers LV, told CNN Money. He added that it was difficult to forecast the impact the film would have on sales.
Then there’s the Kalahari Bushmen saga, which refuses to go away.
“There is no connection between diamonds and the relocation of the San from Botswana’s vast Central Kalahari Game Reserve,” said Tweedy. “The government of Botswana has stated that the relocation of the San communities has nothing to do with diamonds, but is being carried out to provide the San with better educational, health and social amenities.”
Nevertheless, the Kalahari Bushmen took out a full-page advert in American film magazine Variety, asking DiCaprio to help them. Survival International says Botswana diamonds should be regarded as conflict diamonds. On behalf of the Bushmen, it asked supermodel Linda Evangelista to step down as the face of De Beers.
The diamond company is a private, non-listed business so its value can only be estimated rather than gleaned from market data. Nonetheless, the Oppenheimer’s 40% stake is worth about $16,13-billion. Annual sales now total about R6,539-million and dividend payments last year amounted to R250-million.
Surprisingly, perhaps, given the company’s dominance in its sector (De Beers is diamonds), De Beers is much too small to be considered for inclusion in the Fortune 500. Its turnover is less than half of the lowest-ranked Fortune 500 company. It would barely make a Fortune 1Â 000 if such a list existed.
De Beers has somewhat reluctantly admitted that it can no longer control global prices. So it’s aiming for the next best thing: becoming the “supplier of choice” for the industry. By adding marketing and branding value and supplying selected dealers or “sightholders”, it hopes to command a higher price for its diamonds compared to its competitors. It now commands 60% of the diamond market, which is a respectable figure.
It has, for the first time, entered the retail jewellery market through its De Beers LV stores, a joint venture with seasoned luxury goods merchants Louis Vuitton Moet Hennessy of 10 upmarket stores. An inconvenient price- fixing judgement in the United States, which restricted the ability of De Beers executives to travel to the country, has been dealt with. De Beers agreed to pay a $10million fine in 2004 and can now operate in the US.
The De Beers cartel was one of the most successful in history. It was able to buy diamonds that came on to the market in excess of certain targets, thus maintaining prices and avoiding large fluctuations in the price. But, as diamond production increased, maintaining the monoÂpoly became increasingly expensive. The group called it quits in 2000.
Despite the break-up, De Beers has been an extremely good investment for the Oppenheimer family. Nicky and his relatives ranked 134th on the Forbes Rich List, which estimates their net worth to be $4,6billion. Sadly, perhaps, they only managed second place on the Sunday Times Rich List of wealthy South Africans, which ranks wealth according to JSE shareholdings. Indian upstart Lakshmi Mittal came first.
Aside from the Oppenheimers’ 40%, Anglo American holds 45% and the Botswana government owns a direct 15% stake in De Beers. It also has a 50% stake in De Beers subsidiary Debswana.
Though it is historically linked to Anglo, De Beers now forms a comparatively small portion of the group’s business. It contributed 9% of the group’s headline earnings last year; earnings before interest, tax, depreciation and amortisation of $655-million; and $583million of operating profit. It’s a paltry amount, relatively speaking: Anglo’s total underlying earnings reached a record $3,7billion last year, a 39% inÂcrease on the previous year. Fortune magazine ranked Anglo American 196th on the Fortune 500 this year.
It is not easy to work out just what De Beers is worth. The group sold a 26% stake in its South African operations, De Beers Consolidated Mining, to BEE company Ponahalo Holdings for about R3,8billion last year. This would value Consolidated Mining alone at R14,6billion. A rough estimate of the group as a whole, based on the earnings Anglo receives, would value the group at $740million (about R5,7-billion).
But times are tough. Announcing its most recent results for the six months up to June this year, De Beers said in July that short-term rough diamond market conditions would remain challenging.
Trade website Diamond Intelligence Briefs (www.diamondintelligence.com) has complained of the high prices of De Beers’s marketing arm, the Diamond Trading Company, and has suggested that it may need to lower prices towards the end of the year. Indications are that it has already lowered prices at least once, in July.
Until this year, diamond prices were on the rise. Anglo American says world retail diamond sales exceeded $60billion for the first time in 2004. Last year, sales reached $65billion, but the World Diamond Congress said demand had flattened this year as diamonds experienced competition from other luxury goods.
Industry leaders were hoping sales would recover before Christmas, but there are fears that consumers will shy away from jewellery because of the negative attention drawn to conflict diamonds by DiCaprio’s film.
But diamonds don’t have to be bad news. These gems represent 33% of Botswana’s GDP ($3 billion) and a quarter, directly or indirectly, of the country’s jobs. Altogether, 28Â 000 people in Southern Africa are employed by the diamond industry and about 19Â 000 of these jobs are in South Africa.
“The diamond trade contributes more than $8,4billion a year to Africa. Revenues from diamonds have helped fund the construction of hospitals, medical centres and hospices, ensuring that more than five million people in Southern Africa have access to appropriate healthcare,” said Tweedy.
There are concerns about the profitability of De Beers’s operations in South Africa. In February, the group said four of its six local mines were profitable, but at its July results presentation, the company said only two were profitable, with the remaining four being close to profitable. The Koffiefontein mine near Kimberley has been closed. The company told the Mail & Guardian that it was reviewing all its mines to increase profitable production.
Recent months have brought rumours that the Botswana government is planning to sell its stake in the group. Botswana Minister of Minerals, Energy and Water Resources Charles Tibone has admitted to Mineweb.co.za that the original reason for buying a stake was “to gain a board position in De Beers and insight into the diamond industry. At the time the diamond industry was known for its secretiveness, and even though we were assured that we were getting as much information as needed, you could not really prove that was so … so it was useful having a foothold in the boardrooms of the entity that was managing the diamond industry worldwide.”
Diamond Intelligence Briefs says Debswana is the world’s largest diamond producer with the lowest-cost mines, which puts it at an enormous advantage. The company has established its own sales and marketing plans, which could indicate that it is readying for a break from De Beers. This would be a huge loss for the group. According to the trade website, Debswana produces 66% of the group’s production in carats and 70% of the value.
Botswana has denied immediate plans to sell its stake, but has not ruled out plans to sell in the future. Whatever happens, it seems that De Beers, the great survivor, is heading for interesting times.
What conflict diamonds?
Edward Zwick’s upcoming film Blood Diamond stars Leonardo DiCaprio as a South African diamond dealer in Sierra Leone and promises to spotlight the trade in diamonds from war zones. The Guardian reports that industry stakeholders and human rights campaigners fear a consumer backlash against African diamonds, which are valuable exports for poor countries.
So-called “conflict” or “blood” diamonds — rough diamonds used to fund conflicts, mainly in African countries — first came to international attention in 1998, when human rights group Global Witness reported on the war in Sierra Leone, where rebel leaders sold diamonds to buy guns. It was estimated that conflict diamonds form about 4% of global trade.
In 2002 the Kimberley Process was signed to prevent conflict diamonds from reaching mainstream markets. Rough diamonds must be sealed in tamperproof containers and issued with certificates every time they cross an international border. Countries where diamonds are known to be fuelling a conflict are barred from international trade in these gems. — Jocelyn Newmarch
Romancing the stone
The slogan “a diamond is forever” still encapsulates the way most people feel about these gems. A diamond is a sentimental purchase, a gift of love, and should not be resold. Created by American advertising agency NW Ayer, the campaign was described as a “new form of advertising, which has been imitated ever since”. No brand name was mentioned — De Beers had a virtual monopoly anyway — so the agency was able to link the product to an emotional idea.
Successful as it was, the campaign was born out of necessity. In 1938, when De Beers commissioned NW Ayer, the Oppenheimers and their bankers were concerned about the world diamond price. Americans already bought three-quarters of all the cartel’s diamonds, but De Beers wanted them to buy more expensive stones. — Jocelyn Newmarch