The Call Out Of Africa

The most memorable moment at the recent Antwerp Diamond Conference came from the formidable Phumzile Mlambo-Ngcuka, South Africa’s minister of mines. Clad in blue African robes, she forcefully argued for bringing more cutting to Africa, and then took questions.

The Gemological Institute of America’s Russell Shor asked if her country could compete with other centers that have lower labor costs—a standard query, but Mlambo treated it like a relic from another century. “The diamond industry has to get diamonds from South Africa,” she shot back. “And we will make sure they need us.” End of answer. The amused moderator, Chaim Even-Zohar, asked: “Does that answer your question?” For most, it did.

The issue of “beneficiation”—basically, ensuring that diamonds mined in a country are cut there, providing jobs for locals in the process—was barely on the industry’s agenda one year ago. It wasn’t discussed much even at the October 2004 World Diamond Congress. But it’s the issue of the moment, and the latest trend with potential to transform the industry.

It was an issue Mlambo’s boss, South African President Thabo Mbeki, hit hard during his Conference address. He noted that while South Africa is a major producer of gold, diamonds, and platinum, it manufactures only 1% of the world’s jewelry. “[I am here to] deliver a plea in the name of millions of Africans throughout our continent,” he declared, “that we all work together to give practical meaning to a new song: ‘Diamonds Are Africa’s Best Friend.'”

Lev-rage. In the past, De Beers has argued that it’s not economical to cut most diamonds in Africa. But ex-sightholder Lev Leviev turned that logic on its head when he opened factories throughout the continent. Now officials want more companies to be like Lev. South Africa’s Mlambo, in particular, is putting her money collectors where her mouth is. The government’s new Mining and Minerals Bill puts a 5% duty on exported diamonds—and if the bill is passed, that would put a significant crimp in manufacturer’s margins.

De Beers, whose power base is in Africa, has clearly gotten the message. In Antwerp, chairman Nicky Oppenheimer proclaimed that “the new century will be an African century,” and even added “not everything in the past of De Beers is something we can be totally be proud of”—a rare admission from an image-conscious company. Managing director Gary Ralfe has said the company has done a “cultural U-turn” and is now committed to being “allies of government … in creating jobs.”

That means prodding sightholders to open factories in Africa, which they are rushing to do—almost as quickly as they rushed to open factories in India, China, and other low-cost cutting centers a while back. A staggeringly long list of names has opened factories in Africa in recent months, and more are on the way: The Antwerp rumor mill says that more than 50 companies have applied to De Beers for South African sights.

While many complain that De Beers let the issue fester, Diamond Trading Company managing director Gareth Penny notes the DTC already has 14 sightholders in South Africa, and that “De Beers has been supplying the country with cuttable rough for years.” Part of the dispute, however, is centered on the definition of “cuttable rough.” According to Mlambo, “Cutters should decide what is cuttable and non-cuttable, not producers eager to sell outside South Africa.”

Yet that may be the very heart of the issue. Despite all the good intentions and government support, most feel Africa will have a cutting industry only if its factories are economical. Diamond manufacturing is a notoriously low-margin business, and, Mlambo’s dismissal aside, the difference in wages could be a huge challenge—especially with the current strength of the rand. “It has to be done in the right kind of way,” says Penny. “You want sustainable businesses that find innovative ways of offsetting the higher production costs.”

Of course, even if that happens, cutting centers are not built overnight. “It won’t be easy, it will take years,” warns Charles Bornstein, the former president of Antwerp’s HRD who was recently appointed honorary ambassador to South Africa for the Flanders region. “But the people there deserve our help, and I’m convinced the Flemish government will help us do this.”

“They will definitely be able to do better than what they are doing,” notes Dilip Mehta of Rosy Blue, which recently opened a factory in South Africa. But he doesn’t think the country has enough capacity to manufacture all of its production, which De Beers values at more than $1 billion per year.

Inevitably, this will hurt manufacturing in traditional centers, particularly Antwerp, New York, and Israel, although manufacturing has been dropping in all three for some time. Yet even manufacturers in Antwerp showed sympathy for countries like South Africa, which has 28% unemployment.

“One cannot be insensitive to the desires of the South African people,” notes Stephane Fischler, president of the European Council of Diamond Manufacturers. “It’s been 10 years after apartheid and really not much has been done. I just wish the industry had been more proactive.”

Next Stop: Botswana? Even if more cutting moves to South Africa, the issue will not end there. For when Mbeki—who’s also the president of the African Union—talks about diamonds being Africa’s best friend, he’s not talking about just South Africa.

And that’s where the real earthquake could happen. Producers like Namibia already are establishing new factories. The country to watch, however, is Botswana—South Africa’s neighbor and the world’s largest diamond producer (see “The Country That Diamonds Built,” pg. 100). While Botswana has a close association with De Beers and has profited handsomely from the diamond industry, it also has a 40% unemployment rate, and officials clearly see diamond cutting as a hope for the future. Recently, Leviev pledged to build the world’s largest cutting factory there, and several sightholders quickly followed suit.

This issue could be a particular challenge for De Beers’ marketing arm, the Diamond Trading Company. One reason sightholders prefer the DTC is its varied assortments, which come from several mines in several countries. But if “beneficiation” is followed to its logical extreme, anything mined in a country would be sold locally, possibly leaving the DTC out of the loop. Looked at in that way, the DTC becomes a middleman … and we know what DTC executives say about middlemen.

Big Mo. Time will tell whether all this comes to pass, but right now the momentum appears unstoppable. For officials like Mlambo, nothing less than the fate of her continent is at stake.

“This has to be a turning point for Africa,” she said. “Otherwise future generations will judge you and me harshly.”

And they are willing to take strong measures to ensure that doesn’t happen. When Even-Zohar asked Mlambo if she would consider dropping the export levy, she was typically unyielding: “We have such a dismal record of downstream production in this industry. If you don’t structure it in some way, things will keep going as they are going.”

Once again, the message was clear: If diamonds are not Africa’s best friend, Africa will not be the diamond industry’s.