Could Africa Cut Out De Beers?

It’s a question that’s been asked in Canada and Russia, and now, increasingly, in Africa: Why can’t countries that mine diamonds also manufacture them?

“For many years, [diamond manufacturing in Africa] was thought to be impossible,” Abbey Chikane, director of the South African government’s diamond board, noted at the recent Israeli Rough Diamond Seminar. “Now, we know it is doable.”

Not everyone agrees. De Beers has run diamond factories in Botswana and elsewhere in the past, with mixed results. Executives note that diamond polishing is a complex trade requiring a flexible government and a skilled and inexpensive workforce. And while the costs in Africa are not terribly high (an estimated $30 per carat in South Africa), they’re no match for costs in India (“well under” $10 per carat, De Beers says).

But when the poor African countries that mine diamonds see the economic success that countries like India and China have had with diamond polishing, they want a piece of the action.

“It is strange that South Africa is a major diamond producer but supplies only 0.4% of the total global diamond jewelry market,” Chikane recently told the country’s business press. And that’s a situation he and his African cohorts want to correct.

Putting the fear in De Beers. Developing a polished-stones industry may be good for Africa but not necessarily for De Beers, which for better or worse has been cast as defender of the status quo. And the prospect scares many sightholders, only a few of whom have factories in producing countries—although that’s changing. In recent months, perhaps sensing the shift in the political winds, big names like Lazare Kaplan, Julius Klein, Schachter and Namdar, and Rosy Blue all have bought or built cutting factories in Africa.

The issue is setting off tremors in the three South African countries that are the backbone of De Beers’ empire:

  • South Africa. The government of De Beers’ home country is considering a law that would impose a 5% export duty on rough stones, making it more economical to polish them domestically than elsewhere.
    Officials like Chikane have warned against this proposal, saying it could spur rampant smuggling. But he did say that he wants as many diamonds “as possible” cut and polished in South Africa.

  • Namibia. The language is even blunter in neighboring Namibia, where Israeli diamond magnate Lev Leviev is building what will be Africa’s largest cutting factory, employing 550 people and polishing up to 30,000 carats per month.
    According to a report in The Namibian newspaper, Namibian president Sam Nujoma told a crowd at the factory’s opening, “For more than a century … we were told that it was not good to have a processing facility like yours too close to the mines. We have been brainwashed! We have been indoctrinated! … You, Lev Leviev, have taught us it is a lie.… To our brothers and sisters of neighboring states, Angola, Botswana, South Africa, I hope this gives you inspiration to try to imitate what we have here.”
    The Namibian press has even speculated that the government may invoke a dormant law to force De Beers to supply local factories.

  • Botswana. The diamonds of Botswana are the heart of De Beers, contributing an estimated 70% of the company’s supply of rough. And it’s here where the biggest shakeup may be in the offing.
    The government recently announced it was conducting a “Strategic Review” of its diamond policies—and cutting is one of the issues it’s reported to be examining.
    Most people think De Beers and Botswana will continue their partnership, as the two are so intertwined they are sometimes called “Siamese twins.” Botswana actually owns part of the company and has three members on its board of directors.
    Yet tongues wagged when Leviev recently spoke of setting up a diamond factory that would dwarf the one in Namibia. (A De Beers executive scoffed in print, “It’s easy to make promises.”) And considering what happened to some of De Beers’ longtime partners after its strategic review, the company can’t be happy that Botswana is even thinking of looking around.

Falling in Lev. Granted, De Beers isn’t in any serious trouble yet; it has long-term contracts with most of its African suppliers that will continue, in the words of managing director Gary Ralfe, “well past our retirement dates.” But the issue has been a boon for Leviev, who has made a commitment to local cutting his calling card throughout Africa.

At a recent press conference celebrating his agreement to buy as many as 15 million carats a year from Angola (which used to sell to De Beers), Leviev promised more factories and even an Angolan “brand.”

Leviev’s rising star was evident at a dinner following the press conference at Tel Aviv’s Crowne Hotel (which he owns). There, luminaries from both the trade (World Diamond Council chairman Eli Izhakoff) and Israeli politics (former Prime Minister Benjamin Netanyahu) feted the industry’s new prince.

“I’ll tell you a secret—I don’t like monopolies,” Netanyahu said. “We are seeing a very important change here, which has the potential [to help] both Africa and Israel.”

And if all this isn’t enough, Leviev also is said to be in talks with Sierra Leone.

“We were just in Namibia, and now we’re talking about Angola,” Izhakoff said at the dinner. “And next … who knows?”