The Soapbox | Where South Africans Speak Out

BY CHARLES LEMOS

Few companies have controlled an industry as De Beers has controlled the diamond industry. De Beers, established in 1888, is the world’s leading diamond company with unrivalled expertise in the exploration, mining and marketing of diamonds. Effectively, the company’s history is that of the diamond industry. Among the founders of the company was Cecil Rhodes, the man most responsible for British dominion over most of southern Africa. Historically, the company has controlled 85 to 90 percent of the world’s diamond trade. The company only sells its wares at limited sightings called “single channel marketing”  where diamond merchants can only buy or reject diamonds sold in lots determined by De Beers. The price is fixed and the company is able to maintain its pricing structure by limiting the amount of diamonds that are made available. The size of the diamond industry is approximately $30 billion USD.

The company created the slogan “A Diamond is Forever” in 1939 to suggest an emotional value to diamonds that did not really exist prior. The goal behind that marketing campaign was to ensure that women keep their diamonds literally forever and to prevent a secondary market from being created. The campaign is perhaps the most successful ever creating a mass market for diamonds. The main use for diamonds is industrial. One factor that has helped De Beers maintain its control of the diamond market is that until the end of the Cold War, Russia kept its diamonds off the global market – engagement rings were just not a Marxist-Leninist value. In the past twenty years that changed with the Russians forming the Alrosa Diamond company, 90 percent owned by the Russian government. De Beers’ share of the diamond trade has fallen to 40 percent. In 2009 Russia quietly passed a milestone this year: surpassing De Beers as the world’s largest diamond producer.

Recently, De Beers’ fortunes have sunk even further. Short of cash, the company had to raise $800 million from stockholders in just the past year. The onset of the global recession also coincided with a settlement with European Union antitrust authorities that ended a longtime De Beers policy of stockpiling diamonds, in cooperation with Alrosa, to keep prices up.

It is hard to shed tears for De Beers even as if the transformation of De Beers over the past decade or so is a remarkable and little-known story. But the collapse of the diamond trade is having repercussions in Botswana, perhaps the best managed economy in Africa. The collapse of global diamond trade bodes ill, not only for Botswana’s mineworkers and diamond cutters, but also the country’s economy as a whole.  At independence in 1967, Botswana was one of the poorest countries in the world, with a per capita income of about $80 a year. Today, it is among the most prosperous countries in Africa, with a real middle class, and a per capita income approaching $6,000 a year.  Its economy is the diamond industry and the income from that industry has allowed Botswana to build Africa’s longest-lived democracy after that of Senegal.

The discovery of diamonds in Botswana came in 1968, a year after independence. Thus De Beers was forced into a joint venture agreement with the government when otherwise it might have chosen another path. A new company called Debswana was created with De Beers and Botswana each owning half of the company. At their peak in 1990s, the diamond, manganese and copper mines controlled by joint venture provided half of the country’s GDP. Today, it still accounts for a third of Botswana’s GDP.

Debswana is one these private-public partnerships that I often talk about and of which I am fond. From the New York Times:

There is also no question, though, that Botswana was greatly aided by something else: De Beers’s own sense of — to use the current term of art — corporate social responsibility. Unlike most big companies that have exploited Africa’s resources over the course of its tragic history — indeed, unlike most Chinese companies operating in Africa today — De Beers did not simply plunder Botswana. Practically from the start, it entered into a 50-50 joint venture with the government; about a decade ago, it also sold the government a 15 percent stake in the company. (De Beers has only two other shareholders: the South African-based Oppenheimer family, which has controlled the company for over 100 years, and the publicly traded Anglo-American Corporation.)

It has also built roads, hospitals and schools in Botswana; worked to help the country deal with H.I.V. and AIDS; and been involved in and paid for a hundred other things that have helped make Botswana an African success story. Most of the executives in the government-company joint venture are black Africans who have been trained by De Beers. In March, the company closed its diamond sorting facility in London, and opened the largest, most technologically advanced diamond sorting complex in the world in Gaborone. It employs 600 people and is also part of the company’s 50-50 joint venture with the government.

“We think our approach is a competitive advantage,” said Gareth Penny, the cherubic 45-year-old South African who has been the company’s chief executive since 2006. It’s hard to disagree. Botswana’s citizens need roads — but so does De Beers, to transport its diamonds. De Beers needs a healthy work force, so its emphasis on H.I.V. awareness and treatment is clearly in its self interest. Indeed, a more prosperous Botswana helps De Beers in every way imaginable, not least by providing a stable environment in which it can do business.

But the global recession and the fall off in the global diamond market brought on by heightened competition is having an impact. Today comes word from the Minister of Minerals, Energy and Water Resources of Botswana, Pontashego Kedikilwe, who divulged that Botswana feels compelled to rescue De Beers from its debt because the failure of the world’s biggest diamond producer will have devastating consequences on the economy of this small but successful African country. The story from All Africa:

“De Beers is a significant player in terms of protection of diamond equity and as a country dependent on diamonds, we are bound to honour the agreement that has been made in principle,” he said at a press conference on Friday.

Botswana, however, is itself cash-strapped after diamond exports plummeted to the point where the country had to seek a bailout from the African Development Bank (AfDB), will finance $150 million for its part of the De Beers ’stimulus’ package.

The minister said government is mindful of its budget constraints, however for De Beers shareholders to maintain confidence in the diamond industry, they have to see to it that De Beers stays afloat.

“We are in discussion with all our partners on how we can keep the company afloat because the failure of De Beers can have serious consequences on projects (Jwaneng expansion) we are embarking on and the future of the diamond industry.”

Indeed, Botswana is between a rock and a hard place literally.

Charles Lemos is a blogger based in San Francisco.