DIAMONDS are back on the big screen. The stones serenaded by Marilyn Monroe as a girls best friend are now, however, portrayed by Hollywood as Africas worst enemies. Leonardo DiCaprio may win an Academy Award for his performance in “Blood Diamond”, as a mercenary hunting for the precious rocks during the war in Sierra Leone in the 1990s. But in reality, the shape of the industry—which produces an estimated $13 billion of rough stones and over $62 billion of diamond jewellery—has greatly changed since then.
Most of this transformation is due to the fact that De Beers, the company that once controlled much of the supply of rough diamonds, has loosened its grip, and a host of smaller producers are emerging. Regulators in Europe and America and governments in Africa have also promoted change, and “blood” diamonds have almost disappeared. As a result, the diamond trade is starting to look more like any other ordinary industry.
The shift, says Gareth Penny, De Beers managing director, has been “from a supply-controlled business to a demand-driven one.” In the early 1990s the diamond giant was producing 45% of the worlds rough diamonds, but selling about 80% of the total supply from its London marketing outfit, regulating the market through the careful management of a large stockpile. But sitting on a big inventory was not good for financial returns. At the same time regulators in America and Europe were calling for more competition and stories abounded about atrocities committed by diamond-financed rebels in Africa.
After new management arrived in the late 1990s, De Beers changed tack. Its main trading outfit stopped buying diamonds on the open market. The company delisted in 2001 and is now owned by Anglo American, the Oppenheimer family and the government of Botswana. It has settled its long-standing antitrust dispute with American regulators. And it has promised the European Union that it will stop buying diamonds from ALROSA, the state-owned Russian firm that extracts 20% or so of global production, by 2009 in order to promote competition. Today, De Beers sells about 45% of all rough diamonds, and its share of production is about 40%.
As the market becomes more dynamic, De Beers is investing heavily in exploration, developing four mines in Canada and South Africa and selling underperforming operations. The diamond giant has established a chain of jewellery shops in a joint venture with LVMH, a luxury-goods group. It now spends about $200m a year on marketing, which has helped to boost sales of diamonds, particularly in Asia. Marketing is also vital in persuading people to buy the real thing. Synthetic diamonds have captured 90% of the industrial market, but have made few inroads into jewellery, at least so far.
Smaller firms such as Kimberley Diamond Group, Trans Hex and Gem Diamonds are racing to fill the gap between large producers and exploration juniors. Petra Diamonds, another small firm, has just bought one of De Beers South African mines. Petra is confident that it can make money from the loss-making mine, unburdened by De Beers costs. It is also about to start producing in Sierra Leone, and is optimistic about its exploration in Angola, where it is working with BHP Billiton. The company expects to produce 500,000 carats by 2010, up from 175,000 carats last year. But this is still tiny next to the record 51m carats De Beers produced in 2006.
Meanwhile Lev Leviev, a secretive diamond tycoon, has been setting up cutting and polishing facilities in Africa, buying some rough stones direct from governments and moving into production, putting further pressure on De Beers. “Leviev has been a driving force behind the revolution at De Beers,” says Richard Chase of Ambrian Partners, an investment bank, though Mr Penny shrugs this off.
What is certain is that Africa, which produces 60% of the worlds diamonds (see chart), wants to do more than just supply rough stones. “De Beers has failed to properly appraise the aspirations of African governments,” says Chaim Even-Zohar, a prominent diamond specialist. “Now it is payback time.” Gone will be the days when African diamonds were shipped to London to be sorted and aggregated in lots before being sold.
In January the firm agreed with Namibias government that all diamonds produced by their joint venture would be sorted at home, and about $300m worth of gems, just under half the output, would also be sold locally. Last week De Beers, which has already sold 26% of its South African arm to a black-owned consortium, said it would merge its Namaqualand mine with a state-owned diamond firm to create a new independent local producer. And by 2009, all De Beers stones from around the world will be sent to a swanky glass building in Botswanas capital to be aggregated. All this shows that mineral resources need not always be a curse.
African producers are also keen to cut and polish their own diamonds, which adds 50% or so to the value of rough stones, and even move into the jewellery business. Although it remains a big trading hub, Antwerp is no longer the worlds cutting and polishing centre, and Israel has suffered as well. Almost all diamonds are now cut and polished in India or China, but African producers hope to get a share of the business.
And what of blood diamonds? Today, says Alex Yearsley of Global Witness, a pressure group, they make up a tiny fraction of world production. But Mr DiCaprios on-screen antics have raised awareness of the issue. Although it is a big step forward, the Kimberley process—a certification scheme set up in 2002 to ensure that diamonds are not paying for weapons—is not perfect, and dodgy diamonds can still find their way onto the market. De Beers says the films release in America, just before the crucial Christmas season, did not dent jewellery sales. But more customers now want to know where their diamonds come from and want a guarantee that they are clean.
This is good news for those producers that can demonstrate the provenance of their stones. Canada has developed a certification scheme for its diamonds, and since 2004 De Beers has been selling some stones in Asia with its Forevermark, a microscopic engraving that guarantees their origin. Small producers, such as Petra Diamonds, are following suit.
Even so, Global Witness says the industry is not much more transparent than it was a few years ago. Smuggling is rife, especially in countries like Angola and the Democratic Republic of Congo, and illegal diamonds still find their way to rich countries. Some 1m informal miners pan the rivers of Africa for alluvial diamonds, often in appalling conditions. The Kimberley process was designed to stem the flow of conflict diamonds, says Willie Nagel, an international diamond trader who was instrumental in setting it up, but “conflict-free diamonds should not be confused with ethical diamonds.” Mining firms and voluntary groups are working to improve matters. Hollywood may not be looking to a Leonardo for its next portrayal of the industry—but it is by no means certain that it will be seeking a Marilyn either.