A similar dramatic story is unfolding itself in the diamond industry too. After having ruled the diamond industry via the single-channel-system of marketing rough diamonds through the Central Selling Organisation (CSO) for over six decades, De Beers is now changing tack. At its peak it controlled more than 80 per cent of the world’s supply of roughs.

The story unfolds
However, following the Argyle split with the CSO in 1996 and the very difficult period (when Russian leakages hurt the industry) before the Russians finally signed the contract with the CSO and the war in Angola, De Beers had to rethink its strategy. Probably, the last straw was the year 1998 which was disastrous for the diamond industry and De Beers in particular. Then, CSO sales fell by 28 per cent to $3.3 billion and the stockpile of roughs hovered near the $5 billion mark. Prompting De Beers to appoint an outside agency, Baines & Company, for a strategic review of its operations.

Even as the review was in progress, the top brass realised that while it mined only 40 per cent of the roughs through owned mines and marketed about 66 per cent of the roughs overall through its marketing agreements, the stockpile and efforts to persist with the single channel system meant that the shareholders continued to lose. It was felt that the cost of controlling the industry was far more than warranted, the value to the stakeholders and shareholders was falling by the day.

Once the decision was taken to follow the recommendations made by Baines & Co., the results are becoming evident: the virtual and gradual disbanding of the CSO, a new breed of PPP sightholders, the decision to be the dominant (responsible) leader of the diamond industry and not the regulator or protector. In short, no more stockpiling of rough diamonds. To become the ‘the supplier of first choice’ rather than ‘buyer of the last resort’.

The impact
The dramatic turnaround in CSO sales during 1999 by 57 per cent over the previous year to $5.24 billion was the first positive sign for the conglomerate. The sights are healthy and following a record 1999, the current year too promises to maintain that trend. The industry is on an upswing despite growing dependence on USA as a retail market, and stocks are relatively low. Sightholders and shareholders, both seem to be happy. Even the cutting centres have done well. India has now a 55 per cent marketshare of the polished goods for the year 1999-2000 at $6.6 billion, while Antwerp's combined rough and polished exports for 1999 stood at over $12 billion. Even Israel which had lost 11 per cent of its share during 1998 is back with a bang with a 23per cent rise at $4.5 billion.

So is everything hunky-dory for the diamond industry? Will everyone live happily ever after? But before that a look at foundation on which De Beers now wants only to be `the responsible leader' and not the custodian of the diamond industry is warranted.

The reasoning
De Beers has survived over a hundred years because it has been controlling over 80 per cent of the rough supplies. But now, with diminished fire power, can it continue to be a dominant player? Does it have the ammo to back up its dreams of making its stakeholders, shareholders, sightholders, et al., prosperous?

If one looks at the diamond pipeline (refer pg 6) it is evident that $1.9 billion of direct mining costs converts to $6.7 billion worth of diamonds. Thus, proving that diamonds are the most profitable of all commodities (if it is called one). In fact, a mine was said to have recovered its capital cost in just five days - the average can be around two years. In light of this, if one looks at the table (Mining Cost, revenue and margins), it is evident that cost/tonne vary among the various mines. But the significant factor here is that all the low cost mines are either owned or controlled by De Beers.

Consider the Jwaneng mine in Botswana, its mining costs are just $9 per tonne and, the value generated is $147. The gross margin thus is $138 per tonne - a margin of $1.2 billion. The Venetia mine has a cost of $11 per tonne generating $71 per tonne. Argyle's cost (the lowest outside the De Beers' fold) at $17 generates $30 per tonne. Ekati's Panda's costs are $32 per tonne. While Mir is way into the orbit with a cost of $50 per tonne. Incidentally, Orapa at $5 per tonne is also owned by De Beers. More interestingly, the Jwaneng mine has a life of at least 30 years open pit and many more years underground. It contributes over 50 per cent of the De Beers mining income. In fact, if one were to include the Botswana mines of Orapa and Letlakene, these mines combined represent about 75-80 per cent of all De Beers operational mining income.

Thus, just as Clive Lloyd had his battery of fast bowlers to back him up, so does De Beers have these awesome low cost mines to take on all comers. In the past, De Beers' officials had often reminded the industry that in case competition among producers led to a price war, then the less profitable mines would have to close down long before De Beers would even be bothered about it.

In the changed scenario, De Beers will seek to dominate the rough market not by controlling the rough distribution as before, but by owning as many mines as possible. It will not be a surprise if the conglomerate goes for some outright acquisitions. It even strove to double the Orapa mines production even when the CSO cut supplies during 1998.

In short, the following changing scenario is emerging:
(a) Each producer will fight for expanding market share in rough supplies.
(b) De Beers will cease its support of high prices; prices will fluctuate.
(c) De Beers will no longer hold buffer stocks; no more free rides for other producers.
But then, is it De Beers all the way and no room for others? Far from it!

The imponderables
If one were to look for a chink in De Beers' armour, it is that Botswana contributes about 80 per cent of all De Beers operational mining income. So then, for the conglomerate nothing is more vital than Botswana! This is both the impenetrable as well as the most vulnerable spots in its defence. For, if the Government in Botswana decides otherwise or if the situation engulfing most other parts of Africa spreads to this country, then not only De Beers but the entire industry will be in for bad times. Even otherwise, Botswana has been asking for a fair share of the pie. Most of the diamond producers, be it Namibia, Canada or even Russia now want a larger share of profits. All of them even want to engage in cutting and polishing of diamonds. Namibia has gone ahead and enforced a new Diamond Act from April 2000 which if enacted would mean that a portion of the production will have to be offered to the domestic trade there.

De Beers' problems with the US Anti-Trust law are well documented. Even though efforts are on, a solution to the problem seems far away. The conglomerate also recently had a spat with the South African valuators and uncertainty prevails as the government could impose conditions and even ask for better development of the local industry in favour of the majority. The enquiry commission (which was closed down) is also dangling like a Damocles sword over the head. And on the branding front too nothing much seems to have been achieved. Lastly, De Beers appears to have problem with the European Anti-Trust laws too.

Then on the other hand, diamantaires and jewellery manufacturers are actively taking direct stakes in mining producers, Tiffany's stake in Canada's Aber Resources as well as Israel's Lev Leviev mining interests in Angola's Catoca mines and even his association with the Russians. More and more diamantaires are now flocking Tel Aviv than Antwerp as Israel tries to get roughs directly from the Russians.

Moreover, while diamond sales have registered impressive growth, stocks at the cutting centres aggregated $5.1 billion at end-1999, while total debt at the centres was a massive $5.7 billion. Of the total debt, about $3.5 billion was by way of memo sales, thereby ensuring that the proceeds would materialise only after 120 days.

Some other crucial issues confronting the diamond industry include: declining production from Argyle, the almost total dependence on US retail markets for demand and, the power of the Internet.

Declining Argyle production: Ever since Argyle broke away from the single-channel-system, it has been in the news. In the last two years, Argyle's production has fallen from its peak of around 40 million carats to well below 30 million carats. According to Argyle's own estimates it could fall close to 20 million carats in 2001. Unless the mine opts for the underground pit, Argyle could cease to exist beyond the decade.

The fear is that falling production from Argyle could well shrink the US retail market, the cornerstone of the diamond industry. The US market is a pyramid with heavy growth in the lower segment. This is the segment catered to by Argyle-type goods cut and polished by Indian cutters and polishers. The question being asked is can the industry hold on to the consumer of cheaper diamonds by luring them to the higher end or will these consumers be lost to other luxury goods. Of course, with no second Argyle in the offing (that is, no stock of cheaper roughs), the industry must be hoping that the mine lasts longer. It will definitely affect India as a number of its factories depend on the rough source from Argyle only to keep them running. Even though there are talks about the open pit extending its life, proof of the pudding will be in the eating.

The growing dependence on the US retail market for demand: During 1999, the worldwide studded jewellery market improved by 11 per cent to $56 billion; the US market accounted for $24.6 billion. On the diamond content front, the US accounted for 48per cent of the $13 billion at $6.24 billion. Thus, the total dependence on this market cannot be ignored. The US economy has been robust and continues to do so. However, a stage has come when even a sneeze at the Nasdaq causes the diamond industry severe convulsions. Last month's crash of the Dow and the Nasdaq saw some dealers reportedly going bust in Antwerp and there were rumblings even in India with angadias (the trusted courier of the local diamond industry) defaulting and a couple of suicides reportedly linked to losses on the bourses.

Therefore, the industry is desperately striving to explore newer markets as it is not comfortable with the idea of having all eggs in one basket. That is why India and China are being looked upon as consumer centres. The growth in sales in the Asia-Arabic region by 12 per cent and a similar prediction for the current year must give some relief, for Japan continues to be flat. News about robust sale of platinum studded jewellery in China must be music to the industry. Efforts are also on to tap the Latin American markets.

The power of the Net: According to some estimates about 18 per cent of studded jewellery will be sold via the Net in a couple of years time. The Net is thus a potent weapon for marketing, particularly B2B. With US dominating retail sales at 46 per cent of the marketshare and being Net savvy could propel the industry towards trading on the Net. Some say that even roughs can be sold across the Net. Anybody who shuns the Net could be the ultimate loser.

Israel has already made rapid strides here, while India is slowly waking up to the potential. Antwerp seems to be sluggish. De Beers has started corresponding with the outside world via e-mails. However, Gary Ralfe holds that he does not want diamonds to be commoditised. But, it must be borne in mind that it was only after India began cutting and polishing industrial grade roughs that the industry was `democratised' which opened and expanded the industry. Those who ignore the Net will do so at their peril. Where does all this leave India.

Indian scenario
The Indian diamond industry is on `top of the world' at the moment with cut and polished diamonds showing a 32 per cent rise to over $6.6 billion. However, jewellery sales just short of the $1 billion mark are a cause for concern.

Things do look hunky-dory for the gem & jewellery sector. And with the sops offered by the budget as well as the Exim policy, the Indian gem and jewellery sector is upbeat. However, beneath the surface things are rather fluid. The GJEPC has projected a growth of just 8-9per cent for the next year clearly indicating that the cut and polished segment is reaching a plateau of sorts.

Finally, a look at gold jewellery segment.The 14.58 per cent growth does not reflect the loss suffered by this segment in terms of opportunities lost. For, during the same period (during 1999) the global studded jewellery market has grown from $49-50 billion to over $56 billion (De Beers estimates). Thus, the Indian jewellery industry is a laggard in the true sense.

India's quaint mining policy
The Indian mining policy, particularly pertaining to precious metals and diamonds, is a big joke. Rules are being framed periodically, laws written and contracts signed with MNCs like De Beers for prospecting and mining. In short everything is done, but the most important thing, prospecting and mining for minerals, metals and stones seems still in the distant future.

In February, the government had announced automatic clearance for foreign direct investments (FDI) in most sectors. Under this new guideline, the GoI has decided to allow automatic approval for FDI in prospecting and mining of gemstones up to 74 per cent. For prospecting and mining of gold, silver, there is no limit (100% FDI permitted). In another notification, the government has also decided to conditionally allow MNCs to repatriate their profits from India. But will all this prove to be the catalyst required to set off the mining of precious metals and diamonds in India?

Conclusion
For India, the future is in tapping the vast potential of the Net to further the marketing effort and to realise its dream of becoming a trading hub.

The diamond industry is now moving from being controlled on the supply-side and production-led to a market-led industry. The sooner diamantaires, even in India, realise it the better it will be for them.