Lucky escape for the diamond company

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The Independent Online
A SENIOR executive of De Beers, the diamond company, has recently been trying to persuade the vicar at his Surrey church to pray for peace in Angola. Every Sunday, the congregation currently prays for Botswana because some parishioners have connections with an aid project there.

Botswana, the De Beers executive pointed out to the vicar, does not need God's help any more. Thanks largely to its diamond mines, which it owns jointly with De Beers, Botswana has one of the highest per capita incomes in Africa and enough foreign exchange reserves to cover its debt 10 times over.

Angola, on the other hand, despite even bigger and better diamond mines than Botswana, as well as huge oil reserves, is a broken country, with inflation at 1,000 per cent, an $11bn (£6.9bn) debt and most of its revenues mortgaged for years ahead for arms purchases. It could do with some divine intervention.

The last peace agreement in Angola, in 1992, created a diamond rush. Thousands moved to the diamond areas, and Angolan rough diamonds flooded on to the open market in Ant- werp. De Beers, which controls the price of diamonds by buying up any surplus, had to spend about £650m soaking up the Angolan freelance production. In the worst week, it spent £25m.

Embarrassingly, the crisis came just as De Beers opened a new diamond mine in South Africa. The company was forced to announce that it would only buy 75 per cent of producers' output that year and threatened a cut in the share dividend. Some predicted the demise of the De Beers diamond cartel.

But the rainy season and war eventually sent the peasant diggers fleeing from the diamond zone, and the spree died down. It has never restarted.

At the end of last year, the government recaptured the diamond-rich Kwango valley from Unita rebels and signed a peace agreement. But although the war may be coming to an end, it is not safe enough for freelance diggers to return to the Kwango river. The government has also reimposed a law that makes possession of diamonds illegal. It was the revocation of that law in 1992 that helped encourage the diamond rush.

In the meantime, another producer, Russia, has been causing De Beers serious problems. In 1990, in return for a $5bn loan, the Russians agreed to sell the substantial Soviet Union diamond stockpile, as well as future production, to De Beers.

Under the agreement, De Beers bought about $1bn-worth of diamonds from Russia, but the Russians never sold their stockpile. It is now reckoned to have been worth about $8bn in 1990, far more than western estimates at the time and more than twice De Beers' stockpile.

In recent months, desperate for foreign exchange, the Russians have also been selling from their stockpile direct to the open market. Estimates of the value of the diamonds sold range between $600m and $1.2bn - and De Beers says this is in breach of the 1990 contract. The bad news for the company is that it has to spend to soak up the diamonds on the world market. But the good news is that most of the gems are coming from the stockpile, which is expected to run out in the next two years.

According to a recent report by the consultants, Yorkton Securities, only $640m of Russian production last year was newly mined, while $1.62bn came from the stockpile. The Yorkton report estimates that by 1997 the Russian stockpile will be exhausted, the new Russian mine will not be on stream, and the diamond market will have fallen into deficit. Yorkton reckons that De Beers will then be able to lift the quotas, raise prices, and draw on its own stockpile to fulfill demand.

That is how the diamond business has worked for it since the 1920s.

These days De Beers is no longer a one-company monopoly. Instead, it has become the key controller of a cartel with a growing number of members. It is in no producer's interest to pull it down by undercutting De Beers' prices, though it is always tempting for Angolan peasants and Russian managers to sell round it.

Once again, De Beers seems to have escaped. Had the Angolan flood and the offloading of the Russian stockpile occurred at the same time, it might have been a different story. The irony is that if the charitable De Beers executive's prayers are answered, it could be yet.