Diamond Market:
Here is an article from the Globe:
What to do with all those diamonds
Tuesday, October 20, 1998
MATHEW INGRAM
Calgary -- Canada's first diamond mine, the Ekati mine in the Northwest
Territories, has started production -- the final vindication for Charles Fipke,
the Kelowna, B.C.-based geologist who discovered the deposit and was
ridiculed as a crank. But with demand for diamonds at its lowest level in a
decade, the massive De Beers diamond cartel may have the last laugh.
Broken Hill Pty. Co. (BHP), the Australian mining giant that formed a
partnership with Mr. Fipke to develop the mine, has said that it plans to sell
all the diamonds from Ekati itself -- bypassing De Beers, the world's largest
diamond seller and marketer. A slump in the diamond industry, however,
may make that decision less appealing.
In addition, BHP is said by many industry observers to be suffering certain
internal pressures that could also affect its decision. Management has said it
plans to sell assets to try and turn its financial performance around, and
some sources have speculated that in the end the company might decide to
sell its interest in Ekati -- perhaps even to De Beers.
De Beers is the South African-based company that virtually invented the
modern diamond market, and continues to control the majority of world
diamond sales through the 70-year-old Central Selling Organisation (CSO).
De Beers mines a large proportion of the globe's diamonds, buys more on
the open market, and stockpiles them when demand slumps.
All this, including a tightly controlled network of mines, diamond buyers (or
"diamantaires") and marketers, helps control the price of diamonds. In a
similar way, the Organization of Petroleum Exporting Countries tries to
regulate the price of oil -- except that no company controls 70 per cent of
the oil market, and no single company runs OPEC.
Many find cartels inherently offensive, and in fact, the CSO is prevented
from doing business directly in the United States because of federal antitrust
laws. Producers of a commodity also tend to dislike cartels when prices are
high -- but often change their tune when prices fall. Tight control of a
market has its benefits, and that is the CSO's ace in the hole.
In addition to selling diamonds, and spending more than $200-million
(U.S.) a year marketing them around the world, De Beers buys and
stockpiles diamonds through the CSO in order to to smooth out price
fluctuations. In 1996, for example, the organization stockpiled more than
$6-billion worth of the gems because of a supply-demand imbalance.
There is little question that the output from Canada's diamond mines --
including Ekati and the proposed Diavik mine nearby (a joint venture
between Aber Resources and Rio Tinto PLC) -- will have a significant
effect on the global diamond market. Ekati's production alone, which will
amount to more than $500-million worth a year, is expected to make
Canada one of the largest diamond-producing nations in the world.
Once a producing mine looked to be a certainty, speculation began as to
whether BHP would sell its diamonds through the CSO, or whether it
would decide to sell them by itself. In the past few years, the CSO has
suffered from mutinies by Russian producers and by Australia's Ashton
Mining Co., which co-owns one of the world's largest diamond mines.
BHP has said it initially plans to market all its diamonds itself, but
"discussions are continuing" with De Beers about taking some of the gems
-- and the current downturn in demand is likely to give De Beers a
considerable amount of leverage. Just imagine (you can hear CSO reps
saying) what the effect would be if even half of Ekati's output was dumped
onto diamond buyers' desks in the diamond capital of Antwerp, Belgium.
Supporters of the CSO say decades of experience have given De Beers a
knowledge of how to manage the market that BHP -- a newcomer to
diamonds -- doesn't have. BHP, meanwhile, maintains that it is going ahead
regardless. Jim Rothwell, the president of BHP's diamond operations, said
at the opening of Ekati last week that the company is "confident of our
ability to market our full production, even in the current circumstances."
BHP has also said it has no intention of selling its interest in the Ekati mine,
but admits that it is reviewing its global assets as part of an overall financial
restructuring. Rumours of a sale were fuelled recently when the head of
BHP's World Mineral Group, which includes its Canadian assets, stepped
down and no replacement was named.
Last week, CIBC World Markets analyst Jack Jones told a conference in
Perth, Australia, that a sale of BHP's stake in Ekati could be imminent, and
said potential buyers would include De Beers and Rio Tinto. Ashton
Mining's acting chief executive officer Douglas Bailey said recently that his
company would also be interested in buying Ekati.
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