This is from today's Globe & Mail. While most of this is old news, pay attention to the last 2 paragraphs.
BUSINESS WEST
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.
Business West readers can reach Mathew Ingram by fax at (403) 244-9809 or by
E-mail at
mingram@globeandmail.ca
PHIL |
