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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