De Beers new Nuclear Weapon

Fifty years ago De Beers and General Electric were the leading technology firms making synthetic, man-made  diamonds. It was held as a truism in the global diamond  industry that De Beers would only use the synthetic technology to produce industrial diamonds  which can readily be bought in any hardware shop and are used as cutting tools. These are an essential ingredient in construction and are manufactured in China by the billions of carats. But one De beers CEO after another would solemnly promise that De Beers would never produce gem quality synthetic diamonds because, after all, that would undermine their highly profitable mined diamond operations. While they were protesting their innocence Element 6 which is the De Beers synthetic diamond arm, was busily filing patents for gem quality synthetics and preparing for what happened in May and June

 Two months ago De Beers dropped a huge bomb on the global diamond industry and by extension the relative prosperity of Botswana and Namibia, by far the two most diamond dependent countries in Africa,  by announcing that it would establish a new firm under its existing Element 6 which would produce  gem quality synthetics. The new company called  Lightbox will manufacture synthetic diamonds for jewellery at a price range of US200 for a quarter of a carat to $800 for a one carat diamond.

These are modest prices and are aimed at tempting back ‘Millennial’ consumers who as a group are simply not interested in ‘bling’ in the same way as their parents. This new younger generation of affluent consumers looks at a range of possible luxuries when buying and diamonds are only one option and so De Beers has purposely targeted the price range that will compete with branded leather hand bags. This strategy could not be done with quality mined diamonds which are much more expensive.

For Botswana, Namibia, South Africa Angola and Zimbabwe this move is nothing short of an economic disaster because it will certainly not be long before De Beers begins to compete against more high value stones. Namibia produces amongst the world’s most valuable rough diamonds selling at unit export price of more than N$7000 per carat. The Namibian Ministry of Mines appear to have been totally silent about the De Beers move even though in one swoop the old cartel master of African diamonds has completely undermined any bargaining power that African countries have by giving itself  a ‘nuclear option’. In the three countries where De Beers has mines in Africa; Botswana, Namibia and South Africa it has seen government policy towards diamonds decrease their relative power and market position as governments try to extract ever more surplus from the industry.

As the technology for manufacturing modern synthetic gem quality diamonds matured at the beginning of this century Botswana, which already owns 15% of De Beers signed a secret  agreement with De Beers in 2004 that if De Beers ever began to produce gem quality diamonds that it would form a 50/50 partnership with the government. What remains unknown is whether this has eventuated in the case of the US$94 million plant in Portland Oregon and what will be the financial stake of the government of Botswana in the impoverishment of its people.

Why this move is the nuclear option for Africa’s mined diamond producers has to be understood in light of what has happened in the past to the price of industrial diamonds after GE and De Beers started producing synthetics. These were first developed in the 1950’s and GE went into production in the 1960’s. De Beers then entered in a big way in the 1970’s and after 1981 prices on the global market collapsed. First Japan in the 1990’s developed synthetics followed by China at the beginning of the current century. The world’s biggest producer of diamonds is not Russia or Botswana but China which manufactures what is estimated between 4- 8 billion carats per year but has no mines.

The entry of De Beers, then Sumitomo in Japan and finally China collapsed the price of industrial diamonds on the world market. Prices fell in the US from a peak in 1981 of US Synthetic industrial diamonds from a unit import price of US$26 million per tonne to approximately US$2 million per tonne by 2009. Synthetic industrial diamonds are now more than 98% of total global production of industrial diamonds. This sort of massive price decrease for mined diamonds can now be reasonably expected in the gem market once the Japanese and Chinese enter synthetic gem production in the same way they did for industrial synthetics in the last 20 years.

For Botswana and Namibia De Beers has been granted a nuclear weapon with which it can bomb the African economies. So why is De Beers now willing to in effect bomb its own diamond mines with synthetics when it made no sense before? For years De Beers has complained that its market was progressively being eroded in one negotiation after another with African governments. The rates of return on their African mines have declined massively since the heyday in the 1990’s when they were making 500% return on share capital in Debswana, its joint venture with Botswana

But this is only the beginning. De Beers is not the first synthetic gem quality diamond producer but it will for a time be the largest. But having opened what De Beers would argue was the inevitable flood gates of synthetic gem quality diamonds, De Beers will eventually lose complete control of the diamond market that it once monopolized for almost a century. The logic of the market, the often superior quality of synthetics and the competitiveness of Chinese synthetic producers will make mined diamonds much less profitable. The victim will be, once again Africa’s modest prosperity which has come from the twins of relatively good management and good fortune. One of the most important pillars of Namibia’s wealth and the very foundation of the Botswana economy is being undermined by the new De Beers policy. Diversification of the economy is now an utter necessity if Namibia and the other diamond dependent countries of the region are not to slip backwards into further poverty. These are the views of Professor Roman Grynberg and not necessarily those of UNAM where he is employed.