S. Africa's Diamond-Selling Cartel Faces Toughest Test

THE diamond business could be losing some of its glitter.

It is being damaged by an increasing flow of illicit rough diamonds from Angola and Russia and a sustained slump in the world jewelry market - particularly in Japan.

De Beers Consolidated Mines, the associate of the South African mining conglomerate Anglo American which controls 80 percent of the world's uncut diamonds, had high hopes for market growth in Japan.

Some analysts say that De Beers' international marketing arm, the London-based Central Selling Organization (CSO), is in jeopardy.

While De Beers directors have focused attention on the proliferation of illicit diamonds from Angola, some mining analysts note that the real problem lies in Russia where producers are agitating to retain a larger share of production and to set up cutting and polishing industries.

"The Angolan problem is only a smoke screen," says Kevin Kartun, a mining analyst with the Johannesburg brokerage Frankel, Max Pollak, Vinderine.

Mr. Kartun says that the real danger to De Beers lies in Russia, which accounts for 20 percent of world production by value (12 million carats) and is reported to have a $1 billion diamond stockpile that could shatter the diamond industry overnight.

Analysts agree that the stability of the diamond industry is largely dependent on De Beers and the CSO cartel.

"If the CSO crumbled, and was not replaced by a similar cartel, the diamond price would collapse and diamonds would lose their lure and mystique which has been so carefully nurtured by the cartel," says another Johannesburg mining analyst who asked not to be identified.

The De Beers share price on the Johannesburg Stock Exchange has almost halved in the past six months from a high of SAR (South African rands) 93 to 47.85 on Oct. 6.

De Beers announced last week that it is considering widespread retrenchments at some of its South African mines. The share price dropped again at the end of last week on rumors that a BBC Television documentary (The Money Program) on the Russian connection would have grim implications for De Beers.

The program posed the question as to how long De Beers would be in a position to "mop up" diamonds coming onto the market outside of the CSO net.

The BBC program quoted analysts predicting that De Beers would need $4.9 billion next year to buy all the diamonds for which it had contracted. This compared with forecasted sales of only $3.5 billion, leaving a shortfall of $1.4 billion.

"It might be premature to say that the cartel is crumbling," the mining analyst says. "But this is definitely not another cyclical slump in the industry. We are dealing with serious structural problems."

The BBC program quoted Russian mining chiefs arguing for the abandoning of the CSO cartel in favor of more say for the Russians.

De Beers was so concerned about the growing disquiet among Russian producers that it sent De Beers chairman Harry Oppenheimer to Moscow in September, ostensibly to open the De Beers office there.

The Russians are resisting the 25 percent quota which the CSO instructed its clients to stockpile after July this year.

Leonid Gurevich, cochairman of the parliamentary commission on diamonds, said he would like to see Russia increase its sales on the open market from the current 5 percent to 20 or 30 percent because Russia needed the hard currency.

Gary Ralfe, a London-based director of De Beers, said that the Russians had requested a larger share of independent sales. He would not say how De Beers would respond. "We're not negotiating the new contract yet," he said.

Joane Braune, a De Beers spokeswoman in London said that the Russians were meeting their commitments in terms of the contract and were not delivering all the diamonds they were entitled to deliver under the current quota arrangements.

"They are aware of what could be damaging to their own interests," Ms. Braune said.

Since De Beers rocked the financial markets in August by announcing a 26 percent earnings drop, analysts have been speculating as to whether they are dealing with a cyclical slump in the diamond industry or the beginning of the unraveling of the legendary CSO.

"In the short-term they [De Beers] are trying to get all the producers into line by ensuring that they sell their diamonds to the CSO," mining analyst Kartun says.

"In the long-term their strategy is to exercise even tighter control of production by increasing overall gem production and tightening up both the marketing and production sides."

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