Questions were raised on the future of the diamond industry when the Oppenheimer family decided to dispose of their 40 percent stake in De Beers to Anglo American for $5.1billion.
A lot of ink was spilt, while hair raising arguments erupted as diamond market watchers sought to come up with answers on why the Oppenheimers had decided to bid farewell to an industry that kept their tables full of milk and honey for over a century.
BHP Billiton further fuelled the speculation when it announced late November that it was considering moving out of the diamond industry and concentrate on potash, in Canada.
The firm said it does not see diamonds providing it with much room for growth.
That, however, cannot be said for De Beers, which has operations in more than 20 countries, and is the world’s leading diamond producer with mining operations across Botswana, Namibia, South Africa and Canada.
The company had gross assets of $8.2 billion as at 30 June 2011, and reported EBITDA of $1.2 billion for the six months to 30 June 2011.
De Beers also reported profit before tax of $863 million for the 12 months to 31 December 2010.
The Oppenheimers’ decision was interpreted by some as a sign of tough times ahead, given that it had decided to exit a company that has an array of assets, a significant control of the diamond market, and always record a healthy bottom line.
What others asked is why the family was selling its 40 percent stake in a profitable company, when they do not see darkness at the end of the tunnel?
The memory of the late 2008 global economic meltdown, which upset the diamond industry, could have been fresh in the minds of the pessimistic.
The recent dip in rough diamond prices on renewed global economic worries also appeared to buoy this school of thought.
However, the role of the next generation in De Beers was said to have been central to the Oppenheimer family’s decision to sell their stake, not ulcers over the future of the diamond industry at large.
“Nicky was upset that his son (Jonathan) wouldn’t succeed him on the board of Anglo,” an unnamed source close to the family was quoted as saying by The Financial Times.
Another mining analyst at Cadiz, Peter Major, told the paper that each generation of the Oppenheimer family was getting further removed from the business.
“Is sitting on $5.1bn cash going to be better than running a $15bn diamond empire? And for how many years – how many generations is that a real possibility? Are Bill Gates’ kids going to run Microsoft?”
One does not need to waste time speculating over the intentions of the Oppenheimers but look at the conviction Anglo American had on the positive outlook of the diamond industry.
The mere fact that they are prepared to part ways with that amount of money was enough testimony that the company had great faith in the future of the diamond industry.
Surely, it would have been an act of stupidity if the company had decided against its collective wisdom to splash $5.1 billion on a sinking ship.
Petra Diamonds’ chairman Adonis Pouroulis said in the company’s latest annual report that the current volatile rough diamond market was ephemeral.
He said the long term outlook for the market remained positive due to inherent production constraints, which suggest that supply would struggle to keep pace with demand.
On the other hand, Pouroulis said that the rising prosperity and the growth in consumption from emerging economies such as China and India would ensure that demand continues to rise.
Bain & Company concurred with Petra’s chairman as it said in a report that demand was set to grow at an annual rate of 6.4 percent to nearly 250 million carats and 6.6 percent in value terms by 2020.
Somebody once said that never ever rule out the Americans’ spending capability, as they do not hesitate to use their credit cards, whenever they feel that they are not in a financial squeeze.
Bain seem to have understood this as it said that the industry should not reduce its focus on the U.S.
“The appetite for high-quality diamonds in China and India is growing,” said Gerhard Prinsloo, Bain & Company partner. “But industry players would be ill-advised to take their eye off of the United States and its preeminent position as the world’s number one diamond market.”
Although it acknowledged the absence of major new deposit discoveries since Murowa (Zimbabwe) in 1997, Bain said rough diamond supply was expected to grow at a compound annual growth rate of 2.8 percent globally in the decade to 2020 in carat terms, and 3 percent in value terms.
This prognosis appeared at variance with Firestone Diamonds’ recent outlook on diamond supply and indeed with that of several players who witnessed only 1 percent of kimberlite pipes discovered to date declared economically viable.
However, if one considers moves by companies such as De Beers to go underground or expand their operations then the projected marginal supply growth rate at the turn of the next decade was not fictitious.
It was not suicidal to conclude that although the diamond market is currently volatile, halcyon days are certainly coming and they would be hinged on burgeoning demand in Asia as well as the recuperation of traditional markets such as the U.S.
Mathew Nyaungwa, Editor in Chief of the African Bureau, Rough&Polished
