July 13, 2005

Leviev’s Africa gem cutters challenge De Beers

By Alistair Thomson

WINDHOEK (Reuters) - The warehouse on an industrial estate
in Namibia's sleepy capital Windhoek looks little different
from the beer depot next door.

Yet this is Africa's biggest diamond cutting and polishing
factory -- a catalyst and a symbol of change in an industry
whose basic structure has altered little in the past century.

"Our industry has been going through dramatic changes ...
and we now stand at the crossroads," the factory's owner,
Israeli diamond tycoon Lev Leviev, whose LLD company set up the
Windhoek polishing factory, told a conference in India.

"The old excuse that it is economically not viable to
polish diamonds in Africa no longer holds water."

Leviev's assertion has put him and his empire -- which
spans the world's major diamond mining, trading and polishing
centers as well as jewelry retail -- at odds with the
granddaddy of the industry: De Beers.

At the heart of the stand-off, and ultimately at stake, is
De Beers' unique trading structure, evolved over more than 100
years of moving diamonds from the poorest continent to rich
consumers on the other side of the globe.

De Beers takes rough diamonds from its own mining
subsidiaries or third party miners to London, precisely sorting
them into one of around 16,000 categories of shape, size and
color for sale by its Diamond Trading Company (DTC) unit, many
via Antwerp, Belgium -- long the home of the industry.

The DTC sells on to an exclusive group of buyers, known as
sightholders, who either cut and polish the gems themselves or
sell them straight on at a profit. De Beers says the structure
ensures the trade has access to consistent quality stones.

"If you pick up two pieces of gravel, the chances are they
are vastly different," James Nicholson, of De Beers' Diamdel
subsidiary, which is the only channel for non-sightholders to
buy rough diamonds direct from the DTC.

"But put lots of pieces of gravel through our sorting
system and you will end up with pieces that are almost
identical. The client knows exactly what he's buying every

The system has changed little since the early 20th century.


But the system that has served De Beers and its chosen
clients for so long is under unprecedented fire from African
governments who want a bigger cut of the overall supply line.

Sales of rough diamonds from miners worth $11.3 billion in
2004 equated to $16.7 billion worth of polished diamonds in
retail sales, according to Israel-based expert Chaim

For Africa, the buzzwords are "beneficiation" and jobs.

Bending over a revolving diamond polishing plate under the
eye of Israeli instructors at LLD's Windhoek plant, 24-year-old
Candy Kawiwi knows she is lucky to have a job in a country with
more than 30 percent unemployment.

"For more than a century our diamonds were mined and
exported in raw form to other countries without adding value to
it," Sam Nujoma, Namibia's founding president, said when he
opened Leviev's Windhoek polishing plant in June 2004.

Nujoma's complaint has become a popular battle cry among
southern African countries, in particular Botswana, South
Africa, Angola and Namibia -- respectively number one, four,
five and six diamond producers by value with more than half of
world supply.

In the past De Beers has been able to head off any
challenge to its system largely because of its size and
unquestioned control over the majority of diamond sales

But times are changing, and governments with an envious eye
on low-cost India's rise as a global polishing center have
taken heart from Leviev's eagerness to prove his main rival

Efforts by new diamond producer Canada to foster a local
polishing industry have foundered on high labor costs -- which
are less of an obstacle to lower-wage African countries.

Namibia, Botswana and South Africa are also keen to develop
national brands for their diamonds -- which would mean
bypassing the DTC pooling system to ensure local stones are

Leviev's group now has mining operations across the region,
polishing operations in South Africa and Namibia, and there is
talk of setting up shop in Botswana too.

Among some 500 employees training in the Windhoek factory
are a group of Angolans destined to put a new polishing factory
back home into production in November, in a joint venture with
the marketing arm of Angola's state diamond firm Endiama.

Leviev's courting of the region's governments has come at a
particularly sensitive time for De Beers as it negotiates new
and repeat mining licenses in the region, and it has been
increasingly eager to advertise the successes of polishing
clients in the region -- even if they can still not access De
Beers diamonds from local mines.

Negotiations for renewing De Beers' rights to some of the
world's most valuable diamond mines in Botswana led to De Beers
and the government agreeing to set up a local sales arm --
although De Beers said it had not been a condition for renewal.

Meanwhile De Beers' contract in Namibia -- whose diamonds
have a higher per-carat average value than other major
producers -- is up for renewal this year amid much talk from
both sides of increasing "local beneficiation," and South
Africa hopes a new diamond law will increase local access to
rough stones.

"It may well be in the future that the policy of the DTC is
realigned," said Diamdel's Nicholson. "But that is not the way
our sales operate at the moment. It's an area of debate."

De Beers has already seen its mines' majority share of the
world rough diamond market ebb away in recent decades and with
pressure growing to create jobs in southern Africa, Leviev's
expansion may provoke one of the biggest upheavals the sector
has seen since the discovery of diamonds in Kimberley, South
Africa, in 1871 triggered the formation of the modern industry.