Goodbye London, hello Gaborone: De Beers sales head to Africa

Reuters

By Clara Ferreira-Marques

LONDON, Oct 3 (Reuters) - In a spartan office in the Londonheadquarters of De Beers, Elliot Tannenbaum holds a cloudlessstone the size and shape of a domino to the light: a roughdiamond worth millions, even before it is cut and polished.

A veteran diamantaire, Tannenbaum's family firm is one ofsome 80 buyers handpicked by the diamond giant to buy rough gemsfrom its mines, under an arcane system of pre-determinedallocations and regular sales meetings known as "sights".

"I have been coming here some ten times a year for 35 years,I have missed only two or three sights. It is part of ourroutine," says Tannenbaum, whose Leo Schachter group, founded inNew York and now headquartered in Israel, is a majormanufacturer of polished diamonds.

But this week's sight is De Beers' last in London. From nowon, the action will be in Gaborone, dusty capital of Botswana.

The office allocated to Tannenbaum's firm, his dedicated DeBeers contacts and the black-and-yellow attache case stackedwith clear plastic bags of diamonds will move south along withthe whole of the company's sales operation - 85 out of 300London-based De Beers employees.

The 2011 decision to move - which will cost more than $120million, including shiny new offices in Gaborone - follows yearsof negotiations between Anglo-American-owned De Beersand Botswana, the largest producer of gem diamonds and home tomines like Jwaneng, the world's richest.

The move secured a new 10-year contract for the sorting,valuing and sales of diamonds from the Botswana mines run byDebswana, a 50:50 joint venture between De Beers and thesouthern African country's government - the longest salescontract agreed to date between the two sides.

It will shift more than $6 billion of annual rough diamondsales from an international financial centre to a comparativebackwater with a population of 230,000, in one of the mostdramatic examples of a producing country battling successfullyto keep value and profits from the raw materials at home.

The change will test Botswana's ability to develop skillsand services, lower an unemployment rate stuck at roughly 18percent and diversify an economy still dependent on diamonds formore than 80 percent of exports.

By separating sales from corporate headquarters, the move isalso arguably the biggest challenge De Beers has faced to theway it does business since the current sales model was set upnearly a century ago to secure its then-dominant position.

END OF AN ERA

The shift south, long expected in one form or another,raises practical questions - visa difficulties, a lack of directflights and suitable hotels - but has also sparked a debatearound the future of De Beers and its role in the gem market.

Still the world's largest producer by value, De Beers wastaken over by Anglo American in a deal completed last year whichbought out the Oppenheimer family, cutting direct links to thedynasty that ran the firm for almost a century.

"It is what you would call the end of an era, but it shouldnot be seen as a negative, it should be seen as the naturalprogression of the industry," Kieron Hodgson, an equity analystat Charles Stanley in London.

Others are less sanguine.

"I don't think any of them really want to be (in Gaborone),but they don't have a choice as the diamonds are in the groundthere," said RBC Capital Markets analyst Des Kilalea.

"It is akin to saying we won't have an London MetalExchange, you'll have to go to Chile to get your copper. It isblatantly inefficient - though in terms of politics anddevelopment, if I were president I'd do the same."

De Beers has already moved its diamond sorting andaggregation businesses - the operations that sift through theproduction from each mine and bring the gems together beforethey are allocated to buyers - to Gaborone.

It has also been supporting cutting and polishing operationsby making more diamonds available locally - encouraginginternational firms like Tannenbaum's to grow there. The LeoSchachter group now employs some 300 people in Botswana.

A TIGHT GRIP

De Beers' London sights date back to the 1930s, when it setup what became the Diamond Trading Company to control supply,secure demand and tighten its grip on the market in roughdiamonds, of which it held some 80 percent at its peak in the1980s and 90s.

Gems from all mines were aggregated and quantities forcustomers were agreed in advance. Buyers were vetted and couldnot refuse gems in their allocation without risking futuresupply. In exchange, they were assured a predictable, consistentquality and supply.

Until this month, the London sales meetings were interruptedonly by the heavy bombing during the Blitz.

But times have changed. De Beers has been battling lowerproduction and challenges to its sales model for years, in partthanks the collapse of the Soviet Union and the emergence ofmines in Australia and Canada outside the firm's influence.

Its share of rough diamond sales dropped to under 50 percentin 2006 and to 37 percent in 2012, according to consultancyBain. In 2009, it was overtaken in carat terms by Russia'sAlrosa.

De Beers says the move to Gaborone was partly motivated bywanting to keep alive the sights system, which still sells tobuyers like jewellers Tiffany & Co and China's Chow TaiFook, and Indian family firms.

"The Botswana government did not come to De Beers and sayplease transfer your business. The Botswana government said wewould like you to sell the Botswana diamonds here," said VardaShine, who runs De Beers' Global Sightholder Sales.

"We believe our business model is quite strong and providesvalue for De Beers and its shareholders - so we came up with theidea of moving the whole business."

But some in the industry say it presents challenges that themodel may not survive.

De Beers already sells 10 percent of its production throughauction as opposed to via sights, and according to the 2011deal, the Botswana government will be able to sell a portion oflocal production through state-owned Okavango that will rise to15 percent.

De Beers says the auctions provide a guide price forsightholders, but others only see competition.

"There is a direct challenge to the De Beers sightholderssystem taking place," says diamond entrepreneur Martin Rapaport,whose own group operates rough and polished diamond tenders.

There are also questions about the wisdom of separating DeBeers' management, which will remain headquartered in London,from its sales and the expertise that has underpinned the group.

"The diamond end of the business is going to become divorcedfrom the corporate end of the business, and the corporate end ofthe business has already been largely denuded of diamondexpertise," said Brian Menell, whose family sold a stake in theVenetia mine to De Beers a decade ago and now has mininginterests across Africa as head of the private Kemet group.

He also pointed out the move brings De Beers closer to justone of its producing nations, which could arguably skew itsviews. Botswana accounts for almost three-quarters of De Beersproduction, but it also has mines in Namibia, South Africa andCanada.

ANTWERP, DUBAI, GABORONE?

For its part, Botswana - long hailed as an African successstory - is hoping the De Beers shift will help it boost skillsand develop as a diamond hub that will attract a growing trafficof buyers across Africa.

While it may never outshine Antwerp, Dubai or Tel Aviv,Gaborone hopes it can carve out its own niche.

Many question whether it can really change the structure ofan industry where most of the resources are in Africa but mostof the value is generated elsewhere, and whether its strategy isgood preparation for life after diamonds, as the mines age.

Thanks to improvements in technology used in cutting andpolishing and increased efficiency, Botswana has lowered itscosts to compete, for larger stones at least, with India.

But Tannenbaum says productivity still lags behind, makingmargins difficult for smaller gems, where the cost of cuttingand polishing can make up a larger percentage of the finalprice.

"It will take time for the more difficult material - it tookIndia 40 years," he said.

The country also still lacks the financial and otherinfrastructure of, say, Dubai.

Razia Khan, Africa analyst at Standard Chartered in London,said Botswana was being given a golden opportunity.

"The big win for Botswana would be if it could put in placemicro level reforms that result in an improvement in thebusiness climate," Khan said.

"If it doesn't do that it loses an all-important opportunityto expand its economy, to expand its export base, to provide adriver for GDP growth."

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