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Cablegate: De Beers - Reformed Ex-Monopolist As Market Leader

VZCZCXRO7084
RR RUEHBZ RUEHDU RUEHGI RUEHJO RUEHMA RUEHMR RUEHPA RUEHRN RUEHTRO
DE RUEHSA #0781/01 1051427
ZNR UUUUU ZZH
R 141427Z APR 08
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 4147
INFO RUEHZO/AFRICAN UNION COLLECTIVE
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHAK/AMEMBASSY ANKARA 0201
RUEHBJ/AMEMBASSY BEIJING 0788
RUEHBY/AMEMBASSY CANBERRA 0657
RUEHLO/AMEMBASSY LONDON 1496
RUEHMO/AMEMBASSY MOSCOW 0790
RUEHOT/AMEMBASSY OTTAWA 0617
RUEHFR/AMEMBASSY PARIS 1336
RUEHSG/AMEMBASSY SANTIAGO 0190
RUCPDC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC

UNCLAS SECTION 01 OF 02 PRETORIA 000781

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR AF/S, EEB/ESC AND CBA
STATE PLEASE PASS USAID
STATE PLEASE PASS USGS
DOE FOR SPERL AND PERSON
DOC FOR ITA/DIEMOND

E.O. 12958: N/A
TAGS: EMIN ENRG EPET EINV SF
SUBJECT: DE BEERS - REFORMED EX-MONOPOLIST AS MARKET LEADER
AND PARTNER TO SAG

REF: A. 07 PRETORIA 3891
B. 07 PRETORIA 3836

1. (SBU) SUMMARY: De Beers remains committed to South
Africa, even as the former diamond cartel company has adopted
significant strategic changes and has rationalized its
business in South Africa. The diamond company's processing
and marketing headquarters is situated in its historical
capital of Kimberley, where De Beers sorts and markets all
its South African production. De Beers is doing the right
things on local empowerment and beneficiation, but it is not
clear if South Africa can profitably cut and polish a mix of
diamonds. End Summary.

---------------------------------
The Big Hole - Where It All Began
---------------------------------

2. (SBU) De Beers hosted Energy Officer and Specialist for
an April 3 visit to its historic and marketing headquarters
at Kimberley in the Northern Cape Province. Kimberley marks
where South Africa's first mineral rush began in the 1870's,
with the discovery of the first kimberlite pipe. The
resulting diamond rush was followed by the formation of De
Beers and consolidation and development of the "Big Hole",
the largest hand-dug mine in the world. The Big Hole's
economic life ended in 1914 and now has been converted to an
historical tourist attraction in the center of Kimberley. De
Beers operates a fancy, new visitor center that is perched on
the edge of the Big Hole. The diamond giant is contesting a
claim by a local company to prospect on land that encroaches
on the Big Hole. De Beers maintains its commitment to
Kimberley by processing all its South African production
there and running a plant to re-process historical tailings
gathered from mined kimberlite pipes surrounding Kimberley.

3. (SBU) De Beers has implemented a number of strategic
decisions in recent years, after abandoning its cartel
imperatives to control stocks and settling anti-trust suits
with the U.S. and the E.U. De Beers recently shifted its
world-wide aggregating function from London to Botswana,
reflecting its commitment to Africa - and in particular -
Botswana, where it is in a 50/50 partnership with the
government. In South Africa, De Beers has consolidated and
focused its mining activities, selling off some of its
underground operations in Kimberley, the Free State, and east
of Pretoria (Ref A). De Beers is investing significantly in
marine diamonds on South Africa's Atlantic Coast, in its
large Venetia open-pit mine in Limpopo, and in opening its
new Voorspoed Mine in the Free State. De Beers aims to mine
and market diamonds profitably and sustainably in South
Africa. De Beers likes to think of itself as the "Rolls
Royce" of mines, and so it cannot profitably mine some of the
older and now marginal mines, where smaller companies may be
better placed to extract value. De Beers has been a positive
proponent and major partner in the Kimberley Process to
implement certification of rough diamonds to combat conflict
diamonds (Ref B).

--------------------------------------------- ----
Q-------------------------------------------- -----
Market Leader and Support for Local Beneficiation
--------------------------------------------- ----

4. (SBU) In this visit and in a separate meeting last
October in Johannesburg, De Beers Diamond Trading Company
(DTC) Managing Director Faried Sallie stressed that De Beers
seeks to serve as market leader, leaving behind its old
market-controlling behavior. In addition, Sallie emphasized
the new cooperative relationship with the SAG, replacing the
previously existing distrust. Most importantly, De Beers is
committed to making available rough diamonds to the South
African market to support the SAG's calls for increased
beneficiation, or local value added production. In

PRETORIA 00000781 002 OF 002


particular, De Beers has incurred a legal obligation to make
available up to 10 percent of its rough diamonds to the new
State Diamond Trader (SDT), and it has cooperated with the
SAG in bringing technical and marketing expertise to the new
state entity. The SDT must pay market value and purchase a
representative sample of De Beers's production (i.e., small
and large). De Beers also makes available forty percent of
the remainder to South African purchasers, under its
traditional "sight-holder" marketing system. These
purchasers are in turn committed to beneficiate (cut and
polish) in South Africa 80 percent of its purchases in the
country.

5. (SBU) Sallie admitted that the SAG's ambitious goals for
beneficiation will be difficult to achieve, particularly in
that it is difficult to compete with the expertise in the EU
for large diamonds and the cheap, productive labor in India
and China for processing samll diamonds. He noted that the
SDT was not currently using its 10 percent quota, but was
rather purchasing only 3 percent, likely reflecting limited
capacity to profitably finance and beneficiate product.

6. (SBU) De Beers remains proud of its commitment to South
Africa. Sallie stated that De Beers had:

- - Sold a 26 percent Black Economic Empowerment stake to
Ponahalo in 2006;
- - Spent approximately $ 20 million for exploration in 2006;
- - Sold about $ 700 million of diamonds to South Africa's
local cutting industry;
- - Made a significant corporate social investment and
support to the local jewelry industry; and
- - Achieved nearly 80 percent voluntary counseling and
testing for HIV/AIDS with its employees across South Africa.

7. (SBU) COMMENT: It is not easy for De Beers to overcome
its perceived history as a cartel in bed with the apartheid
government and exploiting mine labor, but it has generally
been successful in transforming itself into a good corporate
citizen in the new South Africa, including meeting Black
Economic Empowerment imperatives. De Beers has shown its
commitment to southern Africa by moving its world-wide
aggregation from London to Botswana. It is still not clear
how successful De Beers can be in fulfilling the SAG's
mandate to beneficiate rough diamonds in South Africa given
lack of skills, labor productivity, and retail market.
BOST

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