US embassy cable - 04PRETORIA3560

C O N F I D E N T I A L SECTION 01 OF 03 PRETORIA 003560 
 
SIPDIS 
 
STATE PLEASE PASS TO USGS/GCOAKLEY 
 
E.O. 12958: DECL: 08/04/2009 
TAGS: EMIN, EIND, ETRD, SF, BC, WA, TZ, AO, CG, GH, CA 
SUBJECT: SOUTH AFRICA: DEBEERS CONTEMPLATES THE U.S. MARKET 
AND "KIMBERLEY II" 
 
 
Classified By: ECON M/C JHARTLEY, REASON: E.O. 12958 1.5 (d) 
 
1. (C) Summary: On July 28, Econoff and EconFSN sat down to 
an hour-long conversation with Jonathan Oppenheimer, Director 
of E. Oppenheimer and Sons and Managing Director of De Beers 
Consolidated Mines, Ltd., to review the landscape for De 
Beers in the wake of its July 13 settlement with the U.S. 
Department of Justice on a 1994 price fixing charge.  In line 
with the company's commitment "to be legally compliant 
throughout the world," De Beers pled guilty to having fixed 
industrial diamond prices and agreed to pay a fine of USD 10 
million.  The settlement means that De Beers executives can 
freely travel to the United States and expand the company's 
business in the world's most lucrative consumer market. 
Oppenheimer talked about how De Beers had already started to 
leverage its well-known name in international retail markets. 
 However, the pace of entry into the United States retail 
market would be determined by the company's ability to 
"extinguish its liabilities" stemming from U.S. civil law 
suits (now three in number).  Oppenheimer lobbied for U.S. 
support of a scheme using "smart cards" to register the 
activities of small-scale diamond miners and traders in 
Africa under what he termed "Kimberley Process II."  End 
Summary. 
 
Next in Line 
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2. (SBU) At 34 years old, Jonathan Oppenheimer is the 
youngest heir to Ernest Oppenheimer's original fortune made 
from the mining and sale of South African rough diamonds and 
gold.  Over the past several years, Jonathan Oppenheimer has 
assumed a higher political profile in De Beers, particularly 
with respect to South African mining legislation and company 
operations in Africa.  As Managing Director of Consolidated 
Mines, Ltd., he is responsible for South African operations. 
As a Director of E. Oppenheimer and Sons, he is also 
responsible for African producer relations.  Jonathan's 
father, Nikki, succeeded Jonathan's grandfather, Harry, as 
Chairman of De Beers in 1998.  Jonathan now works along side 
Nikki in the Johannesburg offices of E. Oppenheimer and Sons. 
 The Oppenhiemer family owns 45 percent of De Beers outright, 
and controls another 5 percent or so through direct and 
indirect shareholdings in Anglo American (which owns 45 
percent of De Beers) and Debswana, a 50/50 joint venture 
between De Beers and the Government of Botswana.  Though 
young, Jonathan Oppenheimer occupies a privileged position 
from which to represent De Beers' interests. 
 
De Beers Still the Dominant Force 
--------------------------------- 
3. (SBU) Despite growing competition, De Beers is still the 
dominant force in diamond mining and marketing in the world 
today.  In 2003, the De Beers Group mined 43.9 million 
carats, or about 31 percent of world production, mostly from 
Botswana (30 million carats) and South Africa (11.9 million 
carats), but also from Namibia (1.5 million carats) and 
Tanzania.  In a race with a growing number of diamond mining 
companies, De Beers is actively exploring in Canada, Russia, 
Brazil, India, and participating in early stage joint 
ventures in Australia and several other African countries. 
 
4. (C) De Beers' Diamond Trading Company (DTC), successor to 
the Central Selling Organization (CSO), still controls about 
two-thirds of the rough diamond market.  Most supply is 
guaranteed by De Beers Group mines (41 percent by value). 
The rest comes from direct purchases, especially from Alrosa, 
Russia's diamond mining company.  In 2003, the DTC logged a 
record USD 5.5 billion in sales, partly because of higher 
diamond prices and the decision to sell off excess inventory. 
 In addition, the DTC has embarked on a marketing strategy to 
generate consumer demand for diamonds, which De Beers feels 
lags behind other luxury goods.  Increased demand, lower DTC 
inventory levels, fewer purchases from Alrosa, and equipment 
failures reducing production at De Beers Group mines in 
Botswana lead some analysts to believe that the industry may 
be heading toward a supply crunch and higher prices in the 
near future.  Oppenheimer said that De Beers was concerned 
that the level prices stay relatively stable to encourage 
consumer demand, and to discourage accusations that once 
again De Beers may be manipulating the market. 
Kimberley Process II 
-------------------- 
5. (C) Oppenheimer took the opportunity of this meeting with 
U.S. officials to lobby for De Beers' idea of using smart 
cards and reading devices to register small-scale miners and 
traders in Africa who currently fall outside the Kimberley 
Process Certification Scheme.  Oppenheimer believes that the 
system could connect miners to national ministries, help 
track regional diamond trade, and even provide a vehicle for 
payment.  He estimated that some USD 700 million in 
small-scale diamond production were falling outside the 
Kimberley Process, but believed that most of this was the 
result of legitimate small scale mining.  Oppenheimer thought 
that smart cards could form the basis of a "Kimberley II." 
Kimberley certification would mean that De Beers could enter 
these local rough diamond markets and pay up to six times 
more than local traders were paying the small-scale miners 
now.  De Beers wanted to garner U.S. and other Kimberley 
Process country support to push this idea toward a U.N. 
Security Council resolution. 
 
6.  (C) Ever wary of competition and the possibility of 
unsavory characters tarnishing the diamond trade, Jonathan 
Oppenheimer took the opportunity of the meeting to raise 
ethical questions about the Lev Leviev Group, De Beers' 
Namibian competitor.  He went out of his way to say that De 
Beers was concerned about Leviev's shady past as an Israeli 
arms dealer, but admitted that De Beers had no hard evidence 
of his trade in conflict diamonds or use of diamonds as a 
means to launder money. 
 
Marketing 
--------- 
7. (C) Oppenheimer spoke about the shift in De Beers' 
strategy from one that controlled the supply (and price) of 
diamonds to one that focused on demand.  Under its "Supplier 
of Choice" initiative, De Beers was joining with leading 
diamantaires (DTC sightholders) to stimulate consumer demand. 
 Research showed that consumer demand for diamond jewelry 
consistently trailed other luxury goods.  De Beers wanted to 
change this by advertising more and branding diamonds to tap 
into the different segments of the retail market.  Central to 
this approach was "leveraging" the De Beers name with 
consumers and accessing the U.S. market, which accounted for 
50 percent of the world's retail market for diamonds. 
 
8. (C) Oppenheimer said that market research had revealed 
that consumers viewed the name "De Beers" as being synonymous 
with quality diamonds, even though De Beers did not even 
participate in the retail market.  To capitalize on this 
phenomenon, De Beers had decided to leap frog the cutting and 
polishing industry and move directly into retail, where the 
markups were especially high.  In fact, De Beers had already 
joined with experienced retailer Louis Vuitton Moet Hennessy 
(LVMH) to open high end diamond jewelry stores in London and 
Tokyo.  Under an agreement with the EU's Competition 
Commission, De Beers promised to not source diamonds solely 
from itself to supply its retail outlets.  Oppenheimer 
thought that about 20 percent would likely come from non-DTC 
sources.  Oppenheimer confirmed that De Beers/LVMH planned to 
open a store in New York City, but said that De Beers was in 
"no rush" to enter the U.S. market.  Referring to three civil 
law suits pending U.S. courts (involving potential commercial 
damages from past CSO selling practices), Oppenheimer said 
that De Beers intended to "extinguish its liabilities" before 
moving rapidly into the U.S. retail market. 
 
South Africa Mining Legislation 
------------------------------- 
9. (C) Oppenheimer decried recent confusion in South Africa 
over Black Economic Empowerment (BEE) ownership requirements 
for mining and exploration licenses on state owned land. 
Despite the government's clarification that its 51 percent 
BEE ownership requirement would be limited in duration, it 
was entirely unclear to him as to how the requirement would 
revert after one year to the 26 percent set forth in the 
mining industry's BEE charter.  He further commented that 
applying BEE ownership requirements to exploration was 
especially problematic, since there were no black owned 
companies operating in this area and few black investors with 
deep pockets to fund exploration.  Oppenheimer also decried 
the deleterious effect that the debate over mining royalty 
levels was having on the South African investment climate for 
mining.  No matter the level, he thought that the government 
would be advised to resolve the issue soon, as the 
uncertainty was freezing many investment decisions. 
FRAZER