Come 2008, how many DTC Sightholders can be supported by De Beers’ own production? Of course, it is a total arbitrary decision what the minimum size of a Sight should be – and the new system in which applicants apply for specific boxes in 16 different bands may give all kinds of surprising results, including an undesirable fragmentation.

In practice, the number of Sightholders is going to be limited by the availability of goods in each band – and, mostly, on what will end up in African producer countries. A back-of-the-envelope calculation, partly based on what we consider reliable information, leads to the conclusion that in the 2008-2010 contract period, it seems unlikely that there will be much room for more than 55 Sightholders, a drop of some 40 percent less then the current 93.

Forgetting about the politics of decision making and the quality of the computer model that will give the final figures, it isn’t hard to do the calculation in carats and cents. The worldwide production of De Beers is about 51 million carats, which under certain circumstances, might grow by another 3.3 million carats by 2009 due to Victor, Snap Lake and new off-shore diamond mining projects. In reality, it will probably be less. The Cullinan mine (1.5 million carats) is for sale. And we can assume that some other properties, such as Snap Lake, may also be sold if the opportunity arises.

For the back of the envelope, 51 million carats annual production will do. At an average $91 per carat value, we are talking about a production worth some $4.65 billion at producer country export values, the equivalent to some $5.1-$5.2 billion in Standard Selling Values (SSV). (Next year there is also $400 million available from Russia but that should be ignored when taking a longer-term sustainability view). Out of the 51 million De Beers carats, we estimate that about 37.5 million carats are gem and near-gem (Indian) qualities available for cutting.

From here, the calculations get tricky: When we look at the 14.5 million carats of the South African production, only some five percent in carats can profitably be processed in South Africa. This five percent is worth more than 50 percent of the $1.2 billion of De Beers’ South African output. This five percent in carats could, in theory, support some 3,000-plus workers. There are presently some 19 Sightholders in South Africa.

The productions of Namibia and Botswana are different and, to play it safe and looking at a “best case” scenario, I would put the total cut-able production (of 4 grainers and up) in the African countries, expressed in carats, at seven percent of the De Beers total carat production.

An assumption is being made. This article is not about Indian goods, nor is it about Sightholders processing Indian goods. The back-of-the-envelope calculation looks at the goods which are cut-able in Africa, which are also the very same goods that are cut-able in Tel Aviv, New York, Antwerp, Thailand and probably China.

From the 51 million total output, let’s take a relatively small amount of 12.5 million carats as near-worthless, industrial goods. This represents 25 percent of De Beers’ production. I know that normally we assume that 35 percent consists of industrial output, but the De Beers productions tend to be skewed to better qualities, and with cutting technologies improving constantly, it is not unreasonable to put the total cut-able production of De Beers at 37.5 million carats.

These carats will be divided into three categories:

(1)    The large specials above 10 carats, for which we assume world production to be about 150,000 carats. This would value between $330 to $500 million, in the $2,100-$330 per carat range.

(2)    This category is then followed by the seven percent non-Indian quality production of 4 grainers and up, which is about 3.5 million carats, $2.63 billion at export value, averaging $750 per carat, and some $2.9-$3.2 billion at SSV – the price DTC Sightholders pay.

(3)    And the remaining category of 34 million carats is composed of Indian goods, averaging $45 per carat, counting for $1.53 billion, which are $1.7 billion at SSV.

This makes for a total of $4.67 billion De Beers production, or $5.2-$5.5 billion at selling prices (including profits and marketing costs).

The real question is how many Sightholders are needed for this $2.9-$3.2 billion of non-Indian goods. There are different ways to calculate this. There is an assumption that in the producer countries the value of the diamonds needed per production worker ranges from $125,000 to $160,000 per year.

If South Africa wants to support 3,500 workers, Botswana 5,000 and Namibia 1,000, and taking an average of $150,000 of rough needed per worker, then $1.4-$1.5 billion will have to be allocated to these countries when they reach full capacity at these employment levels. That represents about half of the non-Indian-type of the world production of De Beers.

Less than half of quality goods available to Western Hemisphere
This leads to the inevitable conclusion that the availability of De Beers’ quality goods (4 grainers and up) to so-called Western Hemisphere Sightholders who are producing outside the African countries and who are not processing Indian goods will only be some $1.4-$1.5 billion.

Specials will probably mostly remain in Africa, even though it isn’t clear whether Botswana has – or shall have – the capacity to process the huge amounts of good quality stones in the Specials 10.8 carat and up range. Though South Africa is well known for its specials, these are mostly of not very good quality. Botswana has much nicer specials.

To put it in different terms, only some $140-$150 million of quality goods would be available per sight for the Western hemisphere cutters. How many Sightholders does the DTC need to sell these goods? 10? 15? This also assumes of course, that Diamdel is hermitically closed, and will only serve to test market prices and sentiments. It is our understanding that the consultative process with employees may still conclude leaving some trading activity in Tel Aviv, and Antwerp will be closed instead.

The DTC will probably try to cosmetically and “optically” maintain as many Sightholders as possible. Some Antwerp, Israeli or American Sightholders who have operations in African countries may find out that their entire sight becomes a “dedicated-for-Africa” sight and they won’t have access to traditional goods they hitherto received. Let there be no misunderstanding: those who think that by going to Africa they will actually increase their sights are probably mistaken. They will find out that going to Africa merely facilitated a continuation of sight privileges.

Today there are some 37 Sightholders in India. They receive Indian goods, while some have access to the quality articles, which together accounts for 33 percent of total DTC sales (This figure was confirmed by De Beers). Most of these clients may remain on the list, though there are Indian Sightholders whose performances have come under question and who may find themselves dropped.

Allowing for an adjustment due to the diminishing Russian supplies, it is fair to assume that we will see some 25 Indian Sightholders for Indian goods (and almost none for non-Indian qualities), some 20 Sightholders in South Africa, some 10-12 in Botswana, and two in Namibia (A recipient of goods from DTC Botswana is not necessarily a DTC sightholder). Some of the Sightholders may operate in overlapping jurisdictions, so these total figures are inflated and may total not more than 50.

The question is how many Sightholders will be left in the so-called Western hemisphere, processing non-Indian goods? Will new Sightholders be appointed? The answer to the last question is that there must be new ones, because it is statistically impossible that in the new application system all existing clients score higher than any of the potential clients.

The fact that companies with a mining interest may apply even opens the road for companies like Aber (which owns Harry Winston) or Leviev to become DTC Sightholders. The market speculation that companies like Sterling may have applied for Sights won’t fade away.

The conclusion seems inescapable that New York, Ramat Gan and Antwerp will be hit almost fatally in terms of having the DTC as a principal supplier to their respective industries. Players in these markets must develop a supply relationship with Alrosa, BHP Billiton, Rio Tinto or with new players such as Clifford Elphick’s Gem Diamonds and other suppliers.

This is just a “on the back of the envelope exercise,” looking at best-case scenarios. I hate to think what conclusions one will draw if one looks at these figures in much greater depths.

Have a nice weekend.