At a recent exercise to forecast the direction our industry is heading, which included analyzing economic as well as supply and demand factors, the crucial final words were “and then, of course, we have the three industry wild cards” – a number of factors that causally contribute to the outcome. These wild cards bear names: Nicky Oppenheimer, Sergei Vybornov and Ian Khama. They represent major issues where conjecture is rife and where facts are harder to ascertain in advance.

Wild Card Number 3: Sergei Vybornov

Let’s take it from the bottom up. Wildcard Number 3 is Alrosa’s president Sergei Vybornov, who, lately, hasn’t hidden his personal dislike of the way diamonds are marketed. In a scheduled 45-minute keynote address to the recent Diamond World Congress in Shanghai, it took him barely 45 seconds to get his message across: “Swarovski produces glass, but sells it as if it were diamonds. We produce diamonds, but sell it as if it were glass,” he thundered, adding that he wouldn’t ride in a Mercedes Benz “because it feels to him as having a Volkswagen.” Then he sat down.

Vybornov’s address was the shortest ever given at a World Congress – even shorter than the “greetings” that opened most speeches. Insiders say that Vybornov would want nothing less than seeing a doubling or tripling of diamond prices and getting some decent generic marketing on the ground to achieve that objective.

We now are getting the “by invitation only” to Vybornov’s St. Petersburg conclave, illustrating that he is putting his money where his mouth is. On June 29, a dozen of the industry’s major players will sit around a table in a closed room. The list of invitees includes not only major miners such as Gareth Penny (De Beers), Varda Shine (DTC), Bill Champion (Rio Tinto), Graham Kerr (BHP Billiton), Bob Gannicott (Harry Winston Diamond Corporation) and Manuel Ganga (Catoca), but also the producers’ main downstream partners. Thus we see names such as Dilip Mehta (Rosy Blue), Chaim Pluczenik (Pluczenik), Kaushik Mehta (Eurostar), Isaac Tache (Tache), Lev Leviev (LLD), Nir Livnat (Steinnmetz Group) and Maurice Tempelsman (Lazare Kaplan).

The intriguing additional participants represent the jewelry world: Francesco Trapani (Bulgari), Michael Kowalski (Tiffany), Bernard Arnault (LVMH), Mark Light (Sterling), Laurence Graff (Graff) and Johan Rupert (Richemont). And there are still more invitees such as Victor van der Kwast and Kurt Looyens (ABN-AMRO International Diamond and Jewelry Division), Paul Goris (Antwerp Diamond Bank) and Patrick Kwok (Chow Tai Fook). That the World Diamond Council (WDC) is supposed to meet in Antwerp at the same time is apparently as relevant as the relevancy of the WDC itself. Actually, trade and industry bodies (WFDB, IDMA, CRJP, CIBJO, etc.) and the occasional NGO, which generally dominate industry events, are specifically and deliberately not invited by Vybornov.

The formal pretext of the St. Petersburg meeting is to change the currency in which diamonds are traded from U.S. dollars to Swiss francs. This is tantamount to changing Coca Cola into Pepsi. Another grand objective presumably is finding ways to sell more diamonds at higher prices worldwide.

In the past decades, we have spent tons of ink writing about ex-Sightholders angrily petitioning the Competition Authorities because they had been denied “their right” to purchase rough from De Beers. Vybornov, in contrast, is the only producer ever who has gone to court to retain the right to sell rough to De Beers. He clearly likes the cartel model.

The Russian frustration is understandable. It must be shared by all producers, especially Rio Tinto and BHP Billiton, who are seeing prices in all other commodities going through the roof. Of course, the other commodities have high utilitarian value and are traded in much more transparent market environments... Vybornov’s comparison with Swarovski is understandable but misguided: until Alrosa and other producers can dig up made-to-order diamonds, such comparisons will only produce frustrations but not results.

It is impossible to turn the clock back and reach some tacit collusion on pricing issues. If producers do endeavor to push up the prices artificially, too much out of sync with the polished and retail markets, I think the downstream players will simply not tolerate it beyond a certain point – and we may not be too far away from that situation. Even though everyone views gold, a simple commodity that is traded on the open market, as a safe haven in turbulent times, gold price over the long term has not kept up with inflation. So why should diamond prices outperform gold?

What Vybornov and other St. Petersburg participants must keep in mind is that the current consumer market offers a growing number of other options for discretionary spending; there may come a tipping point where consumers will wonder why they should bother with diamonds. This is especially true in the context that, as an industry, we are heavily reliant on low-income consumers in order to sell cheap near-gem diamonds, which, in turn, economically justifies having mining sites to begin with.

If the St. Petersburg meeting honestly and thoroughly addresses these issues, it potentially could “make a difference.” Vybornov has guts. At the Antwerp diamond conference last year, he told the audience that cutting and polishing in Russia doesn’t make economic sense. When he spoke, there were, by my calculation, some two dozen active manufacturing units throughout Russia. That has now dwindled to merely a handful.

Vybornov has always impressed me as being extremely sharp, quite unpredictable, and sometimes kind of odd, but always determined and self-assured. He is undoubtedly going to make an impact on the diamond business beyond just producing in Russia and Angola.

This makes him one of the Wild Cards.

Wild Card Number 2: Nicky Oppenheimer

It is now June 2008. It is from this month onwards that Anglo American can give Nicky Oppenheimer the one-year termination notice ending the Oppenheimers’ sole right to determine the directors and management of De Beers. Let there be no misunderstanding: this notice will definitely be given, though not necessarily publicly announced. We want to set the record straight: this has nothing to do with the performance of De Beers or the ability of the Oppenheimer family in managing De Beers. At the 2001 privatization of De Beers, the management contract was agreed to for strictly legal reasons, also to “distance” Anglo American somewhat from the management of what then still was an illegal cartel.

The legal situation has changed, so there is no valid reason why a 45 percent owner of De Beers would allow a 40 percent partner manage it all. It is our understanding that Oppenheimer may have done a “favor” to Anglo American by agreeing to the arrangement – even though he was handsomely rewarded for it. For those unfamiliar with the management contract (and that probably includes DTC managers who were still in cosmetics or other private enterprise in 2001), let’s briefly recall it.

At a cost of $17.6 billion, Oppenheimer completed the management buy-out of De Beers, taking the company private in 2001. The Oppenheimers’ ownership in De Beers went up from three percent to (effectively) 40 percent, with Anglo American and Botswana holding 45 percent and 15 percent, respectively. Oppenheimer, through the family company Central Holding Limited (CHL), “will contribute to the strategic development and growth of De Beers and to general marketing initiatives of De Beers and relationships with key customers and suppliers. In addition, CHL will be responsible for the appointment of senior executives and directors of De Beers.” For making this contribution “CHL will receive management fees of US$5 million per annum in respect of each of the years 2001 to 2007 inclusive.” In addition, CHL also may earn incentives (based on performance) worth of up to $10 million in each of those years.

So the agreed “money part” is now over, until Anglo American and Botswana want to extend that element of the package. But the key provision is that Anglo American has the right “to terminate the management contract on 12 month’s written notice given at any times after the seventh anniversary of completion of the privatization transaction” – and that date has now arrived.

Here begins the Wild Card element. Will the Oppenheimers be content “to hang around,” relinquishing their current near-absolute control to a decision-making process reflecting the wishes of the relevant shareholders? In any instance the Oppenheimers and Anglo American may disagree, Botswana would have the swing-vote. Or will the Oppenheimers start preparing their exit to devote more time to pan-African development issues? The betting is on the latter.

It isn’t clear whether the latter scenario would also entail a change in ownership; it probably will. De Beers has become a seller of mines. Though officially only Canada’s Gahcho Kue property is for sale, the investment community believes that De Beers will accept any reasonable offer for Snap Lake and Victor as well. [De Beers’ faithful spokesperson Lynette Gould says these properties are not for sale.]

South Africa’s Cullinan has now gone to Petra. De Beers is clearly in a selling mode, with future earnings coming from Forevermark franchising, diamond jewelry retail sales, etc. If there is going to be an Oppenheimer exit, Jonathan Oppenheimer would most likely walk away with the synthetics part – and become the world’s largest supplier of gem-quality man-made diamonds.

Would an Oppenheimer exit impact the business? You can bet your last dollar on it – no other name has such an association to diamonds. The name adds stability, continuity and comfort – not just for direct stakeholders but also for banks, consumers and beyond. Even after ceasing to be the industry’s godfather, the Oppenheimer family remained the industry’s anchor.

The more compelling argument is that Oppenheimer is a “known factor.” Needless to say, better the devil you know…

Wild Card Number 1: Botswana’s President Ian Khama

Market speculation that the Botswana government would “buy out” the Oppenheimers and that De Beers would become a joint venture between Botswana and Anglo American seems to have no basis in fact. At least not at the present time. At best, it might have been a trial balloon to gauge reactions.

The Debswana diamond company has hired the Monitor Consulting Group – which clearly signals that something is brewing. Monitor is a leading international strategy consulting firm with an active involvement – and known expertise – in mergers and acquisitions and private equity practices. Its worldwide network of thought leaders includes Harvard’s Michael Porter, who has done research on, and work for, De Beers.

Why would Debswana – the flagship company in the De Beers stable – need strategic advice on mergers and acquisitions? It would have been easier to understand if advice was sought on branding issues. At the very same time that De Beers changes the name of its marketing department to simply “Forevermark,” the Botswana government announces its own branding initiatives. Hello? Isn’t Botswana the main part of De Beers?

Though not solely operating in diamonds, the Brand Botswana Management Organisation (BBMO) has a new board of directors, which was appointed by President Ian Khama. This BBMO is a subsidiary of the Botswana Export Development and Investment Authority (BEDIA), chaired by the CEO of BEDIA, Dorcas Makgato-Malesu. The BBMO board also includes Sheila Khama, who serves as CEO of De Beers Botswana. A trade minister said last week that the BBMO “launch marks another important step in the implementation of the Botswana brand. The implementation, if properly done, would create a long-lasting legacy that would improve Botswana’s global visibility and competitiveness not only for goods and services but also for foreign direct investment.”

Botswana is clearly and quickly becoming the center of what remains of De Beers and the DTC. It isn’t growing only on the mining, rough distribution and manufacturing sides, it may surprise us with introducing a Botswana diamond brand that would compete head-on with the Forevermark brand.

A caveat is in order. Any decent diamantaire must be supportive of the Botswana efforts – the country deserves to succeed, for its sake and for the industry’s sake. But will it? Looking southwards to South Africa, well-intended government officials are in the process of destroying their own manufacturing sector. It’s not yet lost – but it is heading in the wrong direction, operating in a shrinking rough environment. Some firms may survive; none will grow. Can Botswana do better? We hope so – but we don’t know.

Who will produce the “big ideas” of the future, concepts comparable to the tennis bracelet, Journey jewelry, the triple-diamond rings, which quickly captured huge market shares? Is that going to be a BBMO task? Botswana has leveraged its mineral wealth, and specifically the Jwaneng renewal, to set a new order and a new agenda. That makes President Khama our Wild Card Number 1.

Are some of our scenarios plain conjectures? Yes, some might be – but it is based on reading the map and trying to figure out to where we are heading. Just understanding the plethora of possibilities associated with these three Wild Cards seems a mammoth task. Much of our future depends on them.

Have a nice weekend.