De Beers Chairman Nicholas (“Nicky”) Oppenheimer was clearly dismayed at last week’s memo in which we quoted his son Jonathan that “South Africa’s attempts to boost a local diamond beneficiation industry would not work unless there was a sufficient subsidy to compensate for the higher costs involved.”

The younger Oppenheimer said that polishing costs in sub-Saharan Africa were $70-$100 a carat compared with $6-$8 a carat in India, a country with roughly one million people in the industry. "Unless the government is determined to subsidize that difference, the net benefit of selling those diamonds locally has to be measured against the net loss," he said.

Nicky publicly expressed “disappointment” with journalists who highlighted “a single line” (i.e. Jonathan’s subsidy demands), while ignoring the rest of Jonathan’s 45-minute speech. The Chairman’s reaction surprises me. With all due respect: when one line in a long speech is as significant as this one undoubtedly is, the De Beers Chairman shouldn’t be disappointed that it was reported. The press would have failed its readers had it done otherwise.

Journalists are hardly interested in public relations speeches – they will always seek and highlight genuine “news value” – if there is any. Jonathan, or at least his media advisors, could and should have known that the request for government subsidization of the local industry represents a major shift in De Beers’ policy – a monumental shift. It is not without reason that the South African Minister reacted immediately and angrily.

Father supports Son and Enunciates new Policy
If someone wanted to dismiss Jonathan’s message as a “slip of the tongue” or “faux pas,” De Beers Chairman Nicky Oppenheimer, speaking at a briefing with analysts, warmly expressed strong support for his son’s message. Said Nicky: “De Beers and the southern African governments have to do what they can to mitigate the [labor cost differential between India and southern Africa] problem.”

It is always heartwarming when a father backs up his son. However, neither father nor son detailed how they envision the implementation of such “mitigation” efforts. I have always been told that in their efforts to support domestic beneficiation in southern Africa, De Beers was not going to subsidize the rough selling prices. In the public debate and consultations with stakeholders, De Beers has also never said it was going to seek subsidies from their partner governments. So the one line in Jonathan’s speech referring to government subsidies has tremendous news value from a journalistic perspective.

What is frustrating is that De Beers again changes the rules of the game while the game is in process. In the past few years, De Beers has handpicked the manufacturers it wishes to manufacture in places such as Botswana, Namibia, and, to a lesser extend, South Africa. Some additional companies secured manufacturing licenses over the opposition of the DTC. But none of these companies was told that they couldn’t possibly succeed without subsidies or other “mitigating policies.” Maybe the DTC Sightholder application process should be re-opened? The policy shift – clearly detected by those journalists who realized that it was buried in a 45 minutes speech – will have enormous ramification on Africa.

In the past, subsidies and/or two-tier pricing policies in rough have always had one net result: massive smuggling and massive terms of trade distortions. Actually, De Beers managing director Gareth Penny had, some years ago, the courage to show that every time the government provides subsidies, employment in the sector increases - but it drops the moment that they are withdrawn. Is that Jonathan and Nicky Oppenheimer’s view of the development of a sustainable industry?

De Beers: Who Speaks for the Company?
We shared our understanding on the subsidy issue with De Beers and a few minutes before going online with this article Communications Director Stephen (Steve) Lussier informed us that Nicky Oppenheimer’s reference to “mitigation” doesn’t necessarily mean ”subsidies” and that every exporting country needs to find ways to compete with low labor cost competitors. Southern Africa is no exception, he said. Lussier stressed that in the carefully crafted comments by Nicky Oppenheimer the word “subsidies” wasn’t mentioned, though Oppenheimer did use the same word (“mitigation”) that was used by the younger Oppenheimer when referring to subsidies. Lussier also disclosed that De Beers had informed the rather upset Minister in South Africa that De Beers is opposed to government subsidies.

The company didn’t inform the public, the stakeholders and the analysts listening to the press conference or to the tape of the proceedings that the company is not demanding government subsidies. Those who listened – and I did – and played back the tape many times – as I did – could not infer from anything that Nicky Oppenheimer said that he disagreed with his son. To the contrary: he fully supported his son’s speech and Nicky scolded at journalists for only quoting the statement on the need for government subsidies – and not reporting on the rest of Jonathan’s speech. There was not a hint – not even the slightest – that Nicky felt that his son had said something that was absolutely wrong, totally out of line and fully inconsistent with corporate policies.

As a journalist, one must also read between the lines – and I felt Steve’s discomfort. After the phone call I concluded that the younger Oppenheimer probably had created a mess (it wouldn’t be the first time) and that his father missed both the opportunity and fatherly prerogative to elegantly remedy the situation and clearly say, “Jonathan’s words didn’t represent De Beers policy. He was wrong and shouldn’t have made those remarks.” I deeply respect Steve’s professionalism and his gallant efforts to contain the damage caused by Jonathan’s remarks.

Personally, I am quite confident that Steve is correct – and that De Beers probably has not adopted a new policy. But at this point in time – the only one that can state this clearly and authoritatively is Chairman Nicky Oppenheimer himself. Noblesse oblige. In the diamond world and at De Beers, it is the Oppenheimer word that counts – and they are also the ones that can withdraw words which were spoken erroneously, thoughtlessly or capriciously. Until that happens, the words stand. [And when it happens, Nicky may also say something about journalists doing their job.]

Oppenheimer Subsidy Calls Infringe on WTO Agreements
Subsidies have never contributed to the South African diamond industry’s sustainable growth. When the issue of rough export duties in South Africa was again raised a few years ago, it was the Treasury Department in that vehemently opposed the duty, as it was felt to constitute a violation of South Africa’s WTO commitments. Taxes should be imposed for tax revenue purposes; they should never be imposed to protect industry or distort international trade, argued the SA Treasury. De Beers fully supported that position. A reduced 5 percent tax was eventually enacted; it is against WTO rules – but countries routinely infringe on such rules. That’s life.

The call to subsidize the domestic diamond industry also blatantly infringes WTO rules. Countries may opt for such options. However, for De Beers, as a corporation, to make such a call is preposterous. What both Jonathan and his father Nicky patently ignored is that their call for this quite illegal subsidy – and the way it was justified - is clearly directed at another major client of De Beers – the Indian diamond industry!

The WTO’s Agreement on Subsidies and Countervailing Measures (ASCM) defines two categories of subsidies: prohibited and actionable. Subsidies to the South African diamond industry would probably fall into both categories, but it is the latter one (actionable) that is of most relevance. It would be actionable from an Indian government perspective as this suggested South African subsidy is fully intended to have an adverse effect on its best Indian interests.

The WTO agreement defines and recognizes three types of damage subsidies can cause – and they all apply. Firstly, the Oppenheimer proposed SA industry subsidies will hurt the domestic industry in other rough diamond importing countries, such as India, China and elsewhere. That by itself is already a sufficient actionable cause under WTO rules.

Moreover, these subsidies can hurt rival diamonds exporters from another country when the two compete in third markets. That is also specifically actionable. And, thirdly, domestic subsidies in one country can hurt foreign exporters trying to compete in the subsidizing country’s domestic market. This applies as well, though the South African diamond jewelry market is not of the greatest concern in this context.

If the WTO’s Dispute Settlement Body rules that the subsidy has even one of the above suggested effects, the subsidy must be withdrawn or its adverse effect must be removed.

What I fail to understand is why would the Oppenheimers, who are making serious attempts to be legally compliant in each jurisdiction where they operate, stick their neck out by suggesting that their government should take illegal actions? Moreover, don’t both Nicky and Jonathan Oppenheimer realize that by calling for actions to “mitigate” the adverse impact of the labor cost in another De Beers customer client country, they antagonize a huge part of their client base? What can they gain from that?

Oppenheimers Give Complex Signals
In all fairness, Jonathan Oppenheimer, in his speech, did express warm support for the African beneficiation policies – and none of the published press comments (or our article) suggested otherwise. Jonathan stressed that “we will support government in its policy and keep government transparently aware of the economic consequences [of the cost differentials] and we will work with government to find the acceptable optimal position. It is a dynamic process towards driving at a sustainable economic equilibrium, but right now it seems to be swinging strongly in favour of local beneficiation, and we will do everything we can to support that.” He added, “Government must then make an informed decision in [its] own mind, addressing [its] own issues.”

Our comments last week neither doubted nor questioned the sincerity or the depth of the De Beers newly found commitment to beneficiation – and the establishment of the local Diamond Trading Companies (DTCs) in the southern African producing countries underscores the seriousness of the company’s wholehearted efforts to find ways to fully meet the beneficiation aspirations of the respective governments.

It is important to stress these words, as De Beers had traditionally opposed diamond beneficiation in the African producer countries for various reasons, one of them being economic disadvantages.

However, in recent years, De Beers’ Gareth Penny and Varda Shine have embraced domestic beneficiation as part of realizing and accepting the legitimate political aspirations of the producer countries to obtain a greater share of their diamond mineral wealth. Penny and Shine have agreed to make all efforts to support the establishments of viable industries in Botswana, South Africa and Namibia. Neither Gareth nor Varda have ever mentioned subsidies in the process – to the contrary.

It is going to be interesting to see how the Penny-Shine team will follow up and implement the new policies outlined now by the Oppenheimers. There is one more aspect that deserves mentioning.

Beneficiation is done neither by government nor by De Beers. Beneficiation is done by private entrepreneurs, by manufacturers who have their own business plans and strategies, their own cost-benefit calculations, etc. Chairman Oppenheimer suggested that “mitigation” (closing the labor cost gap between India and southern Africa) must be worked out by De Beers and governments. It may be worthwhile also to consult the various stakeholders - whose future and money is at stake. The time when everything was decided solely by De Beers and government is, we believe, over. Apparently we may be proven wrong on that score.

Have a nice weekend.