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08/24/2000

Diamonds / Update...Part II

It''s time to wrap-up our sporadic series on the diamond industry,
and the issue of "conflict" stones and wars in Africa. This week
we will turn our attention back to De Beers, the cartel kingpin, its
competitors, and a special look at some alternatives to diamonds
that a few of you guys out there may find pleasing to your wallet.

By most estimates the diamond business is about a $7 billion
world industry; $56 billion at the retail level. De Beers currently
controls about 66% of the trade and has been able to influence
the price through management of its extensive inventory...
estimated, today, to be $4 billion.

There was a time, though, as recently as the mid-1980s that De
Beers (DB from here on) controlled 90%. But competition from
nations such as Australia, Canada and Russia now threatens to
upset the market unless DB can do a better on the marketing end
of the trade.

The conflict diamonds that have now been banned by the United
Nations come from war-ravaged countries like Angola and Sierra
Leone. There is, of course, no easy way to prevent the gems
from finding their way into the pipeline, hard as the U.N. may
try. Last week, we went into detail on efforts promoted by U.S.
Ambassador Richard Holbrooke. And you will hear more about
these maneuverings over the coming months.

But with two-thirds of the trade in uncut diamonds, DB needs to
keep prices high by controlling demand. And they also need to
reduce their huge inventory. Thus, the company is in the midst of
a new, aggressive $170 million advertising campaign to ensure
that all women understand that diamonds are still a girl''s best
friend.

Russia and Canada, however, are more interested in significantly
increasing their own production, which could lead to lower
prices over time.

For its part, Russia plans to double their output and improve its
sales channels. Since 1959, Russia has sold its gems exclusively
through DB. Now, the Russian monopoly, Alrosa, said it would
end its relationship unless DB improved the terms of their trade.
It is crucial for DB to control Alrosa since they supply 26% of
the diamonds sold through DB. A move away from DB to other
channels could cause prices to drop sharply. Russia has a
stockpile of about $1.6 billion.

Canada has also been active recently. The Northwest Territories,
previously best known for fur trading, are turning to diamonds in
a big way. [Of course, this is a move partially borne out of
necessity as the international campaign to boycott furs has had an
impact.] The land is loaded with "kimberlite pipes," funnel-
shaped veins of diamond-bearing rock associated with ancient
volcanoes.

As an example of the Canadian success in extracting diamonds,
the Ekati Mine (near Yellowknife) produces some $1.3 million
worth a day, or close to 5% of the total world production. With
the advent of two other nearby mines coming on line soon, the
Northwest Territories will then produce up to 15% of the total
diamond supply.

And DB knows that if they don''t begin to get their hands on this
production, they will lose their ability to influence prices. So on
August 14, DB purchased Winspear Diamonds of Vancouver, the
first diamond property the company has bought in Canada.

In their efforts to make the Northwest Territories the diamond
capital of North America, Canadian officials are concerned about
protecting the image of the product mined throughout their
country. Marketers want consumers to associate Arctic
diamonds "with images of the north - ice, clean, pristine, crystal
clear," rather than the images of diamonds mined in the war
zones of Africa. [Brooke / New York Times]

So DB is running scared. For their own part, Diamond Trading
Company, or D.T.C., is the name that all DB gems will carry. It
is their hope that by branding the product with the D.T.C. label,
they will be assuring consumers that DB diamonds were mined
under humane work conditions from reputable mines.

But DB and other trading companies may have their work cut out
for them for a different reason; the rise of Moissante.

Harry Koza is a friend and financial analyst based near Toronto
who, among his various pursuits, follows the diamond industry
as closely as anyone I know. I asked Harry to share his
comments on diamonds, in general, and the potential alternative
lurking on the horizon. [Warning: Ladies, you may not agree
with all of the following. Don''t sue the editor.] Koza:

"Diamonds are a triumph of marketing. True ''D'' flawless stones
of a carat or more are relatively rare, but remember, diamonds
are carbon, one of the most common elements on earth. There
are places in Namibia where you could walk along a dried up
riverbed and fill your pockets with the diamonds that are lying on
the ground. Of course, heavily armed guards would shoot you if
you tried.

"It''s a totally artificial market, and a sucker''s game to boot. De
Beers recommends a young swain pay at least three months gross
salary when buying his intended a diamond. The money could
be used as a down payment on a house!

"When I got engaged I bought my wife a green tourmaline
(mined in the U.S.). It''s pretty and other women stare at it.

"And you may also want to look at spinel, which can come in
every color from white to black, and while popular in Europe, is
virtually unknown in the U.S., and therefore often a bargain."

But Harry''s big recommendation lies with Moissante.

"Moissante is a synthetically grown crystal that can be cut up
into gemstones. It has nearly identical mineralogical
characteristics to diamonds (for example, it is virtually as hard),
has a higher index of refraction (it''s brighter and shinier), and it
is almost impossible to differentiate between the two.

"Normal diamond testing equipment cannot tell the difference.
Which, ironically, is causing a wave of new fraud scams: buy a
$500 moissanite stone, then go sell it to some unsuspecting
jeweler for $5,000."

So there you have it. Everything you always wanted to know
about diamonds, and the alternatives, but were afraid to ask.

But before we wrap this up, just a few comments on the death
last Saturday of Harry Oppenheimer, the former South African
business tycoon who was once chairman of De Beers.

Aside from being a giant in the world of commerce (and one of
the richest men in the world), Oppenheimer was also a leader in
the fight against apartheid.

Oppenheimer based his opposition to apartheid on humanitarian
impulses.

"I''ve never thought that the policy of racial discrimination had
been a great benefit to business, because while it may have had
the effect of keeping wages low, it also had the effect of keeping
labor exceptionally inefficient. I believe that apartheid is
something that works against the interest of economic
development, not for it."

Over the years, his stance set him apart from the ruling Afrikaner
nationalists who controlled the government. Incredibly, he was
never asked to dine with the prime minister in the first 34 years
of rule by the National Party.

With regards to his economic philosophy, in an obituary for the
New York Times, Marilyn Berger writes, "Mr. Oppenheimer
maintained that an expanding economy was a better environment
for political change than a contracting economy and therefore
remained a steadfast opponent of economic sanctions as a means
of pressing the South African government to relax racial
strictures." [Editor note: This was also the position of
Congressman Dick Cheney, I believe it''s fair to say, a stance for
which he has been criticized by some pundits examining his
congressional voting record.]

Oppenheimer was a true giant in the history of his nation.

Brian Trumbore

Sources:

Timothy Pritchard / New York Times
Julie Flaherty / New York Times
James Brooke / New York Times
Jeanne Whalen / Wall Street Journal

**Hott Spotts will resume on Thursday, September 7. Your
editor is taking a brief vacation.





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08/24/2000

Diamonds / Update...Part II

It''s time to wrap-up our sporadic series on the diamond industry,
and the issue of "conflict" stones and wars in Africa. This week
we will turn our attention back to De Beers, the cartel kingpin, its
competitors, and a special look at some alternatives to diamonds
that a few of you guys out there may find pleasing to your wallet.

By most estimates the diamond business is about a $7 billion
world industry; $56 billion at the retail level. De Beers currently
controls about 66% of the trade and has been able to influence
the price through management of its extensive inventory...
estimated, today, to be $4 billion.

There was a time, though, as recently as the mid-1980s that De
Beers (DB from here on) controlled 90%. But competition from
nations such as Australia, Canada and Russia now threatens to
upset the market unless DB can do a better on the marketing end
of the trade.

The conflict diamonds that have now been banned by the United
Nations come from war-ravaged countries like Angola and Sierra
Leone. There is, of course, no easy way to prevent the gems
from finding their way into the pipeline, hard as the U.N. may
try. Last week, we went into detail on efforts promoted by U.S.
Ambassador Richard Holbrooke. And you will hear more about
these maneuverings over the coming months.

But with two-thirds of the trade in uncut diamonds, DB needs to
keep prices high by controlling demand. And they also need to
reduce their huge inventory. Thus, the company is in the midst of
a new, aggressive $170 million advertising campaign to ensure
that all women understand that diamonds are still a girl''s best
friend.

Russia and Canada, however, are more interested in significantly
increasing their own production, which could lead to lower
prices over time.

For its part, Russia plans to double their output and improve its
sales channels. Since 1959, Russia has sold its gems exclusively
through DB. Now, the Russian monopoly, Alrosa, said it would
end its relationship unless DB improved the terms of their trade.
It is crucial for DB to control Alrosa since they supply 26% of
the diamonds sold through DB. A move away from DB to other
channels could cause prices to drop sharply. Russia has a
stockpile of about $1.6 billion.

Canada has also been active recently. The Northwest Territories,
previously best known for fur trading, are turning to diamonds in
a big way. [Of course, this is a move partially borne out of
necessity as the international campaign to boycott furs has had an
impact.] The land is loaded with "kimberlite pipes," funnel-
shaped veins of diamond-bearing rock associated with ancient
volcanoes.

As an example of the Canadian success in extracting diamonds,
the Ekati Mine (near Yellowknife) produces some $1.3 million
worth a day, or close to 5% of the total world production. With
the advent of two other nearby mines coming on line soon, the
Northwest Territories will then produce up to 15% of the total
diamond supply.

And DB knows that if they don''t begin to get their hands on this
production, they will lose their ability to influence prices. So on
August 14, DB purchased Winspear Diamonds of Vancouver, the
first diamond property the company has bought in Canada.

In their efforts to make the Northwest Territories the diamond
capital of North America, Canadian officials are concerned about
protecting the image of the product mined throughout their
country. Marketers want consumers to associate Arctic
diamonds "with images of the north - ice, clean, pristine, crystal
clear," rather than the images of diamonds mined in the war
zones of Africa. [Brooke / New York Times]

So DB is running scared. For their own part, Diamond Trading
Company, or D.T.C., is the name that all DB gems will carry. It
is their hope that by branding the product with the D.T.C. label,
they will be assuring consumers that DB diamonds were mined
under humane work conditions from reputable mines.

But DB and other trading companies may have their work cut out
for them for a different reason; the rise of Moissante.

Harry Koza is a friend and financial analyst based near Toronto
who, among his various pursuits, follows the diamond industry
as closely as anyone I know. I asked Harry to share his
comments on diamonds, in general, and the potential alternative
lurking on the horizon. [Warning: Ladies, you may not agree
with all of the following. Don''t sue the editor.] Koza:

"Diamonds are a triumph of marketing. True ''D'' flawless stones
of a carat or more are relatively rare, but remember, diamonds
are carbon, one of the most common elements on earth. There
are places in Namibia where you could walk along a dried up
riverbed and fill your pockets with the diamonds that are lying on
the ground. Of course, heavily armed guards would shoot you if
you tried.

"It''s a totally artificial market, and a sucker''s game to boot. De
Beers recommends a young swain pay at least three months gross
salary when buying his intended a diamond. The money could
be used as a down payment on a house!

"When I got engaged I bought my wife a green tourmaline
(mined in the U.S.). It''s pretty and other women stare at it.

"And you may also want to look at spinel, which can come in
every color from white to black, and while popular in Europe, is
virtually unknown in the U.S., and therefore often a bargain."

But Harry''s big recommendation lies with Moissante.

"Moissante is a synthetically grown crystal that can be cut up
into gemstones. It has nearly identical mineralogical
characteristics to diamonds (for example, it is virtually as hard),
has a higher index of refraction (it''s brighter and shinier), and it
is almost impossible to differentiate between the two.

"Normal diamond testing equipment cannot tell the difference.
Which, ironically, is causing a wave of new fraud scams: buy a
$500 moissanite stone, then go sell it to some unsuspecting
jeweler for $5,000."

So there you have it. Everything you always wanted to know
about diamonds, and the alternatives, but were afraid to ask.

But before we wrap this up, just a few comments on the death
last Saturday of Harry Oppenheimer, the former South African
business tycoon who was once chairman of De Beers.

Aside from being a giant in the world of commerce (and one of
the richest men in the world), Oppenheimer was also a leader in
the fight against apartheid.

Oppenheimer based his opposition to apartheid on humanitarian
impulses.

"I''ve never thought that the policy of racial discrimination had
been a great benefit to business, because while it may have had
the effect of keeping wages low, it also had the effect of keeping
labor exceptionally inefficient. I believe that apartheid is
something that works against the interest of economic
development, not for it."

Over the years, his stance set him apart from the ruling Afrikaner
nationalists who controlled the government. Incredibly, he was
never asked to dine with the prime minister in the first 34 years
of rule by the National Party.

With regards to his economic philosophy, in an obituary for the
New York Times, Marilyn Berger writes, "Mr. Oppenheimer
maintained that an expanding economy was a better environment
for political change than a contracting economy and therefore
remained a steadfast opponent of economic sanctions as a means
of pressing the South African government to relax racial
strictures." [Editor note: This was also the position of
Congressman Dick Cheney, I believe it''s fair to say, a stance for
which he has been criticized by some pundits examining his
congressional voting record.]

Oppenheimer was a true giant in the history of his nation.

Brian Trumbore

Sources:

Timothy Pritchard / New York Times
Julie Flaherty / New York Times
James Brooke / New York Times
Jeanne Whalen / Wall Street Journal

**Hott Spotts will resume on Thursday, September 7. Your
editor is taking a brief vacation.