Long One of Israel’s Best Friends, Diamond Trade Has Unclear Future

A diamond may be forever, but Israel’s steady supply of rough, uncut diamonds may not be.

Sweeping changes in the global diamond industry and political turmoil in gem-producing African nations are causing dealers in the Israeli diamond trade to rethink their strategy.

Israel long has been an established leader in the market for polished diamonds, selling 50 percent of all the stones worldwide and exporting $5.3 billion worth in 2000, up from $4.5 billion in 1999. Diamonds from Israel make up about half the content in jewelry sold worldwide, according to the Israel Diamond Institute.

Until recently, not much had changed since the industry was established in 1936 by two Romanian immigrants who learned the polishing trade in Belgium.

The fledgling industry burgeoned during World War II, when European diamond centers fell under German occupation. At the time, Israel became a haven for European diamantaires, as diamond dealers are known, and a source for polished diamonds.

The industry’s growth has depended on a reliable supply of rough, uncut diamonds — and that supply is now in jeopardy.

Israel had relied heavily on the De Beers Group diamond syndicate to obtain a steady supply of pewter-colored rough stones that could be cut and polished for sale.

Last year, however, De Beers began limiting its number of rough diamond clients in Israel as part of a worldwide campaign to focus on mining and marketing, making it almost impossible for small- and medium-sized dealers to buy the gems.

“The genius in diamond deals is getting the” largest “percentage of rough, uncut diamonds,” said Moshe Schnitzer, chairman of the Israel Diamond Institute and one of the founders of Israel’s diamond bourse, the self-contained, four-building complex in Ramat Gan.

Udi Sheintal, diamond controller for the Industry and Trade Ministry, laments that “Israel isn’t a rough center, and we want to be.”

The rough diamonds, which look like small chunks of dull gray glass before polishing, are the industry’s major resource. Israeli dealers use software programs that help decide how to cut the rough diamonds, and automatic polishing machines to speed the process.

The Diamond Institute also has invested considerable capital in research and development, looking into robotics and laser technology to increase production.

“We want to identify the ideas that can be beneficial to the industry,” said Efraim Raviv, managing director of the Institute. “But if we can’t get the rough supply going, what will we do with the workers?”

At present, 95 percent of the world’s rough diamonds are marketed by the De Beers Group, which has become known by its marketing arm DTC since partnering with the luxury products group LVMH — Moet Hennessy Louis Vuitton SA — to create an independent company marketing premium diamond jewelry.

It’s a quirky business, where the vagaries of the global market and the internal conflicts in the diamond mines of Africa can create a jittery atmosphere.

Most of the rough diamonds come from Africa — often from Angola, Sierra Leone and Congo — where rebel movements finance their wars by selling diamonds from mines under their control. Those stones are known as conflict diamonds.

As a result, international diamond bodies, nongovernmental organizations and the United Nations have been pushing for stricter restrictions on diamonds originating from those areas.

Last August, Congo appointed IDI Diamonds, an Israel-based company, as the sole purchaser of all its uncut diamonds. The deal was valued at $600 million, although IDI reportedly paid only $20 million.

Congolese officials opted for the exclusive purchasing agreement in an effort to guarantee a conflict-free diamond export zone, which is harder to accomplish when dealing with many companies rather than just one. For IDI, the plan was to market the rough diamonds directly to Israeli diamond manufacturers.

Limiting its exposure to one company was “a blessing to the customs officials” in the Congo, Sheintal pointed out.

In April, however, Congo revoked IDI’s exclusive multimillion-dollar monopoly over diamond exports, which was made during the regime of late President Laurent Kabila. Kabila was assassinated by rebel forces in January, and his son, Joseph, now is head of state.

A U.N. report called the IDI deal a disaster for Congo’s diamond trade, saying IDI paid too little and that the Congolese government was being deprived of revenue. The deal also drove much of Congo’s diamond trade underground, according to the report.

IDI maintains that the company fully complied with its agreement with the Congolese government.

IDI’s deal also allegedly included access to Israeli military experts to train a Congolese anti-smuggling force. IDI said it only gave Congo names of Israeli military specialists.

Israel has been accused of involvement with the Congolese rebel movement; Israel’s foreign and defense ministries have denied the allegations.

The Israel Diamond Institute has come out strongly against trade in conflict diamonds, stating that any diamantaire who knowingly trades in the gems will have his membership in the Diamond Exchange revoked.

The writing literally is on the wall. In the Diamond Exchange trading room, where dealers sit at long wooden tables peering through their loupes at dazzling gems, several boards post pictures of dealers who have been expelled from the exchange.

Since last summer, the diamond controller’s office has required importers of rough diamonds to declare that their stones don’t originate in rebel-controlled African regions and don’t violate U.N. Security Council resolutions.

Sheintal also personally processes all shipments of rough diamonds from 12 “sensitive” countries suspected of dealing in conflict diamonds, including Guinea, Liberia, Uganda and Namibia.

Despite Namibia’s unsavory reputation in the diamond industry, Israeli businessman Lev Levayev, a real estate developer originally from Uzbekistan, recently expanded his diamond operations, acquiring 39 percent of Namibian Minerals Corp., a Nasdaq-listed company that has a franchise to mine diamonds in underwater river deposits along Namibia’s Atlantic coast.

Namibian was purchased for $18 million, but was worth $400 million before financial losses earlier this year. The company’s main competitor is Namdeb Diamond Corp., in which De Beers owns a 50 percent stake.

“Listen, he owns mines, he goes to the source,” Sheintal said. “It’s fine as long as he has a certificate of origins.”

According to Schnitzer, the industry warhorse who’s seen it all, the latest machinations are all part of the business.

“It’s cyclical,” he said, sitting back in his leather chair and smoking a cigarette. “We search for solutions. This is a business based on good will and cooperation, not bureaucracy.”

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