Just Say No

140 95 Rapaport News

RAPAPORT… When former First Lady Nancy Reagan embarked on a campaign to fight the war on drugs, rather than legalize the use of harmful substances, she championed a drive to resist their temptations that would span decades. In the past few weeks, proponents of legitimizing Zimbabwe’s Marange diamonds have argued the opposite case: Legalize the diamonds and the consumption of smuggled goods will decrease, they said.

Reports from Zimbabwe indicate that the government is preparing to export diamonds from the Marange fields, even though last week’s Kimberley Process (KP) intersessional meeting ended in a deadlock.

Zimbabwe has approximately 4.5 million carats of rough diamonds from Marange in stock, mined by Mbada Diamonds and Canadile Resources in partnership with the Zimbabwe Mining Development Corporation (ZMDC) between November 2009 and May 2010, according to the KP’s Marange monitor, Abbey Chikane. That stockpile has grown since May, as mining continues.

Further reports indicate that Mbada Diamonds has invited cutters to view its stock and even allocated goods to prospective winners, with some prominent companies among them.

Mines Minister Obert Mpofu has tried to justify the stance that it is within Zimbabwe’s rights to sell the stones by claiming that KP participants, including Israel, the European Union (EU), the World Diamond Council (WDC) and KP Civil Society, gave him the green light to proceed with the exports. It is, however, preposterous to believe that any of those bodies could act independently and with complete disregard for the consensus by which the KP operates. Mpofu will clearly only cite that principle of consensus when it suits him. As a result, Zimbabwe’s cabinet has approved the immediate sale of Marange stones, according to the country’s state-run newspaper, The Herald. The country would issue its own KP certificates, the report said.

This development should not come as a surprise. It certainly wouldn’t surprise the KP members who oppose approving the exports or those who have been fighting for a free and fair society in the country and neither would reports that blocking the exports will result in more smuggling from the fields, be it by the informal sector or, more likely, at official levels.

The argument that the KP should allow the exports to prevent chaos and rampant smuggling from the country does not hold up: The end does not justify the means. Zimbabwe cannot expect the trade and others to sacrifice their principles or legitimize its government’s moral shortcomings under any circumstances.

Of course, there is great concern that 4.5 million-plus carats of diamonds could enter the market illegally. In addition to the moral hazard this would present to the industry and consumers dealing in these stones, flooding the market with these goods could impact the industry’s economic recovery. After all, while demand for rough may have increased, it is still tainted by the recession.

Such an influx could have a marked impact on mining operations, from De Beers to the smallest company in the market. Manufacturers, who are currently feeling some shortages in the market and are eager to obtain more rough, may buy the stock in high volumes only to find that they don’t have enough customers to buy its polished stones. Under such a scenario, prices cannot be sustained and another crash could ensue.

The end result will be that Zimbabwe, too, could find itself without any takers. For this reason, De Beers is playing a very cautious game in raising production after the recession, while Russia’s state repository, Gokhran, has pledged to do the “responsible” thing and keep its vast stockpile off the market for now.

But then again, it is debatable whether Mpofu is working based on economic principles or for the good of the industry. That leaves the likelihood that these goods were always going to enter the market, with or without legitimate KP certificates. It is most likely that Mpofu knew this all along and sought the best way to work the system.

And work it he has up until now, starting at the November KP plenary meeting in Swakopmund, Namibia.

Senior KP sources told Rapaport News that the main sticking points in Tel Aviv related to technical points. These included whether all diamonds mined since November should be cleared for export or only those monitored since Chikane’s first visit to Marange in March and whether an audit of the full Marange stockpile should take place before any exports are allowed. Others insisted that a review mission, as stipulated by the Joint Work Plan (JWP), should take place before certifying the diamonds.

These are issues that a reasonable negotiator should have been willing to compromise on. Instead, Zimbabwe appears to be running out of patience. Faced with increased international pressure and new-found resistance within the KP, Mpofu has continued to threaten to sell his diamonds.

This time, it seems he will make good on his promise. All of these developments reinforce the principle by which the diamond industry, civil society and other governments in the KP ought to operate: The best way to avoid flooding the market with illegal goods is not to legitimize them with certification. It’s up to the trade simply not to buy them. Like a bad drug, the best way to resist blood diamonds is to “Just Say No.”

Note: This article is an excerpt from a market report that is sent to RapNet members on a weekly basis. To subscribe, go to www.rapnet.com or contact your local Rapaport office. The writer can be contacted at avi@diamonds.net.


©Copyright 2009 by Martin Rapaport. All rights reserved. Rapaport USA Inc., Suite 100 133 E. Warm Springs Rd., Las Vegas, Nevada, USA. +1.702.893.9400. This Rapaport Market Report is provided solely for your personal reading pleasure. Nothing published by The Rapaport Group of Companies and contained in this report should be deemed to be considered personalized industry or market advice. Any investment or purchase decisions should only be made after obtaining expert advice. All opinions and estimates contained in this report constitute Rapaport`s considered judgment as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Thank you for respecting our intellectual property rights.

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