When you arrive in Gaborone, the capital of Botswana, it does not take long to grasp the importance of diamonds. At the airport there is a shop selling diamond jewelry. The first buildings you pass on the road to the city centre are connected to the industry: the sales office for De Beers, the most storied name in the business; Debswana, the joint mining venture between De Beers and Botswana; and the Diamond Trading Company, another collaboration.
To quite some extent Botswana is the country De Beers built—and De Beers the company Botswana made. Today the firm gets 72% of its stones from Botswana. The country, dirt poor at independence in 1966, became one of the richest in Africa in large part because of how it husbanded its resource wealth after De Beers discovered diamonds a year later. From 1970 to 2000 Botswana’s economy grew by more than 10% per year, faster than that of China.
That is the history. But the present is less sparkling. The prices of natural diamonds have plummeted over the past several years, mostly because of the rise of cheaper synthetic alternatives. Botswana’s economy has stagnated as a result.
What of the future? Well, it is up for grabs: Anglo American, the parent company of De Beers, is selling up. In 2011 it made one of the worst deals in mining history, buying the Oppenheimer family’s stake in De Beers at a price that implied the firm was worth $12.75bn. Today it is worth less than a fifth of that.
For some that represents a bargain. The potential investors I have talked to for a story this week believe they can revive demand for natural demands and thus revive De Beers.
But Botswana, which wants to increase its stake in De Beers beyond the 15% it already owns, is no ordinary investor. Does it make sense for it to double down on diamonds?
There are good arguments on both sides. A stake of at least 25% would probably give Botswana a so-called blocking minority of votes at board level, a reasonable desire given the importance of the firm. Also reasonable is the goal of extracting more value from the diamond value chain. Bogolo Kenewendo, the mining minister, told me last month that Botswana’s bid reflects its desire to tap into the broader De Beers “ecosystem”.
Sceptics of the deal respond that Botswana will struggle to pay for its stake, having run down the rainy-day fund that diamonds helped build. They note that Botswana already gets the benefit from the most profitable part of De Beers (the mining). And they add that it would be better if the country diversified away from diamonds towards other industries.
The debate matters beyond Botswana. Last week the World Bank published a report on “industrial policy”, in which it conceded that in the 1990s it was too dismissive of the role that the state can play in promoting certain industries. The paper notes that every country in the world actively supports one industry or another through various policies, and offers some advice on how to do that sort of thing in the best possible way.
Ultimately, I suspect that the pertinent question isn’t how much of De Beers Botswana should own but what it would do with that stake. De Beers is a failing company and will probably be bought by a consortium in which Botswana is one of several players. They will need to turn the firm around. That means finding a way to return the magic to natural diamonds, the sense of luxury epitomized by the De Beers slogan “A diamond is forever”.
If Botswana merely wants to extract more value from a failing business in a struggling industry, it will fail. But if it is going to be a constructive part of overhauling De Beers, then the next chapter of its diamond story has a better chance of a happy ending.
Credit: Economist