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The Leviev Factor

Sep 2, 2004 2:39 PM   By Martin Rapaport
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Lots of people have heard about Lev Leviev, but few understand what he is doing and how it will impact the diamond industry. Leviev is interesting not just because of his size — $2.5 billion of annual diamond business; diversity — controlling interest in Africa; Israel — a $1.1 billion Israeli company that makes everything from swimsuits to satellites; wealth — about $2 billion or personal life story — Russian immigrant diamond cutter becomes billionaire. What is really exciting about Leviev is the way he thinks, his attitude that everything is possible and the aggressive strategy that he is using to grow his diamond business. Leviev is one of the few people in the world who has the imagination, determination, resources and ability to transform the diamond industry.

Many people in the media see Leviev as a challenge to De Beers. Stories about him feature shrill headlines such as Forbes’ “Cracked De Beers” or the recent Economist story “The Cartel Isn’t Forever.” But these stories miss the point because their writers, like many others, are only capable of seeing and understanding the diamond industry from the perspective of De Beers. Leviev isn’t about De Beers, Leviev is about Leviev. He is about making huge amounts of money in and from the diamond business. Leviev transcends the slave mentality of sightholders. Perhaps it’s growing up in Russia or his $30 million plus annual donations to charity. Leviev is a confident self-made man whose great success has given him the courage and resources to take risks that others would not dare. Leviev sees the world before him as open with unlimited opportunity. He is not afraid to win big.

Getting Rough

Leviev’s basic strategy has been to parlay his diamond-manufacturing expertise into preferential access to primary sources of rough diamonds. In the early 1980s, at a time when De Beers had exclusive rights to almost all of Russia’s rough diamond production, Leviev defied De Beers and opened a high-technology cutting factory in Russia. He was among the first to cut Russian diamonds in Russia and to no one’s surprise, he lost his De Beers sight. He did, however, gain a strong foothold in Russia that provided preferential access to Russian rough diamonds, a strong relationship with Russian diamond officials that evolved into joint ownership of Angola’s Catoca mine and an exclusive Angolan marketing contract for about $850 million of diamonds per year. From the Russian perspective, Leviev was very good because he broke the ice and due to his success many others began manufacturing diamonds in Russia, providing much needed employment and added value to Russia’s economy. In 2003, Russia mined $1.7 billion of diamonds of which about $550 million were cut in Russia.

Leviev’s Angola story involved a mining investment of some $60 million in the middle of a brutal civil war. His reward was exclusive marketing rights to the Catoca mine — 2003 production was 2.5 million carats worth some $280 million. Eventually, he obtained marketing rights for almost all of Angola’s $900 million rough diamond production. While Leviev is unlikely to maintain exclusive marketing rights of all of Angola’s production, his recent joint-venture marketing agreement with Angola’s ASCORP is an indication that he will retain direct access to significant amounts of rough diamonds. Leviev’s additional mining investments in Russia and Africa as well as his marketing agreements provide him direct access to rough diamonds worth over $1 billion annually.

African Adventures

Leviev’s obvious strategy is to do in Africa what he has done in Russia. Namely, to get direct access to primary sources of rough diamonds by offering the governments that control these diamonds the economic benefit of cutting the diamonds locally. Leviev’s strategy is dynamite. It will over time revolutionize the diamond industry and significantly benefit the development of diamond-producing countries in Africa.

The issue of beneficiation and sustainable development is of the highest priority in Africa. The issue is not just economic, it is political, emotional and explosive. Why should the Indian and Chinese be cutting African diamonds when unemployment in Botswana is 21 percent, South Africa, 31 percent, Namibia, 35 percent and Angola, over 50 percent? Are African’s incapable of cutting their own diamonds? Are mining companies undermining the development of African countries by denying the African people the opportunity to work and add value to their natural resources? Governments will rise and fall based on how these questions are answered.

Leviev is forcefully putting these questions on the agenda. He is opening efficient factories using the latest technology in Namibia, Angola, Botswana and South Africa. He intends to show African governments by example and through investment that diamond cutting can and will be profitable in Africa without any government subsidies. Simply put, Leviev is willing to put his money where his mouth is. He has publicly declared that if Botswana provides the rough he will create tens of thousands of local jobs.

Presidents and Prime Ministers are listening to Leviev and some believe in him. While the capacity of Leviev’s new factory in Namibia is only 600 workers it is the biggest in Africa. He has also turned around Namibia’s bankrupt Namcor undersea diamond-mining company with an investment of $32 million. He is profitably cutting Namibian diamonds in Namibia, providing the government with jobs and added value. How long will it be before Leviev asks the government to provide him with rough direct from Namdeb, the government’s joint venture with De Beers? Why shouldn’t the government give diamonds to Leviev instead of the Diamond Trading Company (DTC) if it means more local jobs and economic development?

Rough Competition

It is obvious that access to rough diamonds is the key to the success of any diamond-manufacturing company. Competition for rough is intense and Leviev is drastically changing the game. While sightholders fill out complex De Beers Supplier of Choice (SOC) criteria forms, Leviev is going after Botswana — the mother load of De Beers diamonds. A new type of rough competition is developing. It will not be based on marketing or even price. It will be based on who can best provide real, tangible sustainable benefit to the African countries that produce the rough diamonds.

At this stage, whether or not Leviev succeeds is almost irrelevant. Over time, development competition for rough will become the new reality in Africa. How much rough you get will depend on how many jobs you create. An integral part of De Beers strategy has been that diamonds cannot be efficiently cut in mining centers and therefore the best way for a government to sell its rough is through the DTC to sightholders. While this may be true for Canada, it is not true for Africa. Leviev is challenging the foundation of De Beers relationship with African governments. He is saying that he can and will cut diamonds in Africa — efficiently and profitably without subsidies.

South Africa’s introduction of new mining laws will require that some 95 percent of the diamonds mined in South Africa be cut in South Africa. In addition, Leviev’s new African factories and the opening up of Angola all point to increased open competition for rough in Africa. De Beers will have to radically change its strategy and face increased development competition. While Leviev will play an important role, it is unlikely that he will create a new cartel. As in Russia, his role will be to open markets for himself and for those that follow him.

Going Vertical

A key element of Leviev’s strategy is to maintain the best cutting technology and expertise. He sees himself as a vertically integrated diamond company and is proud of his ability to handle all aspects of production — from mining rough to manufacturing finished diamond jewelry. Leviev will cut every diamond he can, not merely because he wants to get Africa rough, but because he wants to optimize his profit from diamond manufacturing. While he sells rough regularly, Leviev’s intention is to continue increasing his polished production as much as possible.

Leviev moves over $1 billion of polished a year in a very straightforward manner. Essentially, he supplies large dealers with multimillion-dollar assortments at prices that enable them to resell the diamonds with a reasonable profit. He does not provide memo, long-term credit, service or program options. His is a cash-and-carry business. While the De Beers SOC initiative restricts sales to specific customers and marketing programs, Leviev simply sells diamonds at market prices. If you are a legitimate dealer with money, you can get diamonds.

As Leviev increases his access to rough and resultant polished production, supplies of polished diamonds available to the free market will increase. This is good news for the diamond trade as we will be less reliant on complex sources of supply. If Leviev’s strategy works, the polished sector will dominate the rough sector and rough prices will be set by polished rather than the other way around.

Conclusion

Successful implementation of Leviev’s strategy has major ramifications for the diamond industry. His introduction of cutting factories into African diamond-producing nations puts pressure on governments to reduce supplies of rough diamonds to De Beers and their sightholders, while increasing supplies to firms that cut diamonds locally. More diamonds will be cut in Africa and this will challenge cutting centers in India, China and Thailand. Development competition will become an increasingly important factor in the diamond industry as it provides tangible benefit to developing countries in Africa and democratizes access to diamonds.

Leviev’s vertical integration strategy will increase supplies and market access of polished diamonds in a pro-competitive manner. Increased availability of polished will make the industry less reliant on complex distribution systems dominated by scarce rough supplies.

Leviev is going after the primary sources of rough diamonds. De Beers will have to respond by offering significant economic benefit to African-producing countries. Neither De Beers nor Leviev will dominate the diamond business. Over the long-term, we will see increasing development competition. Simply put, Leviev is changing the rules of the game. Producer governments will expect firms to provide local economic beneficiation if they are to obtain rough diamonds. As Leviev opens up markets, he will face increasing competition from other cutters. Development competition will benefit the diamond markets as it rationalizes access to diamonds and encourages competition in the polished sector of the diamond industry.
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Tags: African Diamonds, Angola, Catoca, China, De Beers, DTC, Economy, Government, India, Israel, Jewelry, Leviev, Manufacturing, Mining Companies, Namdeb, Namibia, Production, Russia, Sightholders, South Africa
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