Africa’s best friends are its youth and diamonds

The Hope Diamond sits on display at the Smithsonian Museum of Natural History in Washington, D.C., U.S., on Wednesday, Sept. 9, 2008. The Smithsonian Institution is the world's largest museum complex and research organization with 19 museums and 9 research centers. Photographer: Dennis Brack/Bloomberg News

The Hope Diamond sits on display at the Smithsonian Museum of Natural History in Washington, D.C., U.S., on Wednesday, Sept. 9, 2008. The Smithsonian Institution is the world's largest museum complex and research organization with 19 museums and 9 research centers. Photographer: Dennis Brack/Bloomberg News

Published Nov 7, 2013

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Africa has been an area of interest to our team for many reasons. One might say the continent’s biggest asset is its youthful population.

With a median age of under 20 in many countries today, that means a very high portion of Africa’s population is dependent on the adult workforce. Tomorrow, however, it means that the workforce will be massive, and the ratio of dependants to workers (the dependency ratio) could be among the lowest in the world.

This huge and youthful population is a key rationale for our interest. While economies in Africa are diversifying and providing many avenues for these emerging populations, the mining and natural resources sector remains a key industry and employer. Diamonds are one of the continent’s resources worth further exploration.

Diamonds aren’t just “a girl’s best friend”, they’re one of Africa’s many natural resource treasures. Used in jewellery, in industry and as a store of wealth, diamonds are gems for which I don’t see demand evaporating soon.

Scientists estimate diamonds started to form more than 3 billion years ago. Their durability has been recognised since ancient times. Even the word “diamond” is derived from the Greek “ adamas”, meaning adamant or unbreakable.

In the past few years, global diamond mine production has been running at between 120 million and 170 million carats a year (a carat is equal to 200mg). This production is valued at roughly $13 billion (R130bn). By 2020, demand is expected to have grown to 192.7 million carats, valued at roughly $22.4bn.

While Russia has become a major source of diamonds, the diamond business is particularly important in Africa, where it brings in about $8.5bn a year. Botswana is a major producer, and diamonds play a big part in its economy, currently representing more than a third of its gross domestic product.

Botswana boasts some of the largest diamond mines in the world, and the industry has given what was one of the poorest nations in Africa a tremendous boost. In southern Africa, some 38 000 people are employed in the diamond trade.

In the past 25 years, global sales of diamonds and diamond jewellery have grown three-fold. Compared with the $13bn value of rough, uncut diamonds at the mine sites, the yearly value of diamond jewellery sold globally is estimated at between $60bn and $80bn, including the cost of diamonds, precious metals and other gems used to produce the jewellery.

Diamond mines are not easy to find. The probability of a diamond exploration company finding a diamond deposit is between 1 percent and 3 percent of all drill tests. From initial discovery to making the economic appraisal and obtaining licences can take three to five years. Then, design and construction of the mine takes another three to five years. It is no wonder that the largest profit margins are obtained at the mining level, given the high risk and expense of developing a diamond mine.

Over a quarter of a million retailers sell jewellery to consumers worldwide, and the internet has opened up new markets and introduced greater price transparency.

Why do people buy diamonds? We all know that a key element is to express love as well as gift giving, but diamonds are also considered by many to be a safe haven for wealth. In times of trouble, they are easy to carry and generally have held their value. When the Russian tsar and his family were murdered by the Bolsheviks in 1918, diamonds were found sewn into the girdles and undergarments of the tsar’s wife and daughters.

Diamond mining and commerce started 1 000 years ago when traders carried rough stones from India to the Middle East, where they were cut, polished and sold to European royalty and aristocrats.

At that time, India was the major diamond supplier. Starting around the 1500s, large-scale diamond mining took place in the ancient kingdom of Golconda, situated about 11km west of present-day Hyderabad. Mines in the region produced some of the world’s most famous diamonds, including the Hope Diamond, Idol’s Eye, Koh-i-Noor and Darya-ye-Noor.

By the 1700s, India’s diamond supply was exhausted and Brazil became an important supplier. Then, Brazil was displaced by southern Africa.

In 1869, a diamond rush started in Kimberley when a shepherd boy discovered an enormous 83.5 carat stone.

In recent years, the cutting and polishing of diamonds has been moving to Asia, particularly India, Thailand, Sri Lanka and China. In the US, it costs about $100 a carat to cut a stone, while in India the cost can be as low as $10. India is now the largest diamond-cutting centre, with as many as 800 000 diamond cutters working in the country. The industry is thus expanding in many emerging market economies, even those without mines.

In the 1990s, the issue of blood diamonds threatened the industry as rebel armies in some African nations began to finance their armed conflicts by selling rough, uncut diamonds from local mines. In 1998, the NGO Global Witness publicised this development.

In 2000, the UN General Assembly adopted a resolution supporting the creation of an international certification system for rough diamonds. Several companies started the World Diamond Council, which instituted the Kimberley Process in 2002, a certification programme by which diamond-producing nations would certify the origin of uncut diamonds and that they were conflict free.

While not perfect, the idea was to prevent blood diamonds from entering the legitimate diamond supply chain, so only certified diamonds with a government-issued certificate could be imported or exported. Today, the Kimberley Process has 54 members representing 80 countries.

It is estimated that nearly all diamonds now being sold are from conflict-free sources. To further control the trade, the World Diamond Council has developed a system of warranties to extend the Kimberley Process certification of polished diamonds to retail outlets around the world. The market for illicit diamonds is still significant, but at least consumers now have a degree of assurance about the origin of their purchases.

Only about 30 percent of diamonds mined are of gem quality and used for jewellery, with the rest used for industrial applications. About 95 percent of industrial-use diamonds are synthetic.

Millions of dollars of special, hi-tech reactors are needed to produce synthetic diamonds, making it more expensive to create them than to mine a natural diamond. According to some experts, the cost of mining a natural, colourless diamond is between $40 and $50 a carat, while the cost to produce a synthetic, gem-quality colourless diamond is about $2 500 a carat.

I think diamonds will always hold a special fascination for people around the world. Perhaps more importantly, the practical use of diamonds in industry is well established. Our emerging markets team has been excited about Africa’s potential in this industry, and we think many countries on the continent should continue to benefit from the sustained demand for this “glass with attitude”.

* Mark Mobius is the executive chairman of Templeton Emerging Markets Group.

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