In the opening scene of Ian Fleming’s novel Diamonds Are Forever, a scheming German swings down out of a helicopter onto a scorpion-infested corner of Sierra Leone, where an Afrikaaner hands him a velvet bag of smuggled diamonds. They shake hands, flex their muscles, and the German flies off in a cloud of testosterone. There we have it: diamond trading – old style.

Even with the valiant assistance of James Bond, the global diamond industry has still had its problems. Miners exploited local labour; traders turned a blind eye to diamonds obtained from militia groups; and regulators were outwitted by shady, monopolistic practices.

But things are changing in this $60bn industry. A UN-backed initiative – known as the Kimberley Process – succeeded in stamping out trade in ‘conflict diamonds’ while significantly reducing illegal trafficking.

Booming demand from new markets in Asia, coupled with the traditionally strong US sector, is pushing this most staid of industries to venture beyond its usual boundaries. Russia and Africa no longer dominate the mining sector; similarly, Antwerp, Tel Aviv and New York no longer dictate the trading place. Newcomers are cropping up to cater for the increased demand, and the hunt is on for fresh sources to secure future

supplies. Simultaneously, the world’s largest companies are doing their best to adapt to the changing times.

For the first time in 70 years, De Beers’ marketing arm, the Diamond Trading Company, has sold less than half of the world’s production – an unprecedented development in the industry. As recently as 2001, the company’s market share was around 60%, a dramatic fall from the 80% it enjoyed throughout most of the 1980s and 1990s.

The new frontier

The undisputed newcomer to the diamond world is Canada. While Botswana and Russia remain the top locations for mining, Canada has seen off traditional competition over the past decade and muscled into third place ahead of Angola, South Africa and Congo. Now Canada is home to two-thirds of the world’s exploration projects. But why Canada?

Although some experienced players are willing to risk investing in African states plagued by conflict and governmental complications, others are turning to Canada’s cosy political climate and the welcoming arms of the federal government.

“Canada is going to become the second largest producer in the coming years,” says Dilip Mehta, CEO of Rosy Blue, one of the most renowned diamond and jewellery companies in the world. “Of course, it all depends on if they have new finds. All they need is to find one or two major mines, and already huge exploration activity is taking place there. It has the potential to be a very important place.”

The next big thing

The world’s largest companies have decamped to the region, setting up joint ventures with junior mining and exploration partners and buying into freshly discovered diamond sources, known as kimberlites. Two champions lead the way: Melbourne-based BHP Billiton, the world’s largest diversified mining group, and the Anglo-Australian firm, Rio Tinto. De Beers will soon stake its claim when its Snap Lake Project goes on line in 2007. A handful of advanced exploration projects are under way across the country.

For years, industry giants like De Beers and Alrosa – the Russian state-owned mining company – have been stockpiling diamonds, but now their coffers are empty and there is fresh impetus to secure new sources. Unsurprisingly, Canada is crawling with squads of geologists and explorers trawling the territories, hunting for the next big thing.

“We have a programme which allows a junior exploration company to obtain a 100% tax deduction against any exploration,” says Robert Clark, a Canadian government specialist in tax and exploration. “This will not only be deductible against corporate taxation but also personal income tax. In addition, we have a 15% federal tax credit which comes straight off the bottom line of the tax you pay.” In the case of Québec, authorities calculate that for an outlay of C$1000 ($790) an investor would only be at risk for C$284.

“The tax regime is the strongest incentive we can provide to mining companies,” explains Don Law-West, senior mineral analyst for the Canadian government. “We lead the world in mining financing from the equity point of view.” Last year, Canada provided more than 40% of the world equity financing from mining, helped mainly by the Toronto exchange, home to the larger companies, and the Vancouver exchange which hosts 1200 junior mining firms.

But all is not as straightforward as it seems. There is a strong environmentalist movement in Canada and companies are obliged to make concessions to the aboriginal populations, both in employment and levies.

“It is not easy up there,” says Daniel Horowitz, CEO of IDH Diamonds, a diamond trader and industry consultant. “The rules are strict; the civil service is demanding. The environmentalists are strong and local populations have their say. Last but not least, it’s a huge technical challenge to get a mine working close to the Arctic Circle.”

Indeed, working conditions in isolated mines can be unforgiving. The largest producing mine in the country, Ekati (operated by BHP Billiton), is located among aboriginal communities in the Northwest Territories, 200km south of the Arctic Circle. What’s more: the mine is only accessible by road 10 weeks a year.

Despite the tough conditions and the social and environmental challenges, Canada is still the most enticing prospect for investors at the moment. “Mining rules are pretty reasonable in Canada,” says Mr Mehta. “It is a very attractive place. Naturally, if you’re in the Western world it’s more interesting for people to be investing over there.”

Challenging Antwerp

But it’s not just the mining sector that is in flux. Traditionally, most rough diamonds hacked out of mines all over the globe were shipped back to Antwerp, the Belgian city which has flourished as the world’s principal diamond trading hub. However, as fresh markets and fresh mines open up, a new trading centre is trying to get a slice of the action: Dubai.

Antwerp traders are reluctant to proclaim Dubai a true challenger to their privileged position at the heart of the diamond industry. Behind the scenes, however, many big trading houses have been hedging their bets, buying up office space in the 65-storey Almas Tower soon to host the recently opened Dubai Diamond Exchange (DDE).

The freehold on the Almas Tower sold out in just one day in January 2005 to industry behemoths including GIA, Eurostar, the Love Diamond Company, Taché and Kristall.

Dubai should not count its chickens just yet, however. Over the years, there have been several pretenders to Antwerp’s crown, but each of them has fallen by the wayside, unable to offer that little something extra lacking in Antwerp.

What’s on offer

“What can Dubai do to take something away from Belgium?” asks Mr Mehta, whose company, Rosy Blue, is expanding into the Almas Tower. “It is very well positioned geographically with proximity to Russia, the former CIS states, Africa and the Indian subcontinent. Dubai will become an eastern hub. Dubai offers businesses the ability to build scale,” he continues, “and it is an immensely important place for distribution.”

But, above and beyond its geographical location, Dubai offers the all-important tax breaks. Zero taxation, first-rate infrastructure and a welcoming bureaucracy mean that crucial procedures – such as gaining visas or registering workers – are resolved at the drop of a hat.

Even the threat of fundamentalism is not enough to deter traders from the opportunities in Dubai. “Dubai is definitely a threat to the Antwerp market place,” says Mr Horowitz. “No question. But what is likely to happen is that Antwerp traders will have an office there, or even their headquarters, but continue to operate from Antwerp for a while. And they will have the best of both worlds.”

But beyond trading, Dubai has little to offer. Antwerp has a century of processing experience while India has become the world’s polishing and cutting centre, with its expertise and competitive wage levels. “India has reached critical mass already,” warns Mr Mehta. “A challenger can only get tired.”

Polished performance

Despite India’s dominance in this sector, many companies are still forced to process close to their mines. Governments often oblige mining companies to conduct at least a percentage of their processing at source – a political gesture to nurture knowledge-based jobs in their own countries.

Mr Law-West explains: “During the environmental assessment phase, the territorial government has made it known that it will not support any mining project that does not agree to sell part of their production to operators and polishers in the Northwest Territories.” This region, however, employs just 100 people in processing, while India – a country devoid of diamond mines – ranks its polishing workforce in the hundreds of thousands.

“There is no inherent advantage in processing diamonds where they are mined,” argues Mr Horowitz. “They are light and can be transported overnight throughout the world. The largest manufacturing centre in the world [India] has no mines; the largest mines have no processing. It’s simply a political game.”

Yet, others see a business opportunity here. “With Canada’s steady supply, there are advantages for niche companies which can flourish as a result,” claims Mr Mehta – an argument echoed by the Canadians, who oblige mining companies to sell up to 10% of their produce to domestic processors. “Canada can potentially offer a guarantee when it comes to supplies and is highly attractive as a country of origin,” he adds, referring to traditional supply problems in an industry dominated by just two or three large mining companies.

As the diamond industry continues to evolve, investors are facing opportunities along the entire production chain. While some choose to scour the Canadian countryside or back explorers on the Toronto exchange, others are setting up shop in Dubai and delivering branded goods to traditional and ever-expanding markets.

Commodity or brand?

The advent of branding is a new development splitting the diamond industry into believers and non-believers. De Beers is leading the way, encouraging its distributors to launch various promotional initiatives to gain brand prominence, stimulate demand and differentiate themselves from the crowd. After all, they might say, your fiancée wants a De Beers diamond glinting on her finger – not just any old rock.

BHP Billiton subscribes to the same theory. Having mined the raw material, the company then does the polishing itself, branding its end product. It is the first mining company to guarantee the origin of its polished diamonds, promising the consumer a high-quality diamond originating from Canadian mines and extracted according to strict ethical standards.

But many in the industry argue that branding is not the way forward. They believe a diamond is a commodity in the same way that steel is used in cars. The industry, however, has never been closer to today’s consumer. Surging demand in China and India has opened up a new front in the retail sector. “[Diamond] jewellery retail is a $60bn business globally – wide open for many entrants,” concludes Dilip Mehta, CEO of Rosy Blue. “However, the success rate is low. If managements step down from their ivory towers and execute on the field, then the probability of success improves.”