Diamond blow to Stock Exchange

De Beers mines about two thirds of the world's diamonds

By BBC News Online's Briony Hale

"I guess it's business as usual," said Gary Ralfe, Managing Director of diamond giant De Beers when asked about the company's $19bn privatisation.

Gary Ralfe: business as usual

But it won't be business as normal for the Johannesburg Securities Exchange (JSE).

There will be a gaping hole left behind when trading in De Beers ceases on 30 May.

The exchange will lose its largest and most prestigious stock, which accounts for 8.6% of its market capitalisation

And the threat of marginalisation is rearing its head, with an increasing number of companies choosing to list away from their geographical homelands.

String of defections

The exchange has already been weakened since 1997 by a string of defections to the London Stock Exchange by South Africa's biggest mining, computer, brewing and insurance companies.

In fact, the trend seems well established, with Billiton, Old Mutual, South African Breweries, Liberty Life, Dimension Data and Anglo American having already made the move as part of global expansion strategies.

De Beers

Founded by Cecil Rhodes

Produces 30m carats of diamonds a year

Controls nearly half of world production

Mines in South Africa, Namibia, Botswana and Tanzania

And several other leading south African firms - the bank Investec amongst them - are rumoured to be plotting similar moves.

This not only raises the visibility of the firms in the global arena, it also provides access to larger amounts of capital if needed for acquisitions or other investments.

"It's now possible to get effective exposure to the South African markets exclusively from London," one Johannesburg analyst told BBC News Online, mourning the loss of De Beers.

"It's hard to imagine how this trend can be reversed in the near future," he added.

Bad news

The delisting of De Beers is bad news for the JSE for two reasons.

Firstly, it is important for the reputation of the exchange, since De Beers is one of the few remaining international firms that is listed locally and is a highly liquid stock.

The world's largest uncut diamond

Local investors are already mourning the loss of a company that has been on the JSE since 1893, and analysts agree that it is a big blow to the local market.

Only a handful of other JSE listed companies - Anglo American Platinum, Impala Platinum, Anglo Gold, Gold Fields - attract a significant amount of foreign investment.

Secondly, it deprives the JSE of the listing of the most valuable South African company, and will push down its market capitalisation by member firms - an important measure of the success of stock exchanges.

The JSE itself admits that there is a move towards sector rather than nationality based indexes and has linked up with London's FTSE to redesign its indexes and create better visibility of the African markets for global investors.

Liquidity boost

But it's not all bad news for investors in Johannesburg.

Speculation over the buy out of De Beers by its sister company Anglo American has given the exchange four months of active trading, during which time shares in De Beers have risen by a third.

This diamond, on loan from De Beers, was almost stolen from the Millennium Dome last year

And despite the series of defections, the volume of trading - known as liquidity - continues to rise.

22bn shares traded for the year ending 25 May 2001 compared to 20.9bn during the same period the previous year.

In fact the defections themselves can sometimes boost liquidity in the home market.

Anglo American - the buyer of De Beers - listed on the London Stock Exchange in May 1999. Now, 62% of all stock transactions are carried out in London.

But a vast increase in the volume of shares traded overall means that the 38% of trade left in Johannesburg is actually greater than the original volume.

Currency boost

And economists say that, although the privatisation of De Beers is overridingly bad news for local markets, it is positive for the economy.

It's now possible to get effective exposure to the South African markets exclusively from London

Stock Market Analyst

The buy back of De Beers stock will see capital of about $3.5bn flow into the country.

Some of this is likely to be re-invested in the stock markets, helping to push prices higher.

And a flow of cash will also help ease pressure on the Rand.

The JSE is the only licensed stock exchange in South Africa, with 526 companies making up its all share index.

It ranks fifteenth of all members of the International Federation of Stock Exchanges by market capitalisation.

Earlier this week, the JSE successfully won unanimous approval from shareholders to proceed with the acquisition of the South African Futures Exchange.

For more than a century, De Beers has sold uncut - or rough - diamonds for cutting and polishing, commanding about two thirds of the global market.