Australia's diamond euphoria: flawed by politics

Discovery of what is potentially one of the largest single sources of diamonds in the world is creating unexpected difficulties for the Australian government.

The main problem is the marketing of the diamonds, and the extent to which Australia should tie itself in with the South African Central Selling Organization (CSO).

The CSO markets almost 80 percent of the gem-quality diamonds traded around the world, and the prices it sets determine the pricing of the remaining 20 percent.

The Australian discovery has not been fully evaluated, but early mining suggests it may be one of the world's richest diamond sources. Located in the barren northwest of Australia in the eastern Kimberleys, the Lake Argyle deposit is in the remains of an ancient volcano.

Tests so far are producing a gram of diamonds for every ton of diamond-bearing rock - about 20 times the return from most South African mines. However, the diamonds produced so far are mainly industrial rather than gem quality.

The lode creates problems for Prime Minister Malcolm Fraser, who is under pressure from the opposition Labor Party to impose export controls to ensure that the diamonds are not handled by the CSO.

The prime minister is on the spot because he was antagonistic toward South Africa and expressed sympathy for black African nations at the Commonwealth heads-of-government meeting in Melbourne in early October.

When Paul Keating, the Labor Party's mining expert, asked Mr. Fraser to ensure that the diamond industry would not fall into South African hands, the prime minister replied:

''I can see no advantage to Australia or to Australian industry in having arrangements in which Australian diamond discoveries only serve to strengthen a South African monopoly in these areas.

''I believe that that would be contrary not only to the interests of Australia but to the interests of Australian corporations.''

Fraser's comments prompted Western Australia Premier Charles Court to warn him not to interfere with the development of the diamond industry.

After several telephone conversations, Fraser backed off from any federal moves to control the diamond marketing.

The prime minister's political support is so low just now that he cannot afford to antagonize the premier of Western Australia, a member of Fraser's own Liberal Party.

Fraser said his remarks had been misunderstood and that his concern was that Australia should not support arrangements that ''only'' strengthen the monopoly.

Sir Charles welcomed Fraser's retreat and said his government would seek the best deal possible for Western Australia and the nation in marketing and processing. He said Western Australia was not reluctant to consult with the federal government ''at the appropriate time, as long as it is fully accepted that resource developments of this kind are basically our responsibility.''

Mr. Keating sharply opposed Sir Charles' approach, and his views may take on added significance if Labor wins the 1983 federal election - at about the time the diamond mines go into commercial production.

Keating claims the present government is content ''with the prospect of South Africa raping our fledgling diamond industry'' and this was a complete mockery of Mr. Fraser's Africa policy.

He estimates that the Lake Argyle deposit will produce 25 million carats of diamonds when it is at full production. In comparison, he says De Beers produces 19 million carats from its South African mines.

The diamond deposit is to be mined by a consortium of companies headed by Conzinc Riotinto Australia (CRA). More than 60 percent of consortium stock is owned by the English-based company, RTZ.

CRA's chairman, Sir Roderick Carnegie, is trying to keep out of the debate about the diamonds. He stresses there is no diamond industry in Australia at the moment.

''What has happened is that we have found a diamond pipe which contains a large quantity of low-quality diamonds,'' he says.

''Most of the diamonds are not the kind of diamonds you give to your future wife, they are industrial diamonds which are used in things like drilling bits, and we're only now starting to find out what the real resource is.

''About 12 months ago, we started examining the question of how to market these diamonds. . . . Now if they were all one-carat stones, which you would buy as engagement rings, it would be a much easier job. But they are many different products and they go to very many different markets.

''We have made no commitment whatsoever as to how to market. We have talked with over 100 different companies. . . . It's quite premature for people to talk about us having made commitments or the government having agreed to commitments.''

He denied De Beers was trying to influence decisions through RTZ.

''I think all of the speculation is fueled by people jumping to conclusions because of the emotional content of the word 'diamond.' ''