Diamond producing countries seek predictable market conditions

Evolution of relationships between De Beers and the Government of Botswana is one of the most intriguing subjects being topical at the diamond market in 2010. Current agreements regulating distribution of diamonds produced by Debswana being a 50/50 joint venture of De Beers and the Government of Botswana and the country’s major diamond miner will expire by the end of the year. According to ongoing agreements, all Debswana production is distributed to 16 sightholders through Diamond Trading Company Botswana (DTCB) equally owned by De Beers and Botswana.
Recently the Government of Botswana has been taking steps to establish rough diamond market free from any obligations towards De Beers. In June this year Firestone and Boteti Mining (joint venture of Lucara Diamond Corp. and African Diamonds) obtained permit to sell rough diamonds mined at ВК11 and АК6 diamond projects accordingly, by means of open tenders. The above news raised certain tensions of DTCB sightholders who are obviously interested in this rough stock but also concerned with possible negative response of their main supplier to such cooperation. Although official representative of DTCB jumped to assert that “contracts concluded by DTC and DTCB with their sightholders do not prohibit the latter to buy rough and polished diamonds from other suppliers,” the mere fact of necessity of such declaration convincingly revealed the existence of problem.
The process and intension of negotiations pertaining to new agreement between De Beers and the Government of Botswana on distribution of Debswana’s production is not covered in free sources, however there is a number of circumstances which suggest that this time consensus will be not so easy to reach.
Botswana has been hit hard by the global crisis: diamond output fell dramatically from 32.5M carats in 2008 to 17.7M carats in 2009. Diamond industry accounts for almost a half of the country’s fiscal revenues. Slump of diamond output resulted in 2009/2010 budget deficit worth over 13% (Botswana used to have surplus budget before the crisis) and forced the Government to resort to a large loan from African development bank.
De Beers’ decision involving drastic reduction of output in Botswana in 2009 was undoubtedly helpful for diamond market in general. However management of funds of a corporation and management of a country’s budget are apparently different by ends and means. And governmental authorities of Botswana have seen increasingly frequent appeals to diversify the country’s economy which is dependant on diamond mining too much. Besides, diversification is understood as not so much development of different new industries as increase in number of players at the diamond market as well as variety of operations, which is confirmed by the above example involving licenses for companies developing ВК11 and АК6 mines.
Will Botswana strive for the right to dispose its share of Debswana’s rough production independently? Is it possible to reach such agreement in principle? Frankly speaking such developments look not too believable. Share of Botswana in De Beers (15%) allows it to bear a moderate part in recapitalization being too small to influence the company’s strategy which does not contemplate autonomy of African partners in terms of distribution policy.
Nevertheless, start of negotiations practically synchronized with strict request of Botswana Mining Workers Union (BMWU) to appoint independent managers to Debswana and DTCB so that they could “represent the interests of the country without compromising the government’s share in both companies.” In opinion of the Union, currently serving representatives of Botswana in the above companies are too tolerant to decisions proposed by De Beers.
Vox populi sounded in due time was heard by minister Ponatshego Kedikilwe who acknowledged the necessity of urgent governmental solution of this issue.
In theory, should Botswana obtain the right to distribute its part of rough diamonds mined by Debswana separately, it would change market conditions significantly and probably not for the worse. This would not only contribute to development of large independent diamond distribution centre in Gaborone but also create serious prerequisites to intergovernmental agreements focused on stabilization of the industry.
A cartel agreement between countries, primarily between Botswana and Russia in the aggregate possessing “controlling stake” in global diamond output would have brought the diamond market back to good old times.
In June this year Newsweek claimed that the idea of intergovernmental diamond cartel was mulled in Moscow at the instigation of “some African nations.” A couple months before a senior official of the Ministry of Mineral, Energy and Water Resources of Botswana stated that “close cooperation between Russia and Botswana with regard to diamond mining is of high importance, signing corresponding agreements being necessary.”
This declaration looks slightly strange apart from the subject of negotiations, no activities of ALROSA being observed at the key region of De Beers.
As yet Tati Nickel (85% owned by Norilsk Nickel and 15% owned by the Government of Botswana) remains the only serious base of Russia in Botswana’s mining industry. According to a statement by the chief executive officer of Norilsk Nickel V. Strzhalkovsky, operations of this Botswana-based enterprise is not profitable and could be regarded as merely maintenance of jobs for Botswana citizens, which is surely essential and to somewhat extent sets off losses at labor market resulting from the drop of diamond output.
Given some informal arrangements reached, such generous charity could be easily converted to corresponding “diamond” agreements.
 
Sergey Goryainov, Rough&Polished