De Beers said in its inaugural Insight Report, which was released last month that the global diamond cutting and polishing sector remains fragmented, with midstream companies under pressure from a mishmash of increasing costs in the upstream, the availability of credit and price-point requirements from their retail customers.
It further stated that the financing challenges were increasingly critical and could intensify over the coming years, as banks apply more stern lending standards to the cutting and polishing industry.
“One possible consequence is that some companies may exit the industry, leading to greater consolidation,” De Beers noted.
Prior to this report, Bain & Company had also noted in its 2013 global diamond report that after growing steadily since 2006 and surpassing pre-crisis peaks in 2011, the cutting and polishing segment of the value chain declined 8 percent in 2012, generating estimated revenues of $20.7 billion.
India’s cutting and polishing sector fell 5 percent in 2012, as new customs duties, the falling rupee, tighter financing and overall economic uncertainty took their toll, while China posted flat growth in 2012, as domestic demand slowed and cost competition from Indian cutters squeezed revenues.
The U.S and Belgium also posted declines in cutting and polishing revenues.
The somewhat sad De Beers prognosis of the state of the diamond-manufacturing sector coupled with negative picture painted in the Bain 2013 report came at a time when there are renewed calls by diamond producing countries in Africa to boost their cutting and polishing capacity.
De Beers even recognized this in its report.
“Over recent years, producing countries such as Botswana, South Africa and Namibia have been striving for increased domestic beneficiation, leading to some cutting and polishing jobs migrating to those countries,” it said.
“Diamonds are critical to the economies of some producing nations. In Botswana, for example, diamonds represent more than one quarter of GDP and over three-quarters of overall exports, whereas in Namibia they represent eight per cent of GDP, and almost 20 per cent of exports.”
These southern African countries have been leading rough diamond producers over the years, but were of the view that diamond mining only creates a limited number of jobs since it is capital-intensive rather than labour-intensive, notes De Beers.
Bain also noted that the biggest government promoter of beneficiation policies was Botswana, which had a longstanding tradition of supporting its local cutting and polishing business.
“For the past several years, Diamond Trading Company Botswana, a joint venture between the government of Botswana and De Beers, has been supplying rough diamonds to the local cutting and polishing industry; as a result the number of people employed in the industry has grown from 300 to 3,000,” said Bain.
“In addition, the government-owned Okavango Diamond Company will increase its share in sales of Debswana’s production from 12 percent in 2013 to 15 percent in 2016. Botswana’s cutters and polishers should also gain from De Beers’ decision to move its Diamond Trading Company’s aggregation, quality-assurance and sight-preparation operations from London to Gaborone.”
However, it said that Botswana’s potential to grow into a major cutting and polishing center was limited.
The country’s labour costs were said to be high compared with those of China and India, and its cutters lack expertise comparable to that of craftsmen in Europe, Israel and the US.
“The growth of Botswana’s cutting industry may well be limited until it is better able to compete on cost with the industry in India and China,” said Bain.
In South Africa, the diamond manufacturing sector, which forms a key part of the government's beneficiation plan, was said to have registered a sharp decline over the years from 3 000 polishers to about 300 last year.
Mining Weekly quoted Ernie Blom, President of the World Federation of Diamond Bourses as saying last year that “the polishers we have left are highly trained, but they are from the older generation and they will soon be gone".
He said the country’s diamond manufacturing had never recovered from the 2008 global economic slump.
Blom also said that the legislative and operating environments in South Africa were also a major hindrance to the growth and development of the sector.
He argued that it was expensive to spend time cutting smaller, poorer quality diamonds, and most local diamond cutters cut larger diamonds or import diamonds for jewellery.
"A fair portion of diamonds is imported for cutting and polishing and South African manufacturers have to pay 40 percent value-added tax on those diamonds,” said Blom.
“This means they carry the costs for three to four months and this does have an effect on their competitiveness.”
Meanwhile, while Botswana and South Africa seeks to traverse through the mucky waters of diamond cutting and polishing, Bain stated that traditional cutting centers in Russia, Belgium, and the U.S had reoriented their businesses to focus on high-value stones and specialized services.
“Belgium, for example, has intensified its focus on the highest-value stones, supported by home-grown research and technology development,” said Bain.
“…in the US, for its part, New York continues to press its advantage as the gateway to the world’s largest retail market. Russia is focusing on modernizing its cutting and polishing sector.”
Mathew Nyaungwa, Editor in Chief of the African Bureau, Rough&Polished
