“While the SADC (Southern African Development Community) is potentially one of the richest regions in the world, most of its … natural resources are exported unprocessed, which earns the region 10 percent of their actual value. Through beneficiation we will be able to increase our returns ten-fold…
“By exporting our natural resources in their raw form, we are not only earning marginal benefits from them, but are, in essence, compromising our efforts to create jobs, or diversify our products, or even develop our industries, and are ultimately, exposing our economies to the vagaries of the fluctuations of the global resource markets,” said Zimbabwean President Robert Mugabe during a gathering of southern African leaders in Victoria Falls last April.
Southern Africa, home to diamond producers like Angola, Botswana, Namibia, South Africa, Lesotho and Zimbabwe, was said to have produced 56 percent of global diamond output by US dollar value and 51 percent by volume, last year.
Mugabe’s sentiments were commonly shared by leaders in the region and in fact talk about mineral beneficiation was high on the agenda in the region as early as 2001.
Individual countries had, however, of late intensified their push for value addition of rough diamonds, albeit at a small-scale level.
This plan had been progressing, somewhat, well since the 2008 global economic crisis, until the diamond market started showing signs of massive distress this year.
Shattered dreams
A diamond conference held late November in Namibia heard that the country used to employ up to 2000 people in the diamond beneficiation sector, but now only employs about 700 people.
In South Africa, the employment rate in the sector dropped to a few hundreds from a high of 4500 people, while about 2000 others had been retrenched in Botswana.
South Africa’s largest diamond cutting and polishing company, Zlotowski’s Diamond Cutting Works, announced some few months ago that it intended closing its doors.
In Namibia, Laurelton Reign Diamonds – a joint venture between Namibian Reign and New York listed Tiffany and Co – announced last September that it had closed shop in the country.
In Botswana, Teemane – one of the oldest diamond manufacturer in the country – collapsed earlier in the year while Diacore forced 50 employees out in August.
Although, the current weak diamond market had been cited as the reason why the region was experiencing this setback in the sector, analysts, especially in South Africa, placed the blame on government(s) for failing to supply adequate rough to the cutters.
The World Federation of Diamond Bourses (WFDB) president Ernest Blom argued that countries with well-established diamond cutting and polishing industries such as Israel, India and Belgium receive government support.
“There is no more consistent supply of diamonds since De Beers sold most of its South African operations," he was quoted as saying by MiningMx last October.
"Instead diamonds are sold on tender and companies, such as Zlotowski don’t have security of supply."
South African opposition, Democratic Alliance’s shadow minister of mineral resources James Lorimer also argued that the red tape and lack of government understanding and willingness to work with the industry was “absolutely startling".
"The most interesting thing is there’s not a single representative of the cutting and polished diamond companies on the South African Diamond & Precious Metals Regulator," he was quoted as saying by MiningMx.
The first Kimberly Process chairperson Abbey Chikane told Rough & Polished some few months ago that for diamond beneficiation to be a success in southern Africa there was need for constant supply of rough, access to capital, technology and markets as well as energy.
Ironically, in countries such as Zimbabwe, there was a low take-up of rough diamonds for beneficiation, although the sector argued that they were receiving poor quality goods from the miners.
High labour cost compared with productivity, outdated diamond beneficiation equipment and shortage of skills were also cited as some of the factors militating against the growth of the sector.
De Beers’ hand
Analyst Roman Grynberg argued that although countries in southern Africa, especially Botswana, Namibia and South Africa, were envying the success story of India, as far as diamond manufacturing is concerned, “dollars speak loudly as the price of rough diamonds was pushed up by De Beers over the last couple of years”.
He posits that this resulted in gross margins in the middle of the diamond value chain growing thinner.
“The cutters, with no reason to stay and no cost of exit, did what any firm does in such a market, they shut their highest cost operations in southern Africa and shifted production back to low-cost Asia, because neither South Africa, nor Botswana nor Namibia would impose any cost on their leaving,” Grynberg noted.
He said the three countries did little to make cutting attractive in their high cost countries.
“What was needed throughout southern Africa was an active government industrial policy to work at lower operating costs, but this will not save the industry now and such a policy should have been implemented 5-10 years ago,” Grynberg opined.
“What is not widely understood about the diamond value chain is that De Beers has a multi-box marketing system that has facilitated this beneficiation disaster. When a De Beers sightholder (customer) buys diamonds, they will get a local box if they are beneficiating in a country and an International box (formerly called a London box) which is normally the largest.
“But in a diamond market like the current one - which is going into decline - there is no great benefit in having yet more high cost diamonds when there are plentiful supplies available at global market prices. So a sightholder can walk away from a Namibia or Botswana box at no cost and still have access to the International box, which can be cut anywhere.”
To him, governments in southern Africa were aware of the reality, painful as it is, that the money in diamonds was in trading diamonds and not in cutting.
“They really prefer their trading arms which make money to cutting factories that make nothing and have a tax free status as in the case of Namibia,” he opined.
“In Botswana, those who buy diamonds from De Beers are supposed to beneficiate but those who buy from the state-owned Okavango Diamonds are not required to beneficiate.”
Grynberg prescribed that the ball was in the three countries’ court.
Why, one might ask?
He is of the view that Namibia, Botswana and South Africa should co-operate and tell De Beers that “the game is up” and that if a sightholder walks away from their territories and stops beneficiating in southern Africa then they automatically lose access to all other African diamonds.
Without this, beneficiation would remain a subject for conference debate.
How about in countries where De Beers does not have any influence?
The response, again, would be governments are cash strapped and the sale of rough diamonds always provide revenue for budgetary support despite much talk of beneficiation.
Zimbabwe had an opportunity to do that, but as Mugabe stated in 2012, only 0.1 percent of the 8.5 million carats produced in 2011, was beneficiated.
Lesotho does the same, produce and auction, the same can be said of Angola.
Given the intricate factors affecting beneficiation in the region, whether in countries where De Beers operates or not, it would take massive guts for governments, through synergies and robust policies, to ensure adequate and good quality supply of rough diamonds to locally-based manufacturers, for this dream to become a reality, market conditions permitting.
Mathew Nyaungwa, Editor in Chief of the African Bureau, Rough&Polished
