The diamond-rich Southwest African nation is enjoying the fruits of its natural resources as diamond prices surge.
With diamond sales soaring and prices of rough goods above their pre-2008 financial levels, the main beneficiaries have been diamond producers and producer countries, according to Antwerp Facets. Strong financial results were released earlier this month by the world's two largest producers – De Beers and Alrosa – and now De Beers’ partner, Botswana, has followed them with a report showing the positive impact that rising production and diamond prices are having on its national economy.
The Botswana diamond sector has seen momentous changes in the past three years as it has pressed for beneficiation of its diamonds. It is also carrying out tough negotiations with De Beers over a diamond agreement that was originally due to have been signed at the end of last year. Given that diamonds play a huge role in the country's economy and its national development, the Botswana government is pressing for maximum return.
"Botswana is clearly pushing for the best possible deal for its diamonds," said industry analyst Des Kilalea of the Royal Bank of Canada. "It is ambitious and wants to get a deal that will enable it to give its beneficiation efforts a boost. However, both sides have advantages in their negotiating positions.
"It's true that Botswana is where the mines are and that it could theoretically pass legislation to ramp up royalties and demand a shorter diamond agreement of five years as has been the case in the past,” he continued. “On the other hand, it knows that De Beers' strategy is based on getting the best possible deal for its business and that the miner could decide that the $3 billion needed to further develop the Jwaneng mine is not the best possible use of its money. In addition, De Beers is probably pushing for 10-year agreement to lock in a longer-term deal. De Beers is not going to simply roll over and agree to what Botswana is proposing.
"Reaching an agreement is clearly complicated. Botswana does not have all the cards, and De Beers needs to show its shareholders, and the wider diamond industry, that it is investing its money in the best possible way. The sides have largely reached agreement and there are probably small issues to be discussed and dealt with. I believe we will see [new De Beers CEO] Phillippe Mellier in Botswana signing the diamond agreement n the next month or so," Kilalea added.
According to the country's latest diamond export figures, Botswana last week [August 1-7] posted record quarterly exports in the second quarter, up 22 percent on the first quarter of this year at $1.37 billion. The strong export performance is further illustrated by the fact that the southern African country's previous record quarterly figures were only set three months before in the first quarter of this year.
Botswana's diamond exports in June alone came to $670.8 million, up almost 400 percent on the year, and 45 percent up on May, according to figures published by the Bank of Botswana. Botswana's diamond exports for the first half of this year were $2.42 billion, and were 33 percent higher than the figure for the corresponding period of 2010. Indeed, the figure for the first six months of this year was just $440 million short of the amount for all of 2010 which was $2.86 billion.
Furthermore, the figures would suggest that, if current trends continue, the country could be on track for exports for 2011 of close to $5 billion. But Kilalea believes the figure will be closer to $4 billion, if current diamond prices continue in the second half of this year.
However, given the current financial turmoil and predictions that a second recession could be on the way in the United States, it might be unwise to make forecasts, Kilalea said. In addition, following price rises of 30-40 percent for rough and polished in the first half of this year, it's likely that the second half of this year will see lower price rises.
"According to the KP statistics, Botswana produced 11.3 million carats of diamonds in the first six months of this year. It sold everything it produced and some inventory from the second half of last year. I believe there was more than six months of production in those figures,” Kilalea stated.
"If diamond exports amounted to $2.42 billion in the first half of this year, then the average price per carat was $212 and that is a high figure, especially when you see that the average price per carat in 2010 was $117, according to KP statistics. I find it difficult to believe that it can continue to achieve more than $200 per carat in the second half of this year. I believe its sales for the second half will be $1.8 billion to $2.0 billion. That would give it a figure for all of 2011 of around $4 billion, which is a very considerable achievement," he added.
Botswana appears to be back on track as far as its global ranking is concerned as indicated by Kimberley Process statistics published last week [August 1-7]. The figures showed that Botswana was the leading producer in the world in financial terms with exports of $2.59 billion. Russia was the largest producer in volume terms, with 34.9 million carats while Botswana's output was 22 million carats.
Earlier this month, Botswana's Finance Minister Kenneth Matambo said the country would aim to cut its budget deficit in the fiscal year ending March 2012, helped by rising demand for diamonds as well as cuts in spending. His aim was a balanced budget and the budget deficit would be cut to 6.2 billion pula ($960 million) in this fiscal year from 8.5 billion pula ($1.3 billion) in the 2010-11 fiscal year.
The government is aiming for the elimination of its fiscal deficit by 2012-13 after a decline in demand for diamonds during the global economic crisis slashed revenue and widened the gap to about 15 billion pula ($2.3 billion), or 15 percent of gross domestic product, in 2009-10. Diamonds generate about 40 percent of the country's income. The country's economy will probably expand 6.8 percent this year, led by a recovery in demand for diamonds, Matambo added.
Botswana reported last month that ongoing increases in diamond sales aided the country's balance of payments and helped it post a surplus of $427 million in the first quarter of 2011 compared with a deficit of $534 million in the last quarter of 2010, the Bank of Botswana reported. Botswana has long served as a model for the use of revenues from diamond sales as a means of financing national development.
Ironically, however, Botswana's greatest natural resource could also be the source of problems in the future. The country is heavily dependent on its diamonds exports and extremely sensitive to turmoil in the global economy. The 2008-2009 downturn showed just how far the country is dependent on diamonds and the price of gems on international markets. Diamonds account for more than 50 percent of government revenues.
As diamond production in the country was slashed during the global downturn due to slumping demand, Botswana ran up a 14-percent budget deficit in 2010 and had little choice but to delay new development projects, stop recruiting public service workers, and slash social welfare spending. On the positive side, however, the country's diamond production can likely be continued at current levels for another 30 to 40 years.
In addition, the country has huge coal and methane deposits which have not yet been tapped which could generate electricity for both its economy and be exported to South Africa which suffers from perennial power supply problems. Furthermore, exploration work is also taking place to identify natural gas and uranium deposits.
