A look into the diamond industry's crystal ball finds that although Botswana may well be an important diamond hub in the future, it also faces big challenges in living up to its promise, Antwerp Facets writes.
Although 2012 is almost upon us with a new set of challenges, it might be more interesting to look further afield at how the diamond industry will look at the start of 2022. That will be the point at which the 10-year sales agreement signed by De Beers and Botswana will have ended.
What will be the implications of the deal, signed last September, both for the global diamond industry and for Botswana in the decade to come? In both developing a modern diamond trading and production hub, and in having to quickly expand a wide range of services, the test facing Botswana is clearly enormous.
Botswana's aim is clear: to become the world's leading diamond centre. Under the terms of the deal with De Beers, all the aggregation and sorting of diamonds, as well as the valuation functions currently carried out in London, will move to Botswana's capital, Gaborone, over the next two years along with the company's key account managers. London's role as the focal point for the distribution of diamonds, which it has held for more than three centuries, is winding down.
Meanwhile, the global diamond industry also faces challenges from Botswana's ambitious plans. In order to secure a supply of diamonds from Botswana, diamond manufacturers may have to consider establishing plants in the country. After decades of seeing its rough diamonds sold abroad where the value-adding activities take place, Botswana now aims to create work for its citizens by seeing the establishment of diamond processing and jewellery making plants in the country.
And the growing importance of the Botswana diamond trade was seen earlier this month with the announcement by the Diamond Trading Company (DTC) of its sightholder list for the 2012-2015 contract period. The number of sightholders in Botswana was increased to 21 from 16, a rise of 30 percent, while the number of sightholders in London remained unchanged at 66, and South Africa lost three. Namibia also saw a rise in the number of sightholders, to 13 from 10 in the previous contract period. The DTC also said that it would be reducing the amount of goods available to London sightholders while increasing those available to Botswana clients.
And it is not just the fact that Diamond Trading Company activities will be moved to Botswana. The rabbit up its sleeve in the sales agreement is that it secured the right to immediately start selling 10 percent of production independently. In the next five years, that proportion is due to rise to 15 percent. Given that its annual production is around 24 million carats and rising, Botswana will clearly be able to leverage the power that the independent sales element of close to three million carats provides to encourage diamond companies to set up operations in the country. Initial estimates suggest that the sales agreement will lead to around $6 billion flowing though the country’s banking system, compared to the $2 billion or so that the country earns currently from the sale of rough goods.
However, the DTC is keen to point out that sightholders will also enjoy great benefits from the sales agreement with Botswana. "This is the longest contract ever signed between the two partners," said Mahiar Borhanjoo, the DTC's Executive Director for Sales and Sightholder Services. "De Beers as secured 10 years of supply with the world's largest producer. That is a very big advantage for sightholders. They know they have security of supply for a whole decade. It's an exciting development."
Although Botswana has clearly created a powerful role for itself as the global diamond centre of the future, its government will also be under huge pressure. That is due to the weight of expectations that the move creates, both from overseas firms and their employees moving to the country, as well as from its citizens who will want to see concrete results.
Botswana’s Minister of Minerals, Energy, and Water Resources, Dr. Ponatshego Kedikilwe, appeared to acknowledge the fact in a statement released at the time of the announcement of the agreement. It was, he said, “only a first step". “Much work needs to be done during the next several years to make this transformation a success,” he said. His comments were reiterated by Eric Molale, who led Botswana’s negotiating team, and who also serves as permanent secretary to President Ian Khama. “We must, as a matter of urgency, change for the better; our work culture, the way we do things, and reduce the culture of entitlement,” he said.
For the foreign nationals moving to Botswana, there will be a huge demand for direct flights and high-level airports, hotels, housing, schools, health services, sport and recreation, nightlife, flights, tourism and security, among other services. One Antwerp diamantaire believes the result could be a replica of the situation that existed in times past. "I think it is inevitable that the foreign workers will all live in the same housing areas and stay together and not more generally with the rest of the population."
As for the local population, there will be a huge expectation that jobs and wealth will be created, he said. "Clearly, many jobs will be created, however there may be fewer than the Botswana government believes, or that can be reasonably expected to be produced. Diamond companies will, inevitably, be aiming to keep costs down in order to protect margins, particularly in view of the high transport costs associated with Gaborone especially due to the high transport costs. Since there are no direct flights to Gaborone now, sending goods abroad is going to be expensive and time-consuming. Keeping costs down will mean as much automation as possible, and keeping the number of employees in check."
One analyst said the benefits for Botswana would be considerable. "Foreign direct investment is clearly going to be large as a result of the knock-on effect for a broad range of services outside of diamonds. Housing, alone, will benefit greatly with big projects taking place. And investors won't be as nervous about investing in Botswana as they might be about putting their money elsewhere. Botswana is a democracy; it holds elections every five years. The rule of law is strong, and there has never been a civil war. These are all important advantages."
A further implication of the progress of the beneficiation efforts is likely to be that it will be keenly watched by neighbouring countries wishing to emulate it, both in diamonds other resources. The ability of Botswana to put pressure on De Beers to agree to move the DTC's operations to the country and on diamantaires and jewellery makers to set up plants is likely to have implications throughout the region, said the analyst. "Diamond producers such as South Africa, Angola and Namibia will be watching how successfully the beneficiation programme progresses. It's likely that Zimbabwe will also be monitoring it as well. Now that the Kimberley Process has approved exports of diamonds from Marange, Zimbabwe has the potential to mine millions of carats annually."
Indeed, South African diamond industry analyst James Allan of Allan Hochreiter even went so far as to say that the inevitable expansion of the Botswana diamond industry would have a hugely deleterious effect on his home country's diamond business: “In the long-term these developments in Botswana are going to kill the South African cutting and polishing industry," Allan commented.
His comments were largely echoed by Rockwell Diamonds CEO James Campbell who told miningreview.com that Botswana will assume a dominant position because of the high volume of diamonds that will be made available to diamond manufacturers in the country, as well as the ease of doing business in the country. “The best place in the world to go for rough diamonds in the future is going to be the diamond hub in Gaborone, where you will get access to Botswana’s diamonds as well as production from other countries," he added.
"Further afield, South Africa has huge gold and platinum mining operations. Might the authorities decide that it should be beneficiating those metals locally. In a similar way, Angola is developing its oil industry. Might it be encouraged by what will happen in Botswana to demand that oil companies refine more of the oil locally and sell it from Luanda? The ball is rolling now and developments can be difficult to foresee, but there's no doubt the implications will be substantial."
