Botswana polishes its prospects
South Africa attempted and failed to domesticate a large part of the sorting, cutting and polishing and create a large diamond beneficiation industry.
Under its recently completed sales agreement with De Beers, Botswana has obliged the marketing arm of De Beers Diamond Trading Company to move its selling functions from London to Gaborone. A revolution in global diamond marketing and processing is taking place that will see the diamond industry literally go south.
The question being asked is whether it and Namibia, which also has a beneficiation programme, will succeed in creating a sustainable industry. Most observers see Botswana, with its massive remaining reserves, as the only Southern African Development Community country that will be able to develop anything resembling a sustainable downstream diamond industry.
Diamonds are a business in which the big profits are made at two points in the value chain. The first is at the mine gate and some of Botswana's mines are among the most profitable in the world. The south-central Jwaneng mine reputedly produced a dollar of diamonds for 10 cents at its peak.
The second part of the value chain in which serious money is made is at the retail end where the besotted husband-to-be parts company with what has become an obligatory price of two to three months' salary to demonstrate to his love that, despite the depressing divorce statistics, his feelings will indeed last forever.
The cutting and polishing of rough diamonds is simply not a profitable part of the value chain and that is why the big four diamond miners, De Beers, Alrosa, BHP-Billiton and Rio Tinto, generally leave the cutting of stones at the bottom end of the market to Indian cutters from Surat and increasingly competitive firms in China and Thailand, where workers are frequently paid a pittance. India is reported to have about 500 000 people employed in diamond cutting and polishing and has made its name on being able to cut stones that were once considered too small and of too little value to bother.
At the top end of the diamond market, where large and valuable stones are processed, cutting is done in high-cost locations such as Antwerp, New York and Tel Aviv, which have the technical expertise.
Botswana, and to a lesser degree Namibia, fits into the middle, processing expensive but not top-end diamonds.
Until 2000, none of the big miners were interested in the retail end, but following the formal end of the 80-year-old De Beers diamond cartel in 2000 after a tumultuous decade of blood diamonds, anti-trust suits in the United States and the European Union, rising competition from new producers and an increasing difficulty in controlling all its "sightholders", as buyers are called in De Beers- speak, the company abandoned the cartel arrangement whereby it would in effect buy any excess diamonds to maintain market price. It then adopted its so-called supplier of choice strategy, which its sightholders irreverently dubbed "supplier of no choice".
De Beers also partnered with LVMH Moët Hennessy Louis Vuitton and headed for the top end of the retail market as part of its new strategy. It opened diamond shops in the most expensive locations around the world and started trading branded diamonds in its own name. It is said that this end of the value chain can be as profitable as mining, but De Beers, the only diamond miner to have gone into retail, has never made as much from retail as it initially expected.
<strong>Weakening market position</strong>
Until 2 000 almost no processing of diamonds took place in Southern Africa, because De Beers strongly opposed it and argued that cutting should happen where it was most profitable. But with its weakening market position and the advent of its supplier of choice strategy, the company needed to curry favour with its African suppliers and reversed its policy to become a vocal supporter of local beneficiation.
For Botswana, beneficiation of its diamonds is a long-standing policy objective of the government and the product of a decades-long struggle between different views of government and policy. The government has successfully managed to create an industry of more than 3 000 employees based on the cutting and polishing of what have been wrongly considered its diamonds.
Yet neither Botswana nor its smaller diamond-producing neighbour, Namibia, cut and polish their own diamonds. Sightholders receive an allocation of diamonds based on several criteria, one of which is their commitment to processing those diamonds in-country. But the boxes or "sights" are an aggregation of diamonds from all De Beers mines or mines in which De Beers is a partner. Therefore, a Namibian cutting firm supplied by De Beers cuts diamonds from Botswana, Canada, Namibia and South Africa.
In 2011 Botswana exported 4.9-billion pula (about R5.3-billion) in processed diamonds. Although it is still a small fraction of total diamond exports, it is by far Botswana's single largest manufactured export. The exports of unprocessed diamonds were 25-billion pula in 2011, so the cutting and polishing industry still has significant room for growth.
Diamond sightholders prefer their diamonds rough so that they are able to process them wherever in the world is most profitable, but given a choice between a regular allocation of diamonds from the Diamond Trading Corporation and thus processing a part locally, or buying from other suppliers or on the secondary market, most of the sightholders will simply accept the relatively high cost of processing to procure a steady supply.
Botswana is working to lower the cost of processing, but no one is under any illusion that either it or Namibia are cost-competitive with Asian cutters and polishers. What sightholders do is take a portion of their allocation – about 20% – that is not economical to cut profitably locally and send it to their Asian subsidiaries.
It is frequently asked whether Botswana's model is sustainable. Revenues from known diamond mines will go off a cliff in 2027 or thereabouts. This is not because large-scale mining of diamonds will end, but rather that costs will have risen substantially at existing mines and most revenues come from profits, not taxes.
Relatively large-scale diamond mining and, by extension, cutting and polishing will continue in Botswana until the late 2030s at least. Thus Botswana basically has an entire generation to make the cutting and polishing industry more profitable by raising productivity and lowering costs.
Diamonds are forever, as the celebrated De Beers marketing slogan goes, but diamond cutting and polishing is not. After 25 to 30 years of processing, the Botswana diamond industry will either stand on its own, or the country will adjust and move on to new industries. The coming decades of processing will create new skills, industries and enterprises that will mean either Botswana will develop a competitive industry like India, or be forced to exit. In either case, the diamond cutting and polishing industry will have played a vital role in transformation.
<em>These are the views of Professor Roman Grynberg and not necessarily those of the Botswana Institute for Development Policy Analysis where he is employed.</em>