De Beers
As South Africa's contributions to the world's diamond trove continue to dwindle it is impossible not to contrast its fortunes with those of its neighbour, Botswana.
Whereas the percentage of the world's diamonds produced by South Africa has fallen to 12%, by value, the latter is now the world's largest diamond producer, with a growing beneficiation strategy.
De Beers, which controls 40% of the world's diamonds by value produced, has moved all of its sorting and diamond trading from London to Gaborone.
The move, which will boost Botswana's beneficiation sector even further, means that all De Beers's buyers, largely from the United States, Israel and India, where the bulk of jewellery is still being made, will commute every five weeks to select and buy diamonds.
Botswana achieved this by completing a sales agreement with De Beers that gives the company the rights to some of the world's best quality diamonds for the next 10 years.
David Prager, global head of corporate affairs at De Beers, said it's a good example of a strong 50-50 public-private partnership, which creates a benefit for De Beers and Botswana, and ensures "that Botswana gets to keep much of its resources in the country".
No recovery
The South African diamond industry has never really recovered from the 2008 economic slump, as declining production and sales figures from the department of mineral resources clearly show.
In 2011 South Africa was ranked fourth in the production of diamonds, despite the Southern African region producing 60% of the world's supply of the gems. Ahead of South Africa are Botswana (27%); Russia (19%) and Canada (18%). Angola follows South Africa with 8%.
Annual diamond production in South Africa has decreased since 2005, when it peaked at 15.7-million carats, to seven million carats in 2011. The latest figures from the department of mineral resources indicate that 2012's figures, which are yet to be released, will be about 7-million carats.
Reports of a depressed global diamond sector suggest that the South African industry is likely to face reduced demand for a while yet, and at least in 2013. The United States, which is the biggest consumer of jewellery worldwide, is only starting to come out of the doldrums now.
The International Diamond Exchange said global polished sales dropped to $20-billion from $22-billion and rough declined to $15.5-billion from $18-billion the previous year.
It estimates that in 2013 polished demand will grow by 10% to $22-billion. "The best thing about 2012 is simply to forget it ever happened," the exchange said recently.
Challenges
The downturn has presented a number of challenges that will determine whether South Africa retains or increases its share of the diamond market in future. The diamond manufacturing sector, which forms a key part of the government's beneficiation plan, has decreased dramatically in size. In just three years it has gone from 3 000 polishers to about 300.
Ernie Blom, head of the diamond council representing the manufacturing sector, said: "The polishers we have left are highly trained, but they are from the older generation and they will soon be gone."
Blom, who gave the gala address two weeks ago at the Kimberley process meeting that is tackling the problem of conflict diamonds, said the drop followed the 2008 economic slump.
It seriously burned the oversupplied diamond industry — from retailers to manufacturers — and the resulting cutbacks meant the positions of polishers lost then were never filled.
On top of this, there is no structured training plan for new polishers to get them to the required levels, Blom said.
India, which realised that cutters and polishers who were laid off when the economy slowed down did not return when there was an upturn, opted to retain nearly 800 000 workers despite difficult trading conditions.
It has made use of demand for the smaller industrial diamonds to keep its industry going and its cheaper labour costs make this viable.
Major stumbling block
In the South African diamond sector the legislative and operating environments are cited repeatedly as being a major stumbling block to the growth and development of the sector.
It is too expensive to spend time cutting smaller, poorer quality diamonds, and most local diamond cutters cut larger diamonds or import diamonds for jewellery.
Blom said: "A fair portion of diamonds is imported for cutting and polishing and South African manufacturers have to pay 40% value-added tax on those diamonds. This means they carry the costs for three to four months and this does have an effect on their competitiveness.
Petra Diamonds chief executive Johan Dippenaar believes that current legislation in South Africa favours larger companies, citing standards for equipment, red tape and labour issues as just some examples.
He said this makes it hard for smaller entrants, "such as we once were", to infiltrate the market — which he believes is important for the future growth of the South African diamond market.
"The country would see a much more natural progression if we could keep working at the problems we are seeing and, of course, wages in mining have seen much high increases than wages in other sectors," he said.
"At the moment it's all in favour of the big guys, and this can make the big companies lazy and uncompetitive, and I am not talking here just about South Africa or the diamond sector, but worldwide."
Drop in employment
Data supports Dippenaar's position. Employment in the diamond mining sector dropped from about 18 000 in 2008 to about 12 030 in 2011. The wage bill did not, with about R2.1-billion paid for salaries in 2011 — similar to the 2008 salary bill.
Because diamonds are often situated in large deposits, the sector requires less staff than a gold or platinum mine and tends to be more mechanised. This could be why it has remained largely unaffected by the labour unrest that has plagued other mining sectors and this is one advantage for investors.
Minister of Mineral Resources Susan Shabangu appears to have taken note of the criticism raised by the sector. In her budget speech on May 28 she admitted that legislation had hampered the development of the diamond sector and that the government planned to do something about it.
"Since the introduction of the Precious Metals Act and the Diamond Act, as amended, the benefit of jurisprudence has highlighted significant shortcomings during implementation of the Acts, both of which have experienced reversal of transformation and decline in beneficiation activities relating to jewellery manufacturing," she told Parliament.
"It's our intention to review both Acts in order to maximise the beneficiation of precious metals and diamonds, the developmental impact as well as transformation in general in the subsector."
The Diamond Act, which introduced requirements that South African mines need to make 10% of their run of production available to local manufacturers, is not considered to have made a significant contribution to beneficiation.
Cause of failure
The chief executive of the now liquidated state-backed diamond beneficiation firm African Romance, Mohseen Valli Moosa, in January attributed his company's failure to, among other things, the failure of the State Diamond Trader — which was set up to source diamonds for manufacture from the 10% run of diamond mines — to supply quality diamonds.
The State Diamond Trader, which is meant to source diamonds for the manufacturing sector, has reported a loss of R1.7-million in the year to May 2013, sparking calls by opposition parties in Parliament for the business plan to be reviewed.
The trader, which has R50-billion revolving credit from the Industrial Development Corporation, anticipates a R14-million loss for the financial year to 2014.
The high cost structures in the South African diamond sector also made it more expensive than that in India and China.
Solutions to high prices include removing VAT on imported diamonds and creating industrial development zones, as China and India have done. South Africa's plan to create a secured supply of diamonds for local manufacture has also run into trouble.
A senior figure in the diamond sector, who did not want to be quoted for fear of retribution from the government, said: "The problem is that the legislation should not have been left in the hands of a government department like mineral resources, because they only focused on access to diamonds and that is only one of the issues facing the sector. Departments such as treasury and finance should also be involved to look at ways to make the diamond sector more competitive."
Dollar-trading accounts
Blom said that while the government reviews the sector, it should consider allowing manufacturers to have dollar-trading accounts, to reduce the volatility being experienced in the rand-dollar rate.
"This would also assist the manufacturing sector greatly," he said.
Trade and Industry Minister Rob Davies announced in April that research into the sector had been commissioned.
Blom said it's important that this process is consultative and that business is able to contribute in a meaningful way.
It is understood that Dr Paul Jourdan, one of the co-authors of the ANC's controversial State Intervention in the Minerals Sector policy document, was commissioned to conduct this research. Jourdan believes that South Africa can no longer be a country that digs out its resources, but needs to benefit from the end result.
It's unlikely that polishing and cutting will bring in the big money. Value chains suggest that the bulk of the money is made at the mine gate and at the retail end, where the jewellery is sold.
De Beers's immediate forecast for the sector is one of slow growth. In a financial statement in December last year, it said it had produced 14% less in this last financial year than in 2011, but believed that there would be diamond price growth in 2013.
Local firms adamant industry hasn't lost shine
While South Africa is going to have to work hard to increase its beneficiation and job creation opportunities, De Beers and Petra Diamonds are very positive about prospects for increasing diamond production in the country.
Johan Dippenaar, chief executive of Petra, said: "South Africa is by no means a sunset mining destination." This is significant because Petra has the bulk of its operations in South Africa.
Philip Mellier, De Beers chief executive, said his company is actively exploring South Africa to look for "elusive and economically viable mines of the future" by revisiting its historical mining data. Provinces being explored include the Northern Cape, Limpopo and the Free State.
De Beers currently makes 40% of its diamonds mined here available to South African clients.
"The challenge to increase the beneficiation of diamonds and increase the number of jobs in diamond-cutting ultimately comes down to profitably cutting lower-cost rough diamonds by being competitive in a global sense — achieving that is the best protection for our economy and that is an unavoidable fact of life in a global economy," said Mellier.
While larger companies can absorb losses, Trans Hex — citing a 20.4% decline in South African production, slower sales and discontinued operations in two Angolan mines — reported that earnings were down by 59.3%. The company saw an R85-million profit, against its last annual R208-million profit.
Adding to its woes is uncertainty about whether the South African government will sell its stake in Namaqualand Mines to Trans Hex or distribute it to the local community. The department of mineral resources did not respond to questions posed to it on the sector.
Dippenaar said that Petra, which bought a number of De Beers's older mines, believes that if things are changed properly there will be improvements. "I believe there are still lots of opportunities [here]."