Region fails to cut it in diamonds

For the past year Botswana, Namibia and South Africa have seen their dream to cut and polish their own diamonds evaporate like a mirage on a hot October day in the Kalahari.

In Namibia last month, Laurelton Reign Diamonds, a joint venture between Namibian Reign and New York-listed Tiffany and Co, closed its doors with what was reported to be the loss of 160 jobs.

A string of retrenchments and closures in Botswana, which has the region’s largest diamond deposits and cutting labour force, were reported earlier this year. In August Diacore retrenched 50 employees and Teemane, one of the oldest cutters, shut its doors in Serowe early in the year.

“Yes, we are retrenching. We do not have any plans to shut down our operations and we are financially stable,” said Diacore’s managing director, Kfir Teichman.

In South Africa, the Zlotowski’s Diamond Cutting Works, a subsidiary of Chow Tai Fook of Hong Kong, recently closed its operations.

Everyone is looking for someone to blame.

Five weeks ago, James Lorimer, the Democratic Alliance’s spokesperson on mineral resources, waded into the diamond beneficiation blame game and attacked the ANC government. He said there were only 200 diamond cutters employed in South Africa, down from 4 500 several years ago.

He offered three explanations for the demise of the country’s diamond- cutting industry. They were the passing of the 2007 Diamond Second Amendment Act, which the diamond industry loathed, high labour costs and a government that does not listen to the private sector.

It is a classic case of being right but missing the point. There is no doubt that labour costs are higher in South Africa than in Botswana and Namibia.

The situation of diamond-cutting firms closing is common to all three Southern African countries that have set diamond beneficiation as part of their national trade and investment objectives, and all three are failing.

They view the 800 000 people cutting diamonds in India’s biggest export industry with a combination of envy and anger because Southern Africa is providing the raw materials for the prosperity of others.

More than half the diamonds in India are African.

But dollars speak loudly and, because the price of rough diamonds was pushed up by De Beers over the past few years and gross margins in the middle of the diamond value chain became even thinner, the future of beneficiation became clear. The cutters, with no reason to stay and no cost of exiting, did what any firm does in such a market – they shut their highest cost operations in Southern Africa and shifted production back to Asia.

The three Southern African countries did nothing to make diamond beneficiation attractive. What was needed was active government industrial policies to work to lower operating costs. It should have been implemented five to 10 years ago.

What is not widely understood about the diamond value chain is that De Beers has a multibox marketing system that facilitated this beneficiation disaster. When De Beers sightholders (customers) want to buy diamonds, they can get a local box but must beneficiate in Southern African country or an international box that can be cut anywhere. But in a diamond market that is going into decline, there is no 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.

Former Namibian president Hifikepunye Pohamba was reported to have said that if firms in Namibia did not process their diamonds in that country they would lose their licences. But nothing was done because Namibia could not do without Botswana’s co-operation. The closure of high-cost plants in South Africa, Namibia and Botswana became almost inevitable.

The reality is that the governments, like the diamantaires, know the money in diamonds is to be made in trading and not in cutting, and they prefer their trading arms to the cutting factories – and in the case of Namibia enjoy a tax-free status.

In Botswana, those who buy diamonds from De Beers are supposed to beneficiate them in the country, but those who buy from state-owned Okavango Diamonds are not required to.

Until Namibia, Botswana and South Africa tell De Beers that if a sightholder walks away from their Namibian or Botswana box and stops beneficiating those diamonds in Southern Africa, they will lose access to the international box, beneficiation in Southern Africa will remain a political pipe dream.

Roman Grynberg is at the University of Namibia. These are his views.

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