Diamond Beneficiation in Decline in Namibia and South Africa and Stagnant in Botswana

Diamond Beneficiation in Decline in Namibia and South Africa and Stagnant in Botswana

The wages of diamond cutters in Botswana and India are not  dissimilar yet in India there are 800,000 cutters and in Botswana only 3,750. The difference between the two countries stems largely from the productivity of workers. De Beers in its 2014 Diamond Insight Report has said that the cost of cutting in 2013 ranged from $60-120/ct in Botswana while in India the range varies from $10-50 per carat. In other words in the smaller diamonds, Botswana is six times more expensive than India and for the larger more expensive stones, it is almost three times as expensive because of low productivity, low cost of ancillary services as well as the number of working days in the year - 232 in Botswana  as opposed to  over 280 days  in India.  That is the reason that Botswana is limited to commercially cutting stones of one carat rough and above.

The only bit of good news is that at the top end Botswana is becoming a slightly cheaper place to produce than was the case five years ago. But the other two smaller southern African diamond producing countries which are trying to beneficiate diamonds ie Namibia and South Africa are actually more expensive locations than Botswana and it is for that reason along with the supply of rough and what the industry considers draconian beneficiation requirements etc. are also very important issues here) that employment in South Africa has almost halved in the last five years in diamond cutting from 1,800 workers in 2008 to 1,000 in 2013. The situation in Namibia is almost as bad with employment falling from 1,500 in 2008 to 970 in 2013. In other words, with the exception of Botswana diamond beneficiation is going backwards in the main producing countries of Southern Africa. Indeed the costs of cutting in both Namibia ($60-140/ct) and South Africa (130-150/ct) are higher and tend to be rising faster than in  Botswana.  But the increase in beneficiation and the increase in employment is mandated under a 2006 agreement between De Beers and the Government of Botswana.   

If the world’s ‘diamantaire’ had their way no cutting or polishing would occur in Botswana and Southern Africa at all. The answer as to why cutting occurs in Africa is as De Beers politely puts it in its publication because of ‘government policy’. In other words if you are a De Beers sightholder and you want Botswana or Namibian or South African rough diamonds then you have to process some of them here. How much? So far the answer is not very much at all. In 2013 about  23 million carats of rough were produced in Botswana and if the Statistics Botswana figures are to be believed the total volume of polished exports was a mere 273,000 carats in 2013. Assuming it takes 2.5 carats of rough to produce 1 carat of polished diamonds Botswana is in effect exporting 3% of its rough produce. While the value of cut diamond exports has been rising from Botswana the volume of diamond production has been more or less stagnant over the last five years of the De Beers agreement,  

At first the results of the efforts of diamond beneficiation i.e. 3% of production looks very unimpressive until you consider that because of the low productivity in Botswana and the fact that 80% of diamonds coming out of the ground are very small (ie less than 0.2 carat) most diamonds have to be processed in low cost centres like Mumbai and Surat in India where there are 800,000 Indians working cutting diamonds. Jewellery and cut diamonds is India’s biggest manufacturing sector and it exists because the Indians have been able to produce cut diamonds cheaply and because they have access to Africa’s diamonds. The Indians emphasize the former and ,dangerously,  tend to take for granted the latter.

The employment numbers, costs and the general direction of beneficiation are not encouraging in Namibia and South Africa. In Botswana the results are better but require a real reassessment by all governments as to what is being done throughout Southern Africa. Both Zimbabwe and Angola also have serious aspirations to cut and polish diamonds as well. The failure of diamond beneficiation is a direct result of the failure of industrial policy to address the fundamental issues of productivity in these infant industries. In Botswana for example there is not even a diamond school to train cutters and polishers who have been trained by individual firms in the industry. But a school is the least of the issues. It is necessary to come to terms with workers and unions on the productivity issue or the potential benefits of diamond beneficiation will be lost to India permanently. Industrial policy in Africa has helped to create infant industries but has rarely if ever had sufficient focus on the boring, expensive and very ‘un-sexy’ issues of nurturing the infant industry to become globally competitive.

Often there is contradictory policies that serve to weaken beneficiation. On the one hand governments want beneficiation but in the case of Botswana they also want diamond trading independent of De Beers so the buyers from state owned Okavango Diamonds which currently sells some 13% of national production is exempted from the beneficiation obligations and its buyers can simply take their diamonds elsewhere for cutting. This figure is set to rise to 25% over time. Many diamantaire reason - why buy from De Beers and be forced to operate an inefficient factory in Botswana when you can buy from Okavango or Lucara and  just send your diamonds to India for cutting. The thinner the profit margins for cutting become the more the complaints mount from De Beers siteholders. But it is one thing to complain, quite another to give up a secure De Beers site which assures constant supply of diamonds for  profitable Asian factories.

The unfortunate response of some policy makers to the low productivity and stunted development of this infant industry, is as so frequently the case, to merely look for more value added activities such as jewellery making rather than doing the hard graft of addressing productivity issues in the cutting and polishing industry. This involves working with firms and workers to develop appropriate ways of addressing the productivity and cost issues which in turn involves money which governments are unwilling to provide. This is the hard tedious work of day to day industrial policy and there are no simple or pat answers to raising productivity and becoming internationally competitive but if successful it is an activity that could create employment for tens of thousands of African workers.   

But perhaps the most difficult and useful question is how do you deal with the unions and the workers? If you listen to some of the employers they simply wish the unions would go away and they be allowed to increase productivity and take all the increase in profits. Such an approach is unworkable and what is needed is a way of assuring that part of any increase in productivity goes to the workers Without such a productivity sharing arrangement and a partnership between unions and employers,  industrial policy will not work in the diamond cutting sector.  

From a short term perspective the best outcome would be exactly what the world’s diamantaire expect, that the infant African industries will go into terminal decline, as appears to be the case already in Namibia and South Africa, and India will resume its ‘rightful place’ as the natural home of diamond cutting and polishing of Africa’s diamonds. In Africa this outcome will be a political disaster and no thinking ‘diamantaire’, whether Asian or European should wish for as the complete failure of beneficiation as it may well prompt a knee jerk inward looking reaction from African governments when it comes to dealing with diamond trade.

These are the views of the author professor Roman Grynberg and not necessarily those of any institution with which he may be affiliated

 

 

An OPEC for Diamonds- Could it Work?

Would a  ‘cartel-lite’ or ODEC for Diamonds work?

If HE. President Khama’s recent state of the Nation address is anywhere near correct then diamond production in Botswana  will continue at globally significant levels until at least 2050. Industry sources suggest that Botswana’s  production at the main mines at Jwaneng and Orapa could, in theory, continue at similar levels to 2050 but this ultimately will depend on prices and the costs of extraction. Given the P25 billion in expansion announced by Debswana in Maun last week costs of extraction will no doubt rise and while production may continue government revenues will surely decline. The obvious question is whether there is another  way that Botswana  and other diamond producing countries can delay the decline in revenue for at least a few more years.

According to the estimates presented by Dr Rob Davies from Zimbabwe recently at a conference in Gaborone there is scope for Botswana to  have a ‘gentleman’s agreement’ with other major producers to  slow production of diamonds even further than has been the case. With diamonds as with other commodities the only problem in the market is to find a gentleman with whom you can have an agreement.  In what is probably the first public estimates ever it was found that a 1% increase in price of rough diamonds will only result in 0.45% decrease in demand for rough diamonds. Unsurprisingly Dr Davies results show  that the demand for rough diamonds is what economists call ‘inelastic’ i.e. unresponsive to changes in price. This means that it is possible to decrease production and simultaneously increase profits and government revenue at the same time because consumers will not stop buying. Dr Davies estimated that 25% decrease in production would eventually yield a 16% increase in government revenues. 

Planned Contractions?

It was certainly noticed by the International Monetary Fund in its recent 2014 publication on Botswana that the country has become the ‘swing producer’ in the world diamond market. This is in fact not strictly the case and while Botswana is by far the biggest producer in the De Beers  zone i.e Botswana, Namibia and South Africa all have undergone significant decreases in production since the onset of the ‘Great Recession’ which began in 2008. Production was dramatically cut in Botswana from the 30 Mct plus production which was common before the economic crisis to much more modest levels. In 2013 production was a around 23 Mcts.  But the decrease in supply from the De Beers zone in the post 2009 period  was helped by the natural decline of diamond production in what were previously substantial low value producers like Australia. If the Kimberly statistics are to be  believed, then total world production of diamonds peaked in 2005, long before the Great Recession,  at 176 Mcts and declined sharply during the recession but has never recovered and in 2013 was 130 Mcts or 26% off its peak.

 But while Botswana diamond production went through the most dramatic of decreases simply because it was the largest producer in the De Beers zone, similar patterns of decreasing diamond production were experienced in Namibia and South Africa. Irrespective of the origins, the decline in production has given rise to  some of the most spectacular price results seen in the rough diamond market for decades. Unit export values for Botswana rough diamond rose at the their fastest rate since the early 1980’s. This is hardly what economists expect; for prices to rise so rapidly during one of the most sluggish periods of  economic growth on record since the great depression of the 1930’s. And yet what it took was simply an act of restricting supply to the market in a perfectly legal way ie. by keeping the stones in the ground. Part of the observed  decline was of course the natural decline of diamond mines in Australia and other locations.

No gentlemen in diamonds?

So could Botswana and other diamond producers limit production even further to increase returns? In theory yes, but in practice there are several caveats. Any further restrictions in supply and increases in price could result in even greater incentives to substitute, often illegally, synthetic diamonds  which are undetectable to the naked eye for mined diamonds in the production of jewellery. The anecdotal evidence, despite what some of the diamond bourses want to believe, is that  nefarious penetration of the diamond market for smaller stones is already occurring in a significant way. While global production  is declining China is now the world’s biggest producer by far with no mines to speak of and production estimated at around 6-10 billion carats of industrial diamonds.

But even if the world’s’ diamantaires’ are  even willing or let alone able to  keep the synthetics out of the value chain for a few more years there is the perennial problem of any such ‘cartel-lite’ approach to managing the diamond markets – it is the problem of chisellers.  A cartel whether light or heavy version like the Central Selling Organisation  run by so successfully by De Beers until fifteen years ago,  is that they are like a marriage between pathological philanderers where the parties want the marriage but everyone wants to cheat ie, chisel on their partners. The nice thing about diamonds is  that  mined diamonds are really scarce in nature and hence the possibility that when the countries inside the tent decide to cut production that someone outside will just ramp up production as happens so frequently with OPEC and the oil industry is just not there… well at least not entirely.

No Russian Free Riders – Bring Putin in!

Russia has for the last several years just kept its production relatively static but being the world’s largest producer by volume  any agreement to keep the diamonds in the ground would need an agreement between Russia and Botswana at very least. Together Russia and Botswana make up some 45% of global production.  Including Namibia and South Africa would strengthen the arrangement and bring the share of world trade to 55% but the real interlopers at the margin are Zimbabwe ( 10mcts in 2013), Angola(9mcts) and DRC (15mcts) which are significant diamond producers but whose borders are so porous and whose regulatory systems are so opaque that any agreement by them to restrict production would be of  no commercial value.  Even though promises  about output levels from these countries are virtually meaningless it is important that if such an arrangement is ever developed that they are inside rather than ‘outside the tent’.  The only other producers of any significance Australia (11mcts in 2013)and  Canada (10.5 mcts) would almost certainly never agree to join such an arrangement.

A production restricting ‘cartel lite’ arrangement that focused on the larger diamonds( i.e. grater than melee size ,0.2 carat)  and an agreement to limit these rarer but more valuable  stones may have a significant effect on the market and would not require De Beers, Alrosa or BHP-Billiton to involve themselves in what would, at a commercial level be an illegal cartel, that would result in legal action by both the EU and the USA. However, this  would be a perfectly legal inter-governmental agreement to conserve a scarce resource which all countries have the right under WTO rules to do.

An obvious threat to such an arrangement would be new entrants e.g. like the diamond discoveries in Zimbabwe over the last decade. However, new and significant  discoveries of diamonds are actually quite rare and the industry consensus is that  few major additions to mined supply are expected.

The final possible threat to this sort of arrangement might come from the ‘grand diamantaire’ -those billionaires further down the value chain, who because of their own diamond stocks and massive financial resources were able to destabilize the De Beers control of the diamond market in the early 1990’s. At the time De Beers cartel was able to discipline anyone who got in their way. But those days are now long gone and these ‘grand diamantaires’  must constitute the most serious threat to any supply restricting arrangement. Could they successfully destabilize the market as Lev Leviev did in the 1990’s. If Botswana and Russia were to co-operate then the answer is probably not. 

For Botswana this arrangement might work to delay the inevitable decline in diamond revenues for five or ten years. But in diamond deals  there are no sure thing and whether an ‘ODEC’ (Organization of Diamond Exporting Countries) that keeps diamonds in the ground succeeds would have a good deal of luck involved- as is always the case with diamonds.

These are the views of the author and not necessarily those of any institution with which he may be affiliated.