Diamond Beneficiation – Subsidizing the Living Dead

 

Earlier this year Mr Obeth Kandjoze, the Namibian Minister of Minerals and Energy very publicly tore strips off what remains of Namibia’s diamond beneficiation companies. It was a dressing down that the industry richly deserved. The office of the Diamond Commissioner indicates that only about 20 percent of the total beneficiation sales made by the Namibia Diamond Trading Company (NDTC) during 2016 was processed locally.

 

The Minister said  “We do appreciate the need for a flexible business environment that allows you to manage your Namibian business in a sustainable manner. However, the practice of exporting in some cases 100 percent of rough diamonds meant for beneficiation purposes is in our view totally against the spirit of beneficiation and I would like to put it on record that we condemn the continuation of this practice in the strongest terms,”

 

Namibia has allocated US$ 430 million ( to the 11 so-called diamond beneficiation firms)  that operate out of tax free zones in the country. This amount is supposed to be increased annually. So why are they selling their diamonds and not cutting them? The answer is simple enough. One of the prime reasons for being a De Beers (or NDTC) site holder is you get diamonds. But you can buy those same diamonds on any exchange whether it is Antwerp or Tel Aviv or Dubai so why buy from De Beers? The answer is simple – the De Beers prices are below the prices that these diamonds are exchanged on the secondary market. Diamonds are no different from any other commodity, they are cheaper at source. How much cheaper?  In a normal market, and the last couple of years  has not been a normal market you can flip a De Beers box for a normal gross premium of 8-10%. In good years it is much higher but in the last few years it was actually negative and site holders were losing money and walking away from their  allocations.

 

The main incentive for locating a factory in Namibia is that you get an extra allocation that is less than those normal De Beers site holders get and so the gross return the industry can make from just flipping the annual allocation of $430 million is between $30-40 million.  But the alternative is that they can set up a factory, some legitimate others mere ‘Potemkin factories*’, and cut stones here but it is far more profitable to flip the whole box or send it to a factory India for cutting where cutting costs are much lower.

 

In actual fact according to normally reliable sources in De Beers only 5, and industry sources suggest it is only 3, of the 11 firms operating in Namibia actually do any cutting at all. Yet under the  new policy which was announced by NDTC all of these 11 firms, even the ‘non-cutting, cutting’  firms will be rewarded by a minimum allocation of a minimum supply level of US$15 million ( $N200 million). The stated objective is to start all local diamond cutting and polishing factories off at a level of supply that ensures reasonable viability and sustainability.  Presumably this reward is because of their stellar performance of some of these firms in doing nothing for Namibia in the past. No doubt the new Diamond Commissioner will say she will monitor these firms.

 

If you speak to these firms some will tell you the reason that they do not beneficiate is they are not allocated the right type of diamonds for the purpose of cutting in Namibia. They can only make a profit from the larger  stones. De Beers on the other hand will tell you that they give allocations specifically tailored to the needs of the firm.

 

If one looks at the trade figures for polished diamond exports it tells a very sorry story of decline. Exports from Namibia of cut diamonds have halved over the last three years from N$1.7 billion in 2014 to N$875 million last year. Diamond beneficiation is in free fall.

 

Ironically last year the government of Namibia and De Beers gave the diamond cutting industry  a fabulous concession that amounts to a massive subsidy. In 2016 Namibia decided to give all its special stones i.e those stones above 10.8 carats that come from Namibia to be cut and polished by local firms. This is literally giving the local beneficiation firms the crown jewels. These huge diamonds are geological rarities (most diamonds are much less than 1 carat) and are enormously valuable but are amongst the most difficult to value. The government and De Beers need to assure close supervision of firms to make sure they are simply not ripped off by some of the firms in the cutting industry. According to  industry sources De Beers  is selling these special stones to local cutters at their  polished prices which decreases the profitability of the cutters. Access to these special stones is something the diamond cutting firms in Namibia have long sought but few of the 11 firms have the slightest technical capacity to cut diamonds of this size in the country. Some have been placing advertisements in the local paper to get local cutters ( almost none exist) with such experience in preparation for importing these cutters from Europe. Traditionally diamonds that large were sent to Antwerp, New York or Tel Aviv for cutting by an expert given that with a diamond that valuable you do not want a relative amateur doing the job. 

 

Just three years ago when the guru of the diamond industry, Chain Even-Zohar published in  Diamond Intelligence Briefs an article stating that the reason why these firms were locating in high cost Botswana and Namibia was because they were getting a  cross-subsidy from De Beers in the form of an occasional  special stone. At the time the De Beers spokesperson strenuously denied that this was happening, Now it is not just an occasional stone but policy.

 

The response of the demise of the industry in Namibia has been ever more subsidy. This is akin treating someone with a congenital skin condition with cosmetics. It is merely treating the symptom and not the cause, which is the lack of competitiveness.  As things stand at the moment we cannot possibly compete with the Indian goliath which has 800,000 people cutting diamonds, half of which originate in Africa.  To solve Namibia’s competitiveness problems is very hard work and very politically unpopular and hence there is no appetite amongst government officials to deal with this problem. They know the political and economic constraints. If you are a high bureaucrat and you try and fail to implement such a painful policy then your name will forever be associated with that failure, so why even try because failure will end your career. And so instead the nation fails to implement hard but necessary policy.

 

These are the views of Professor Roman Grynberg and not necessarily those of UNAM where he is employed.  *In the 18^th  century Count Grigory Potemkin, Prime Minister of Russia reacted to Empress Catharina  terrifying desire to ’see how the peasants lived’. He  built a village with fake fronts of  peasants houses  with happy dancing girls along the banks of the Dnieper River and moved it as the Empress proceeded to Crimea.