Will Government Allow the Diamond Cutting Industry to Perish?

Will Government Allow the Diamond Cutting Industry to Perish?  

 ‘Diarough which owns Teemane in Serowe, will continue to operate its Bhopal factory in India as well as its factory in Thailand and neither they nor De Beers  will suffer the consequences of the job losses in Botswana.’

For the diamond cutting industry the news last week could hardly have been much worse. In January the press reported that MotiGanz and Leo Schachter had laid off 150 workers. Then last week a bombshell was dropped at Teemane Manufacturing Company  owned by Diarough would close with the loss of some 320 jobs in Serowe. This is the bigesst employer in the village of Serowe and the consequences  will be felt for years to come and for what are probably around 2,000 people who are dependents of those employed in the industry. With a total reported employment in the diamond cutting and polishing industry of 3,750 in 2014 this was a massive retrenchment and will cause real pain to many thousands of low income Batswana. This is a time of great sorrow and pain in many households in Botswana. 

Low Productivity and High Costs

In 2013 Botswana is reported to have exported P6.6 billion of polished diamonds making  it by far the biggest manufacturing exporter in the country. Two reasons are commonly given for the sudden rash of closures in Botswana’s diamond sector. The  first is quite correctly a structural one- Botswana, like Namibia and South Africa, is simply not competitive in comparison to low cost and high productivity locations like Surat and Mumbai where most of the world’s diamonds are cut. The second is the squeezed margins. Wages in Botswana are about the same as they are in India but the differences are in the  productivity. Indian cutters will produce 2-3 times as much as those in Botswana.  This is correct but not new and it has been well known since before the establishment of the industry in the 1990’s. The table below presents the costs cutting and polishing a rough diamond in various locations.  Botswana has become more competitive over time but it just cannot compete with India yet but it is a more competitive location than either South Africa or Namibia.

Cost of Processing in Botswana Compared to Other Diamond Cutting Centres

	Approximate Cutting and Polishing Costs (USD/crt)		Approximate Total Cutting and Polishing Jobs		Comment
	2008	2013	2008	2013
Canada	125	140(NWT)	300	50-80
		180(Ontario)
Botswana	45-125	60-120	2200	3750	Diamond producing countries gaining market on the back of
Namibia	45-125	60-140	1500	970	government policy, despite higher costs than traditional manufacturing locations
Belgium	120	150+	1000	150-200	Old cutting locations have lost share of manufacturing following
US	110	300	100	80-100	migration first low cost locations
South Africa	60-100	130-150	1800	1000	and subsequently to producer
Israel	47->55	140-->300	2000	400	countries
Far East	15-35	20-50	29,000	10,000	The trend of growth in low-cost
India	6-50	10-50	850,000	800,000	locations has recently started to reverse

Source: De Beers   2014 ‘Diamond Insight Report’ page 40    

 

Decreasing Rough-Polished margins

This structural lack of competitiveness of Botswana and the rest of southern Africa has meant that, despite growth in employment in Botswana over  the last few years,  they are now all ‘going  south’ in terms of employment in the industry. But what has changed to make it necessary to close so many factories and to lay off thousands of workers across the continent? As can be seen from the chart below since about July 2012 the margins between the price of rough diamonds and 0.5 carat polished diamonds have been narrowing. Even in good times it is said that Botswana’s diamond manufacturers are not  able to make a profit on diamonds that are much smaller than half a  carat polished. 

This narrowing of margins has given rise to some increasingly bad tempered exchanges between Mr Philippe Mellier, the CEO of the De Beers Group and the head of the International Diamond Manufacturers’ Association, Maxim Shkadov, who in January this year claimed that the margins of his members are close to zero. The diamond cutting industry has also fallen victim world wide to a limiting of bank credit to the industry which has made it even more difficult to operate.

…and a bad deal for Botswana and southern Africa

So gross margins are falling in the cutting industry and diamond manufacturers are closing their highest cost operations in Southern Africa. No surprises in any of this except for the fact that the deal that the Government of Botswana made with De Beers in 2004 and revised in 2011 specifically required diamantaire who were DTC (Botswana) sightholders to cut and polish in Botswana. Under this deal these sightholders would eventually get $800 million worth of rough to process here in Botswana. But these sightholders are not fools, they knew at the time that Botswana is a high cost  location, so why did they set up here ? Industry sources have claimed that in the past the DTCB sightholders would get thrown a ‘special stone’ by De Beers occasionally to compensate them for locating in Botswana.  These stones are multi-million dollar diamonds and the profits from one is often enough to compensate producers for low productivity in Botswana. De Beers strongly denied this at the time but now this practice has certainly come to an end. In 2012, the last year before diamond exports figures became confused with re-exports associated with aggregation, Botswana exported some $4 billion of diamonds.

If $800 million or so goes to DTCB sightholders what happens to the other $3 billion that Botswana produces? Well De Beers has many sightholders, 84 according to its web site of which some 21are in manufacturing in Botswana. The rest take their diamonds in what is one of the other four boxes i.e. Namibia, South Africa and Canada where some of these De Beers sightholders have beneficiation obligations. But a large chunk of all the diamonds produced in southern Africa go into what used to be called the  ‘London box’ which,  since the move to Gaborone is called,  an ‘international sight’. Therefore sightholders may get up to 5 boxes of diamonds  at the  Gaborone sights every 10 weeks. But the  so-called London or international  box can be sent anywhere for processing and so in a bear market for polished diamonds, such as is presently the case, the local manufacturers, many of whom have access to a London box, can simply close their factories in Botswana, lose access to their Botswana box but still continue production in India or China.

As Chaim Even Zohar, the guru of the diamond industry, pointed out in a recent statement on the 2004 agreement ‘There were penalties to be paid if the targets (of beneficiation) were not reached. In the current (2011) contract, I understand, the US$ value of local rough sales are still contractually agreed, but there is no agreed minimum employment level’. This was done to allow the companies to use highly automated machinery but will have effect of allowing these sightholders and De Beers to get off without the sorts of  fines in the earlier agreement.

Time to renegotiate the 2004 and  2011 agreement with De Beers?

What has happened to the diamond cutting industry is what economists call ‘regulatory failure’. The closure of the factories in Botswana would probably never have occurred if our agreement with De Beers had said that firms that do not beneficiate a portion of their sites in Southern Africa cannot have access to southern African diamonds … full stop. But instead we have created a complex marketing formula which made the cost of exiting Botswana in the current bear market very low indeed. The firms that closed their doors will continue to have access to Botswana’s diamonds. Thus in a sense the situation where De Beers was claimed to have ‘subsidized rough with rough’ has now been reversed … Botswana provides rough for Indian industry at the cost of our evaporating polished diamond industry. If we had an arrangements which said that only those firms operating plants in Botswana, Namibia and South Africa can have access to De Beers African diamonds the plant in Serowe would probably be open today.

Diarough which owns Teemane Manufacturing Company in Serowe, will continue to operate its Bhopal factory in India as well as its factory in Thailand and they nor De Beers will suffer the consequences of the job losses. Was this foreseen at the time the agreement with De Beers was signed in 2011? Almost certainly not – it was what economists call an ‘unintended consequence’ of the negotiated marketing system.  

Similarly Botswana has imposed beneficiation obligations on De Beers but at the same time we are exempting state owned companies like Okavanago or private ones like Lucara and Gem Diamonds from the same obligations. The buyers from these companies can take their stones and cut in India and so it is becoming easier and easier to get Botswana diamonds without any beneficiation. In this way government policy encourages diamond  trading but undermines our beneficiation efforts.

Policy Failure- Infant industries and Delinquent parents

Most of humanity enjoys making babies… or at least trying. The unfortunate consequence of success is some 20 years of nurturing an infant until it has reached a level of maturity and effectiveness in the world where it can stand on its own feet. That is the minimal definition of a good and fit parent. A delinquent parent abandons the infant at birth without paying the bills, taking the responsibility for proper nurture and assuring proper discipline and gets on with making even more infants. This is an unfortunate but nonetheless good metaphor for the history of industrial policy in Botswana and much of the region. Over 35 years Botswana has created many ‘infant industries’ as they are known in economics and they have almost all been abandoned at birth without the requisite hard work and money to make them work. What we know from the Asian experience of industrialization is that setting up the ‘infant industry’ is the sexy part of policy- but the expensive, boring and very unsexy part is spending the huge amount of money, effort and time and imposing the discipline to make your infant an effective and competitive adult. Most countries fail and that is why they do not develop.

I was reminded by a colleague that some eighteen months ago we attended a meeting between government, the diamond manufacturers association and the other stakeholders who met to form a diamond industry ‘cluster’. We talked about the need to improve productivity but  to the best of our knowledge, nothing ever happened. If Botswana continues to conduct industrial policy towards the diamond cutting and polishing industry in this manner then it will go the same way as the clothing industry and the automobile industry. We need to work with the private sector, the unions and spend what it takes to assure that our workers are effective and competitive. Industrial policy, like raising children, is not a free lunch. In the end diamond cutting must occur here in Botswana because it is a great place to do business but that is not today but may be the product of 20 years of hard work to create a developed competitive and vibrant industry.

In the meantime it is certainly time for Botswana, Namibia and South Africa to reconsider their agreements with De Beers and see  what can be done to assure that diamond beneficiation in Southern Africa occurs in the way it was intended. 

These are the views of Professor Roman Grynberg and not necessarily those of any institution with which he is affiliated.

Botswana's Newest Export -Fish !

Botswana’s Export Diversification –Fish!

The Ngamiland fishery has become the lawless ‘wild west’ of Botswana and government needs to act before the next fishing season begins at the end of this month.

In 2010 the Tahal group presented a bold idea to Botswana Ministry of Agriculture, that part of the 420 mcum of water that would be taken from the Zambezi as part of the country’s riparian rights would be used for an integrated agricultural project which would include amongst other things a maize, soy and canola  industry in Pangematenga which would in turn be used to develop an industrial poultry export industry as well as an aquaculture industry that would export some 13,000 tonnes of fish per annum. The  fish that would have been exported would include tilapia and catfish.  But the very idea that Botswana, a landlocked semi-desert would become a major exporter of fish products was just  a step too far. Successful public officials are described with many adjectives, but certainly bold is not one them. This idea of a Botswana fish export sector was simply beyond the  pale for those in  the Ministry of Agriculture and the idea was just too bold, too risky and was canned.

Botswana’s Fish export industry – its in the pooh!

But now, without a litre of water being abstracted from the Zambezi and without even much investment Botswana is silently becoming a significant exporter of unknown quantities of Tilapia and catfish to water rich countries like Zambia and DRC. The interesting question is how and why. Next month the 2015 fishing season will begin again on Lake Ngami which has come back to life in 2011 after a period of 20 years. The reason why the lake has become such a prolific producer of fish recently is because in the 20 years that it was dry it was used by local cattle farmers to graze their cattle. When the waters finally returned the cattle dung provided a rich source of nutrients for the fish coming in from the Okavanago River and breeding locally.

 At the end of the month my friends and relatives will return to Lake Ngami to fish for catfish and tilapia which will then be exported to the DRC and Zambia. This in turn raises an interesting but disturbing question. Both these countries are correctly described as ‘water abundant’ and indeed the Congo and Zambezi rivers were long considered one of the most important sources of fish for the local populations in the two countries. So why do either of these countries need Botswana’s fish? The reason is simple enough- they managed their fish stocks as badly as we almost certainly will and there are not enough fish left any more for the locals so they now import tilapia from a semi-desert country like Botswana.

When Lake Ngami came back to life in 2011 after a very long dry patch urban consumers of fish in Francistown, Maun  and Gaborone were delighted at the sudden influx of what were then relatively cheap fish from the lake.  But since last year there have been major changes in the way fishing is going on there as increasingly fishers are finding that they can get much better prices from the hundreds of Zambian and Congolese ’salters’ that live in tents by the side of the lake. When I drove from Maun to Ghanzi in September there were hundreds living in a tent camp by the side of the road. According to local experts there were eleven camps surrounding the Lake with what are said to around 1,000 people in all.  In 2014 the largest, with a population of 400 looked like a refugee camp with scores of crowded tents. So how over 1,000 Congolese Zambians, Zimbabweans and Malawians receive work and residence permits to do the ‘technically difficult’ job of gutting and salting fish in Botswana is a matter the Immigration department probably needs to explain to Batswana

Ms Neo Ntshwabi - Exporter of the Year?

The fact is that there is more money to be made in the international trade in Tilapia and catfish than there is in catching the fishing and selling them locally. About 300 Batswana get permits to fish and Zambians and Congolese now buy the fish caught and salt them by the side of the road.  A medium sized fish costs about P2-3 by the side of the lake and when sold in Gaborone it can sell for up to P8-10. But when Batswana eat fish it is either fresh or frozen but certainly not salted. If you can dry and salt the fish and get it to Lubumbashi in the DRC you can  treble the price according to Ms Neo Ntshwabi who sells fish to the Department of Education in Katanga . Four times a year Neo drives her fish 1,700 km to DRC where she sells 6,000 fish per trip at what she reports in $3/fish ( P27/fish) . On this basis she brings home a healthy gross income  USD72,000  per annum. While costs eat up much of this it leaves enough to pay for a home for her and her two children.

 But one needs to stop a moment and ask how many people would be willing to drive from Botswana to DRC let alone carrying large bags of dried fish. In my estimation Neo is a truly heroic Motswana woman and really deserves an award as ‘exporter of the year’ for having the guts and determination to do business no matter how hard it may be. Like so many women in this country she has to raise her children with little help from their father.

But if you believe the statistics from Statistics Botswana, and most analysts in Ngamiland don’t, the country does not export fish in any quantity. The figures suggest a total of 300 tonnes of fish were exported to Zambia and onto Katanga in the DRC in up to November 2014 at a value of less than P1 million. These are the figures reported by BURS at Kazangula.  Either BURS is not receiving the proper value and volume figures for the fish leaving the country or the big sixteen wheel trucks full of fish that leave Maun regularly during the fishing season along with 1,000 plus Zambian and Congolese workers must be making a huge loss.

No Zambian and Congolese salters need apply

The government might wish to co-ordinate several departments to properly regulate the northern fisheries. Lake Ngami and other smaller lakes in the vicinity of the Okavango like Lake Xhau need to be carefully controlled. Fisheries officials need to police the number of fishers and carefully monitor the size of nets that they use along with the actual number of fishers per licence. Immigration needs to make sure that these Zambians and Congolese are in the country legally and BURS needs to record the real value and volume of fish leaving the country.  The Ngamiland fishery has become a lawless ‘wild west’ of Botswana and government needs to act before the next fishing season begins at the end of this month.

The Lake Ngami fishery is completely unsustainable as the lake will one day disappear as it has in the past.  But it is also unsustainable because the rate of extraction of fish is not controlled and Batswana are no better or worse at management than most people- almost no country has succeeded in sustaining this sort of fishery but it should certainly be the right of Batswana and not Zambians  and Congolese to benefit from the fisheries and the greatest commercial benefit is in the trading far more than it is in the fishing. The real danger to the ecology of Botswana is of course that once the foreign traders have arrived they will shift away from Lake Ngami once it is overfished and then do the same to the eco-system of the Okavango. That would be of far greater concern to the economic future of the country.

These are the views of Professor Roman Grynberg and not necessarily those of any institution with which he may be affiliated. For the purposes of transparency Ms Neo Ntshwabi is a cousin of his wife Ms Doris Shalie Grynberg.  

So Why are you Unemployed?

So why are you Unemployed?

When I left university in Australia  forty years ago with a degree in Economics I had nine job offers within the first week. Fast forward  to Gaborone today while you are definitely more likely to get a job with a degree than without, there are now some 5,000 graduates waiting for internship with the Ministry of Labour. Different country and a vastly different time you say. While most university graduates still eventually get jobs, where I work we have an increasing flow of very bright and intelligent young Batswana university graduates who come to work on internships, often for as long as two years for nothing more than P1,300 per month.

I really began to panic early last year when a young and very enthusiastic Motswana with a degree in mining engineering from Queens University in Canada came to work for us. Queens has one of the best engineering and mining schools in North America. So when someone with a good degree from an excellent university comes home because he wants to serve his country and not stay in Canada but has to take an internship then we have real reason to fear and be concerned with what is happening to the country. Eventually the young man got a good job with BCL and I have no doubt will make an excellent contribution to the nation’s development. But equally I have many bright young UB graduates who I have trained on this program who  after two years have found no job and have had no choice to go back to the cattle post in Shakawe and Bobonong. These are deeply embittered young people who feel that life and  government has failed them.

So what changed ?

Not only the Kalahari and the Indian Ocean, but a whole lifetime stands between my experience of looking for a job in Australia in the 1970’s and that of the current generation of Batswana university graduates. The easy answer to explaining the difference is that, that was Australia and this is Botswana but that answer is just completely wrong because in 1974 as Africa was freeing itself from the shackles of colonialism there were still many good jobs for university graduates. But many if not all those jobs were in government as new ministries opened up, young people who could perform, and many who could not, got jobs for life in the new post-independence public service. There were not enough people to fill these vacancies. What has really changed is not the place but the passage of time- that cruel and insensitive monster that eventually kills us all.  

The post-independence African model of development that emerged in so many countries, including Botswana, was based on extractive industries. Foreign investors would develop mines or agriculture, the government would tax them and the revenues would be used to hire university graduates. Of course this model was limited by how much natural resources you had and  how much your government officials stole from the revenue. Botswana was blessed in that at the beginning it had one of the richest resources in Africa i.e. the diamond mines, a good  share of the revenue from De Beers and a post independence government that did not plunder its people. It is for this reason that the government has until very recently remained one of the most important employers of university graduates. But as government revenues stagnate then this model is failing and we will replicate what happened to the rest of Africa much earlier.

In comes Reagan and Thatcher

When I arrived in Tanzania in 1979 to teach Economics at the University of Dar Es Salaam the strains of the old African development model were starting to show. Following Tanzania’s horrendously expensive invasion of Uganda to oust, the dictator Idi Amin the government of Tanzania began to run out of foreign exchange. The state owned factories that had been established under ‘Ujamaa socialism’ by President Julius Nyerere collapsed and there was nothing in the shops – no sugar, no bread, no maize and painfully, no beer. Tanzania soon collapsed into what we called a ‘hunter- gatherer society’ where everyone spent their time hunting for food and basics and not doing their job.

The same  free market ideology that brought Margret Thatcher and Ronald Reagan to power in the UK and the USA in 1979/80 began to affect Africa directly through the complete domination of the free market, trickle down thinking in the World Bank and the International Monetary Fund at around the same time.   No need for government intervention, the market would solve the problem. Cut government spending, open up markets to international trade get rid of marketing bodies and all would be well. According to this economic philosophy the private sector would step in and do the job that government could not do effectively but it didn’t. This was the so-called ‘Washington consensus’ that dominated what passed for economic thinking for nearly 30 years.  Tanzania  implemented just such a set of reforms in the 1980’s and a whole generation of young graduates that had previously been assured government jobs for life soon  found themselves selling second hand clothes  in the market.

Homo Davos

Fast forward to today and the ‘masters of the universe’ met last week  in Davos, Switzerland as they do every winter to sip champagne and discuss how to get even richer and also, amongst other subjects,  how it is that everywhere you look in the world  income distribution has shifted so much in favour of the rich and against the poor.  Davos has become a magnet for international organisations desperate to attract the attention of the masters of the universe According to Oxfam the top 1% of the world’s population  owned 44%  of the world’s wealth (e.g. houses, shares and other assets) in 2009 to 48% in 2014, while the least well-off 80% currently own just 5.5%. Oxfam suggested that on current trends the richest 1% would own more than 50% of the world’s wealth by 2016.. The International Labour Orgaisation  also published a report showing that global unemployment is now at 200 million and will  continue to rise to 212 million to 2020. The ILO has also predicted that income ( ie. what you earn every year) inequality will also continue to widen and that globally the richest 10% earn 30-40% of total income while the poorest 10% earn around 2% of total income.

The answer as to why this happened lies very much in the world many of these very same people at Davos shaped over the last three decades. When one listens to their debates and discussions on inequality one would think that they were on another planet when all this was happening rather than at the very forefront of the rising inequality.

Part of the reason why the rich get richer is the same reason why I have so many unemployed graduates. The world moved on, we implemented a globalization where trade would occur not in nation states but along global value chains where production was located in the lowest cost locations. The old unionised automobile workers in Canada and the US who in the 1970’s had two cars, a comfortable home for their families as well as a cottage by the lake seems like  a remote memory of a now distant and almost extinct world. Those jobs have moved on to Asia and Latin America, real wages in North America have been pushed downwards and those workers in Asia certainly became better off but those in North America have generally not become much better off and many became much worse off falling into low paid jobs in the service sector ie. KFC. It is these people which are called ‘the middle class’ in America that paid for the uplifting  of Asian workers. The wealth trickled down but mostly it trickled up to  those who owned the factories who became so much richer because of globalization and their ability to make use of much cheaper Asian labour.

But to blame trade liberalization and globalization is not quite right. Of the nine jobs I was offered at least three that I can think of disappeared eventually because of the new information technology. Most disappeared because the jobs went to Asia. The flexible job market combined with the rapid advance of robotics  and advanced computers will in the coming years mean that some 48% of existing professions can be eliminated with the existing state of technology. And that capacity only increases every year Computers now do everything from driving  giant driverless trucks,  at Australian mines, to   drones which will shortly eliminate delivery trucks. And what is the response of the most economists is … get an education, work   hard, train to be an IT and robotics specialist and there will be plenty of jobs. This rings hollow to the otherwise unemployed IT graduates working here on internships We may one day soon have the chance to ask the unemployed truck drivers from Orapa and Jwaneng what they think of this and whether they can retrain as IT specialists?

19^th Century Ideas in the 21^st.

Global inequality between the rich and poor has increased substantially over the last 40 years to the point where even those in power know they have succeeded beyond their wildest expectations in creating Ronald Reagan’s nightmarish Dickensian world where the rich have amassed vast fortunes and little has trickled down to the poor, at least not those in their own countries. What has certainly changed is that globalization and technical change has created a middle class in China, India and the other developing countries. But those who paid for this middle class are the segments of the American and European working classes ie the ones they call the middle class that is increasingly on the endangered species list.

We need to rethink our 19^th century economics for a new world where the power of computers, robotics and information technology are so great that an ever increasing number of people, including university graduates, will not have anything resembling long term meaningful jobs. And while great wealth will be created from this, an unsustainable misery is now emerging  amongst young people all over the world who are bearing the brunt of this 19^th century social experiment. If humanity does not find a better way to give peoples’ lives meaning and share this great wealth that technology and globalization are creating then it will end badly for us, as we now possess the technology of destruction needed to make the 20^th century fascist wars  and communist revolutions look like rather tepid affairs.

 

These are the views of Professor Roman Grynberg and not necessarily those of any institution with which he is affiliated.

 

 

Will Putin crash the Global Diamond Market?

Will Putin crash the Global Diamond Market?

In the mid-1990’s when the Russian Federation was being created out of the ashes of the former Soviet Union, Valdimir Putin’s infamous vodka swilling, bottom pinching predecessor  Boris Yeltsin was involved in a process that was to create the Russian oligarchs who made their fortunes accumulating Russian mineral and energy assets at knockdown prices. In gold, aluminium, nickel, oil and gas Yeltsin allowed the oligarchs to accumulate vast fortunes from disposing of the nation’s assets cheaply.

As the Russian economy  collapsed into an crisis of unparalleled  proportions in the 1990’s in the face of the break-up of the Soviet Union and large sections of the Russian population on fixed incomes such as pensioners slid into grinding and previously unimaginable poverty more and more of the nation’s jewels began to leak onto the global market.

In the early 1990’s De Beers was still king of the global diamond market and almost all countries that discovered new diamond deposits used the De Beers cartel, the Central Selling  organization (CSO) which would  buy up stocks of diamonds that were leaked to shore up the decline in revenues that occurred when the Soviet Union collapsed and became the completely resource dependent exporter that it is today. The leaking of US$1 billion of Russian rough diamonds onto the global market at the time was a serious challenge for De Beers as it had annual sales of USD4.5 billion on average over the period. The evidence is that De Beers seems simply bought up the leaked Russian goods onto the market in order to assure no serious decline in prices.

 In the past De Beers had acted in case of Argyle in Australia and Zaire to punish large companies and countries that tried to operate outside the CSO. De Beers would do this by dumping large quantities of very similar quality diamonds on the market just when the recalcitrants were trying to sell their assets outside the CSO. This depressed prices massively and all though it hurt De Beers, it hurt the chisellers even more because De Beers had deeper pockets and was better able to take the loss. The lesson for everyone in the diamond market, including Botswana, was clear- don’t mess with De Beers because they can seriously undermine any player who acts outside the cartel.

Putin in the Global Economic Crisis

If you fast forward some 15 years you get some indication of just how shrewd Putin could be with the management of diamond resources. In 2008/9 the global diamond market collapsed, prices fell through the floor and there is no more Central Selling Organization as De Beers had dismantled its cartel arrangement in 2000 and moved to a new “Supplier of Choice’ strategy which, while no longer a monopoly, was supposed to maintain its control of the market in other ways.

Without a CSO to buy up excess diamonds the only option was to shut the mines and contract production until the price and demand recovered. That was the De Beers strategy. Mines in Botswana were closed for several months and production decreased in Namibia, South Africa and Canada- countries that are known as the ‘De Beers Zone’. But this was not Putin’s strategy. What he did instead was to in effect guarantee a low but adequate price of diamonds to Alrosa and he instructed Gokhran the Russian Federation’s State Precious Metals and Gems Repository, to buy USD1.2 billion worth of diamonds at the height of the crisis in 2009. In retrospect Putin was astute and two years later Gokhran re-entered the world diamond market selling part of its stockpile that it had reportedly purchased at USD71/carat at approximately USD131/carat. Russia did not lay off its miners and continued producing and its Ministry of Finance made a tidy profit from the transaction.

One can compare this to Botswana where De Beers shut the Jwaneng mine, Botswana  saw its GDP plunge 8% in 2009 and the country went  into significant debt for the first time. Public debt rose from 5.7% of GDP in 2007 to almost 18% in 2013.Botswana borrowed USD1.5 billion in June 2009 from the African Development Bank in order to stabilize the national economy. It is easy enough to conclude that Putin was really clever and the De Beers/Botswana policy was simply short-sighted. But being shrewd requires money and Putin could afford to be clever in 2009 because the Russian Ministry of Finance had revenues from multiple high value minerals and hydrocarbons. Botswana on the other hand only has revenue from diamonds and hence  for Botswana to stockpile diamonds would also have been clever but certainly much riskier because it is far more exposed to the diamond market than the Russian Federation.

The Putin-Modi Diamond Deal

In  early December Putin and Indian PM Modi attended the World Diamond Conference in Dehli, with both leaders keen on ramping up direct exports of diamonds to India. A reported USD 2.1 billion deal was signed with Alrosa for direct exports. India currently exports polished diamonds worth $20 billion and both governments want to see more direct imports. Only about 20% rough diamonds are sold directly from Russia to India and Alrosa  seeking to avoid the potential impact of EU and US sanctions. But Indian diamantaire normally prefer to buy their diamonds through tax-free Dubai or Switzerland where they can transfer price any profits they may have mistakenly declared. Nevertheless, almost immediately after the Russia-India agreement in New Delhi  Indian sightholders at the most recent Gaborone sight of De Beers (DTCB) began giving up their boxes  citing the cheaper goods available from Alrosa than from De Beers and the squeeze on their margins caused by galloping rough prices. It was reported that 25% of the December Gaborone sight remained unsold. In a thoroughly globalized market like diamonds the impact of EU sanctions on Russia is now reverberating through southern Africa.

 Putin in 2015- Boris II?

What Yeltsin faced in 1993 was fundamentally different to the crisis that Putin faced in 2008 and may yet prove to be much more severe than what Putin now faces. Yeltsin faced a complete meltdown of the Russian economy and was desperate for money to stave off economic collapse. This year and next we shall see the stuff from which Putin is made because he will now face a major economic crisis that even he recognizes will last at least two years. Yeltsin pretty well knew that any diamonds that he sold onto the world market behind the back of the De Beers cartel would be bought by the CSO at prices that would not undermine the world diamond market.

But now there is no cartel. In 2013 oil and gas made up 68% of Russian exports and its price has fallen by more than 50% in a year and is trading at less than USD50/barrel. A similar portion of the Russian budget comes from oil and gas revenue. Russia also faces economic sanctions as a result of its annexation of the Crimea and its aggression in Eastern Ukraine. No-one can be certain as to the precise magnitude and duration of the decline of the Russian GDP this year though analysts are predicting a fall of 6% of Russian GDP in 2015. Putin himself believes that the crisis will only last two years. But if the crisis becomes much worse will Putin order an acceleration of production and  export of Russian diamonds to make up for the loss of government revenue? Putin of course knows that there is now no cushion in the diamond market. Since the economic crisis of 2008 De Beers has contracted production in its zone significantly which is one of the main reasons why rough prices have been rising as rapidly as they have during the last five years during the economic crisis.  

But the real long term question is whether Putin is likely to act in the diamond market in the same way as Boris Yeltsin did 20 years ago? In December Russia was reported to have begun selling its gold stockpiles but it is not a significant enough increase to severely effect the gold market. In the diamond market Russia is the world’s largest producer of mined diamonds by volume and unlike gold, any increase in supply would  have profound effects on the global diamond prices. A Russian policy of leaking or dumping diamonds is, at this point,   highly improbable given that there is no longer a CSO and a floor to the diamond price and so Russia is likely to maintain a stable supply situation unless the severity of the economic crisis intensifies to the point where Putin becomes financially desperate and morphs into Boris II? And in such a case the world will have much more to worry about than just the price of diamonds.

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

 

 

 

 

 

Knowing the future and Revising the Diamond Projections

Knowing the future and Revising the Diamond Projections

‘De Beers and the Ministry of Minerals Energy and Water Resources should  release, in approximate figures,  the new diamond resource assessment because it will remove uncertainty  about what President Khama meant about Botswana reaming a ‘significant diamond producer’ until 2050 and will help private investors in Botswana make better informed decisions.’

In late 2008, in wake of the financial meltdown,  the worst since the Great Depression of the 1930’s,  Her Majesty Queen Elizabeth, paid a visit to the London School of Economics and posed the incredibly embarrassing question to the assembled economists  ‘how was it that none of you  could see this coming?’She asked. It was a question that could not easily be dismissed because, after all, this was the Queen and she was simply echoing the very question that was on everyone’s lips.  How did the economists get the future so wrong? The number crunchers from the LSE, one of the UK homes of that type of economists who believe they can help mere mortals see the future through their highly sophisticated equations and models looked at their shoes and within a few weeks were spinning all sorts of answers.

Had the Queen gone to Cambridge University she might have come across a few remaining economists who were still literate but not counted amongst the highly numerate charlatans that populate so many universities. Those who were trained by Lord Keynes, the most famous economist of the 20^th century, would certainly have answered what Keynes taught at Cambridge and what every businessman and woman  know-  ‘Mam’, they would almost certainly reply ‘the past is immutable and the future  is unknowable’ This is almost trite but it encapsulates the difficulty that we all face both as people and as businessmen. We make an investment and one it is made that decision cannot be readily changed and we make that investment believing but never really knowing what the future holds cannot be known it offers opportunities. And where we are wrong in our investments and the dice of posterity do not fall in our favour...there is always the bankruptcy court which is market’s way of dealing with fools and uninformed optimists.

In 2008 and 2009 the consensus amongst mainstream economists  was that what was happening to the world was just a financial crisis  stemming from US banks and global investors having mistakenly and with government incentives offered  mortgages to people who did not have the income enough to pay. This is what was called the ‘sub-prime mortgage crisis’. Banks all over the world bought bundles of these American mortgages, often not knowing the laws or even the nature of the asset they were buying, and hence an American financial disaster quickly morphed into a global one.

It was only later, starting in 2010 that some economists began to ask if the 2008 crisis was simply just  a banking crisis then why did it begin amongst the poor and lower income groups in America and why in 2008?  It was then people started to put various bits of the crisis together. The process of analysing what happened in 2008 is by no means complete and hundred of doctoral these are yet to be written. What is known is that there has been a massive shift in the distribution of income in the USA over the last thirty years in favour of the rich and away from those low income workers, ie those who were supposed to pay these sub-prime mortgages. Along with the massive rise in oil and food prices that occurred in 2006/7just  before the 2008 financial meltdown provided the conditions for the economic crisis. No-one saw it coming because no-one was looking at what had happened to the structure of the America economy and those charlatans whose models did not predict what happened were largely looking forward based on one or other variant of what had happened in the past. Driving down the highway looking in the rear vision mirror is never very clever.

Economists Make Mistakes … sometimes big ones!

Late last year I was asked by the Ministry of Minerals to make a presentation on the future of base metal prices. I just giggled. For years I had seen absolutely wrong projections from the IMF, the World Bank and Economist Group on the future of commodity prices. If the economists in any of these  agencies or firms could reasonably predict copper and nickel prices with any accuracy then they would be  very, very rich people and would not be sitting at their work stations  making predictions of the future for a few thousand dollars a month .

We have a similar case with oil prices which should be a lot easier to predict but oil prices have in the last few months slipped from over $110/barrel to under $50 in the last few days. Can anyone find an economist or so called ‘commodity specialist’ who was predicting that the price of oil would halve in 2014? To the best of my knowledge, not a one!  But unlike the far more complex situation with money markets this decline should have been fairly predictable. Between the massive increase in the supply of gas and other hydrocarbons as a result of ‘fracking’ in the US , the collapse of substitute hydro-carbon and fossil fuels eg coal and the weakening global economy there should have been warning bells. But this did not occur.

Is Economics useless?

If your idea of economics is based on believing scurrilous  number crunchers, ie those predicting the future then on the basis of past performance  a saguma will give you results that are probably no worse than most economic forecaster. The famous economist John Kenneth Galbraith once quipped that the only function of ‘economic forecasting was to make astrology look respectable’.  But if your vision of economics is a little humbler, that as a  discipline it exists to help people to understand  what forces shape the world we live in then it is far from useless.

Diamond projections

But there are errors in economics that stem from really bad data and information. Last year I undertook a study for the government about the future of the Botswana economy after diamonds ran out. That of course was based on the assumption that the diamonds would soon run out. I did not try to predict the future but to analyse why the country had not diversified and what would happen when, based on the governments’ own estimates the diamonds would run out by 2027. But those predictions on future diamond production were wrong and superseded in August 2014. All the analysis the government had done which showed that diamond revenue would seriously decline after 2027 were completely wrong. The new resource projections were made by the diamond industry and on  this basis HE President Khama could safely say in the state of the nation address  in 2014 that Botswana will remain a ‘significant  diamond producer’ until the end of the 2050. But President Khama did not elaborate on what  it meant in practice to be a ‘significant producer’- does that mean 5 Mcts o5 25 Mcts per annum as both numbers are significant.

Clearly the earlier diamond projections upon which Botswana’s 10^th National Development Plan were based were completely wrong and they were wrong not because De Beers suddenly discovered a massive new mine but because there is no financial interest in informing the diamond  market that there are far more diamonds in Botswana as it will only serve to depress world prices. But there are  bigger  development issues for Botswana. The new  resource assessment is almost certainly very good news for Botswana as it means there will be no imminent decline in diamond revenues after 2027. For the sake of Botswana I am happy to report that my earlier assessment was completely wrong. But equally the new resource assessment mean for an entire generation the heat is now off the policy makers and as a result no-one will ever think seriously about undertaking the sort of economic reform measures that are needed to drive economic diversification.

 But because the resource assessment is not public the good news about the future of the country is also not public and hence it is vital that the government release the future diamond production projections to 2050 because all private investment in Botswana ultimately rests on this number. De Beers and the Ministry of Minerals Energy and Water Resources should  release, in approximate figures,  this new diamond resource assessment because it will remove uncertainty  about what President Khama actually meant about ‘significant diamond producer’ and will help private investors make better informed decisions about investment. The future, as Keynes said, is unknowable but there is no reason to make the job of business more difficult by not publicising this most important of Botswana’s statistics.  

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