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Leveraging South Africa’s Diamonds

Editorial

Mar 23, 2012 12:49 AM   By Avi Krawitz
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RAPAPORT... By all accounts, South Africa should have a vibrant and growing diamond industry. The country has numerous mines, albeit old ones, and a trade that dates back more than a century. Not to mention a marketing pull perhaps surpassed only by De Beers — diamonds are still largely associated with South Africa by the general public. Even locals are surprised to learn that the country is only the fourth largest producer by value and sixth or seventh by volume.

However, the mood in Johannesburg’s Jewel City hardly exudes optimism. Rather, dealers and manufacturers seem at a loss for words or strategy regarding the industry.

The demise of South Africa’s diamond trade is not a matter of production but a question of ensuring that sufficient supply is kept in the country to support, or rather grow, the local industry. Most agree that the legislative changes of 2005 governing the industry have not effectively facilitated growth, or job creation, in the local beneficiation sector.


Indeed, from the trade’s point of view, little progress has been made since Rapaport News last reviewed the industry about a year ago (see editorial “Diamonds & Jobs in South Africa” published on April 28, 2011). If anything, its prospects appear bleaker and the beneficiation sector has shrunk. 

Industry leaders estimate that the number of cutters employed in South Africa has fallen to about 900, down from last year’s count of about 1,200. Ernie Blom, president of the Diamond Dealers Club, which represents the local industry at the World Federation of Diamond Bourses (WFDB), reasoned that the workforce has dwindled due to a combination of insufficient training, an aging skilled labor force, and competition from other centers in the region, particularly Botswana. 

These are all valid. However, Blom and others stress that fewer goods are being supplied to sustain the local factories. This scenario became most evident when De Beers Diamond Trading Company (DTC) announced in December 2011 that it is cutting the number of its South African sightholders from 14 to 10, effective from next month’s April sight. In addition, De Beers is expected to supply fewer goods to those successful sightholders as the company continues to shift its focus toward Botswana (see Editorial “Moving DTC” published on March 16, 2012).   

De Beers has sold a number of its South Africa mines over the past few years, including the significant Cullinan and Finsch operations to Petra Diamonds. As a result, De Beers Consolidated Mines (DBCM), the company’s South African mining unit, saw production fall 29 percent to 5.443 million carats in 2011. In 2007, DBCM’s production stood at 14.998 million carats. 

Petra has been the main beneficiary of the De Beers sell-off and the company anticipates production of 2 million carats this fiscal year and expects to become a 5 million carat producer in five years, supported by a predominantly South Africa-based portfolio. But Petra has a different selling model, and while significant, it is by no means a large-scale supplier on the level of De Beers and ALROSA that can change an industry.

By nature of its open tender sales, the vast majority of Petra’s production is therefore exported. While by law it is required to first show the goods to prospective local buyers at the government’s Diamond Export and Exchange Center (DEEC), the reality is that foreign buyers exert more clout at the tenders.

Therefore, with fewer goods feeding the local factories, many are reportedly downsizing. This is neither De Beers nor Petra’s fault. Both companies have the right to invest where they want and maximize their sales as they see fit. Rather, government has failed to woo the mining companies to facilitate industry growth in the same way as, for example, neighboring Botswana has. Equally significantly, the country has failed to establish efficient structures to enable that growth.

Most point to the State Diamond Trader (SDT), and the legislation enabling its formation, as the root cause. The SDT was established to purchase up to 10 percent of South Africa’s run-of-mine production for distribution to small and historically disadvantaged beneficiation companies. In turn, by selling to the SDT, and making other goods available at the DEEC, the larger mining companies are exempted from a 5 percent export levy on the remainder of their production.

However, the SDT has proven inefficient in distributing to the local industry. Observers note that   most of its purchases from the mining companies are pre-financed by two or three large clients thereby enabling those companies to procure the supply.

Futhi Zikalala, CEO of SDT, acknowledged in a 2010 interview with Rapaport News that the trader was able to survive the economic downturn because of the “innovative” strategy it employed at the time, enabling its clients to pre-finance their purchases — to pay upfront before the SDT sourced their goods. Zikalala was not available for comment in time for this report. 

In the SDT’s annual report for the year that ended March 31, 2011, Zikalala stressed that the SDT was able to purchase more diamonds with its own resources throughout the year and thereby make more diamonds available to its mandate clients. The report stated that the number of SDT clients rose from 34 to 60 clients in fiscal 2010-11. Data for the current fiscal year was not available at press time.

Ernest Malakoane, chairman of the United Diamond Association of South Africa (UDASA), which represents small, mostly previously disadvantaged diamond businesses, stressed that his constituents are not getting the goods. An attempt was made in June to bypass the trader when the South African Diamonds and Precious Metals Regulator (SADPMR) procured 6,000 carats from Petra to sell in a pilot tender marketed to local cutters. Malakoane reported that 63 companies participated in the tender. However, the pilot was discontinued, possibly due to political sensitivities pertaining to the SDT.

Ilan Kaplan, the recently appointed chairman of the South African Diamond Manufacturers Association (SADMA), noted that growth in the beneficiation sector faces major entry barriers, including a lack of financing available for small manufacturers. Others note that much of South Africa’s production cannot be cut profitably in South Africa, as it can in India. Rather, they lament that a niche opportunity is not being developed.

Kaplan estimates that the industry should be able to sustain a workforce of over 1,000 and stressed that while there are enough diamonds mined in South Africa, they need to be channeled more effectively to the local industry.

Indeed, South Africa’s total production rose 44 percent year on year to 8.9 million carats in 2010, according to the most recently available Kimberley Process data. It also has the traffic of rough dealers coming to the country and that may even be set to increase when Botswana soon launches its government-run tenders and DTC moves its sights to Gaborone. Diamantaires will need to fly via Johannesburg to get there.

But a greater portion of gem quality rough needs to be cut and polished locally if South Africa intends to maintain or even grow its diamond industry. It is clear there are no quick fixes to the challenges the country faces. Most agree that changes to the legislation are required before any real progress can be made, and this would be a lengthy and tedious process. It will require close cooperation between a unified industry — which in itself presents a challenge — and government.

The changes need to be made sooner than later. In doing so, government needs to develop a policy that will encourage multinational diamond manufacturers to return to South Africa and to ensure that local ones are able to prosper. Mining companies such as De Beers, Petra and Trans Hex ought to be instrumental in facilitating that growth with their production.

Diamonds therefore still present a much needed job creation opportunity for South Africa. It’s not too late. As the Botswana experiment has shown, diamantaires will go where the rough is, and despite everything, South Africa still has that. The country needs to leverage its own resource for its own benefit, if it wishes to restore the industry to its former glory.

The writer can be contacted at avi@diamonds.net.


This article is an excerpt from a market report that is sent to Rapaport members on a weekly basis. To subscribe, go to
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Copyright © 2012 by Martin Rapaport.
All rights reserved. Rapaport USA Inc., Suite 100 133 E. Warm Springs Rd., Las Vegas, Nevada, USA. +1.702.893.9400.


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This Editorial is provided solely for your personal reading pleasure. Nothing published by The Rapaport Group of Companies and contained in this report should be deemed to be considered personalized industry or market advice. Any investment or purchase decisions should only be made after obtaining expert advice. All opinions and estimates contained in this report constitute Rapaport`s considered judgment as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Thank you for respecting our intellectual property rights

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Tags: Avi Krawitz, De Beers, diamonds, Jewel City, Petra Diamonds, Rapaport, South Africa
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