RAPAPORT... Established in September 2007, South Africa’s State Diamond Trader (SDT), looked upon by many as Africa’s benchmark model for beneficiation, is experiencing growing pains. In order to meet its mandate to help develop a local cutting and polishing industry of smaller entrepreneurs, SDT was designed to siphon off 10 percent of the country’s diamond production. But the demand for rough is 200 percent greater than the supply, according to Abbey Chikane, SDT chief executive officer (CEO).
Chikane told Rapaport Diamond Report that it is necessary to test SDT’s commercial viability and business model before it can increase distribution to meet demand. In its first two supply cycles, SDT worked with 78 clients as a research sample, raising the number of participants to 181 in the most recent third cycle in April-May. In his personal view, Chikane adds, SDT should not supply more than 200 clients “because we won’t be able to satisfy demand.”
LOFTY GOALS, LIMITED SUPPLYFew argue with SDT’s mandate to create a viable domestic diamond polishing center in South Africa so its own citizens can benefit from the country’s valuable diamond resources. “Imagine when beneficiation is working,” says Louis Lipchin, an executive member of the United Diamond Association of South Africa (UDASA). “From the time a stone is sent to a factory, it could pass through 10 to 15 people, helping to feed each one’s family.”
But the reality is that the current supply shortage and disappointing quality of goods means the intended beneficiaries are not getting the quantity of rough they expected. Two graduates of “The Hive,” an incubator program created to build entrepreneurship among local cutters, expressed concern that they have yet to be invited by the trader to view stones for purchase. “We need to know that we can go to the trader every month and get a consistent supply of profitable diamonds,” they stress.
SDT held its first sale in January. De Beers was on board from the beginning in supplying its 10 percent share of production, and Chikane said agreements with other mining companies should be signed by the end of June 2008. Eventually, all the South African miners are expected to sign similar deals committing 10 percent of their overall production to SDT.
SDT was given until the end of June 2008 to prove to the state-owned Industrial Development Corporation (IDC) that it was commercially viable. The IDC currently provides the trader with a revolving credit of approximately $4.6 million (ZAR 35 million) a month, which is scheduled to rise to $6.5 million monthly after June 2008. Chikane said the trader would need $10.9 million in monthly credit to distribute 10 percent of the country’s current overall diamond mine production.
RUN OF THE MINESupply shortages aside, some South Africans have deeper concerns that SDT represents a downgrade in the quality of goods the country’s industry receives. “The trader has been mandated to provide run-of-mine goods, which includes unpolishable industrial stones,” Lipchin says. “In the past, we always got gem-quality stones.”
Lipchin acknowledges that SDT is working within its mandate by supplying run-of-mine diamonds, but explains that the weakness is in the legislation. “Run-of-mine stones were sprung on us because we were never part of the negotiations,” he says. “Something went wrong there because you cannot beneficiate industrial diamonds.”
Tom Tweedy, De Beers spokesperson, notes that every organization was invited to participate in discussions to formulate the new law. Nevertheless, Lipchin points out that while the Master Diamond Cutters Association negotiated on behalf of sightholders and larger beneficiators, efforts to have Ernest Malakoane, chairman of the UDASA, negotiate for its constituency of more than 200 previously disadvantaged smaller traders and companies were not successful.
UDASA, Lipchin explains, is calling for a review of the legislation to better represent the goals of beneficiation “because the industry is currently at the worst it has ever been.” Chikane says such a review is required of SDT. “Since our clients are new, we are currently assessing the model as stipulated in the legislation,” he says. “Very soon, SDT will be able to identify challenges that are being faced by these clients as a result of the run-of-mine concept.”
The coming months may prove crucial for SDT, as it takes on more clients, grows its budget and pens supply deals with other miners.
“SDT represents a great opportunity for us,” says Heno Kruger, a director of Namakwa Diamonds, an SDT client. “It is our hope that it will grow, and it is very important for the industry that it will develop into a sustainable source for manufacturers. We are all committed to making the South African industry work.”
Article from the Rapaport Magazine - June 2008. To subscribe click here.