RAPAPORT... Five years after South Africa revised its legislation to encourage participation of disadvantaged citizens in the diamond industry, the country’s beneficiation program remains shrouded in controversy.
With employment in the cutting industry down by at least half — by conservative estimates — since the legislation was enacted, it would be hard to dispute the fact that the new law has not succeeded in its mandate to grow the industry. In addition, disagreements among various interest groups have left the diamond industry with no official representation, as the chairman, vice chairman and chief executive officer (CEO) of the Diamond Council of South Africa (DCSA), which has historically served as the industry’s umbrella organization, have all resigned.
“The group that was previously called the council does not represent anyone and doesn’t have a mandate to do so,” says Ernest Malakoane, chairman of the United Diamond Association of South Africa (UDASA). A short-lived attempt was made in November 2008 to unify the UDASA with the three existing arms of the DCSA — the Rough Diamond Dealers Association of South Africa, the Diamond Dealers Club of South Africa, representing polished diamond dealers, and the Master Diamond Cutters Association of South Africa, representing diamond cutting and polishing factories.
Former DCSA Chairman Ernie Blom explains that the organization’s secretariat is still functioning, albeit on a limited scale, until such time as new leadership is appointed.
Following the split, UDASA claimed the DCSA name and now calls itself the Diamond Council of South Africa (with UDASA). Some industry observers recognize that the council is in disarray but cautioned that they are wary of UDASA’s “confrontational” approach.
More recently, UDASA has formed a so-called “black caucus” representative group to advance its aims, with the most pressing of these, Malakoane stresses, relating to the severe lack of rough available to polish. In the wake of the global economic crisis, beneficiation — the drive to grow the cutting and polishing sector among previously disadvantaged South Africans — appears to be taking a back seat to business survival.
Not About Production
South Africa’s diamond production fell 52 percent to 6.139 million carats in 2009, according to Kimberley Process (KP) data, with De Beers accounting for 78 percent of the total. While the declines were undoubtedly a direct result of the recession, most agree that the State Diamond Trader (SDT), an agency overseen by the Department of Minerals and Energy, has failed in its mandate, as set out in the Diamonds Amendments Act of 2005, to “promote equitable access to, and local beneficiation of, the Republic’s diamonds.” The SDT was created in the fall of 2007 to buy up to 10 percent of all the diamonds produced in South Africa, and distribute them to local cutters and polishers, to promote local beneficiation.
In December 2009, the DCSA, through then-CEO Braen Migogo and chairman Blom, was quoted accusing the SDT team of being inefficient, adding that restrictive regulation and various bureaucratic obstacles were the main contributing factors to the decline of the country’s diamond manufacturing and trading sectors.
Futhi Zikalala, acting CEO of the SDT, says there are some strong misconceptions about the SDT and the way it was set up to operate. “The trader was set up to promote local beneficiation and therefore provide access of rough diamonds to local beneficiators. We keep a register of all its clients, who have to possess a beneficiation license and an operating factory,” she explains. “We don’t distinguish between the larger and the smaller companies as long as they meet these requirements.”
A Profitable Trader
Zikalala notes that the SDT was able to survive the economic downturn because of the “innovative” strategy it employed at the time, enabling its clients to prefinance their purchases — to pay upfront before the SDT sourced their goods. “The question is what happened to those cutters who were not willing to buy during that difficult time, and whether those that continued to do business have the funds and the skills to buy the goods,” she stresses.
Zikalala also refutes claims that the SDT does not have access to funds, but notes that these funds are insufficient. She adds that, in spite of the financial crisis, the trader operated at a profit for the year that ended on March 31, 2010.
The SDT has a revolving credit facility of ZAR 50 million ($6.9 million) with the state-owned Industrial Development Corporation (IDC), but also uses client prepayments and its own resources to purchase goods. “We used a minimum amount of credit last year and our strategy is to use our own resources rather than credit because loan funding is expensive,” she explains.
Many industry observers also point to the legislative stipulation that the SDT should buy run-of-mine production as working to its detriment, since it means that most of the goods the SDT purchases are lower-grade, industrial-type diamonds.
One industry professional, who requested anonymity, notes, however, that it would have been unconstitutional for the legislation to suggest that a government agency such as the SDT can “cherry pick” a portion of a private mining company’s supply. He stresses that the expectations about beneficiation were unrealistic from the beginning, as South Africa could never have an industry on the scale of India, with its hundreds of thousands of workers. “At absolute best, we could maybe employ about 2,000 workers,” he estimates.
Zikalala explains that when the trader buys from the mining companies, it views the full production and takes a representative sample of the goods in accordance with the legislation. She stresses that the SDT can purchase less than 10 percent of rough production, and that it buys based on market demand and its budget.
Unfair Criticism?
Still, the contrast to the system in place prior to the legislation change — when the private-sector De Beers unit, Diamdel, was supplying goods to the secondary market — is striking. “Diamdel was not cheap, but they were consistent and you could build up a profitable business with their supply of cuttable stones,” the anonymous industry professional stated. Diamdel disbanded its South Africa operation in 2007, in conjunction with the establishment of the SDT.
Insisting that the criticism leveled at the SDT has been disproportionate, Zikalala says, “The recession knocked us all and we had to decide to sink or swim. This is only our third year, but no one has given us time to grow.” She adds that the trader remains focused on its mandate to grow the industry but it cannot do so alone. “Government, the industry, banks, everyone has to play their part,” she says. “Others need to come on board.”
With the more productive pre-SDT era fresh in industry veterans’ memories, and the newcomers roughing it out for survival in a challenging economic time, the mood in Johannesburg’s Jewel City does not present an optimistic environment of hope. In light of the lack of recognized representation for the industry, it appears Zikalala may be left to grow her organization’s effectiveness and influence on her own. One way or another, South Africa’s beneficiation dream is not what it used to be.
Article from the Rapaport Magazine - September 2010. To subscribe click here.