Botswana, along with its diamond-dependent economy, finds
itself on the brink. After years of planning and negotiations, Botswana’s
capital city of Gaborone is about to assume the position of the world’s premier
rough distribution location. That new role is due to the imminent relocation of
the De Beers Diamond Trading Company (DTC) from London to Gaborone, as well as
the Botswana government’s planned launch of its own rough diamond sales.
The timing could not be better. Botswana urgently needs to
diversify its economy away from diamond mining. It was a question of
now-or-never to ensure the country’s long-term economic sustainability. Despite
its current rank as the world’s largest producer of rough diamonds, those
diamond resources are limited, making development of downstream diamond
activities imperative to Botswana’s long-term future — its life after diamond
mining.
“The real long-term question is whether the cutting and
polishing industry can sustain itself,” says Keith Jefferis, managing director
of Econsult Botswana, a private economic and development consultancy, and
former deputy governor of the Bank of Botswana. “It’s one thing to get the
diamond-cutting factories here when you are a major rough producer; it’s
another to keep them here when the resource runs out.”
Debswana, the local diamond-mining joint venture between the
government and De Beers, recognizes its resource limitations. Chief Executive
Officer (CEO) Jim Gowans estimates that the company’s four mines have about 20
years of life left in them. He points out that while Debswana intends to ramp
up production from the approximately 24 million carats expected in 2012 to
stabilize at approximately 29 million carats per year over the next 15 years,
output would come exclusively from the current portfolio of mines. “We’re not
so much about growth,” Gowans says. “Most of our investments have been to
extend the life of the mines we already operate.”
THE REAL POTENTIAL IS DOWNSTREAM
Botswana’s growth is, therefore, expected to be driven
downstream. With 16 diamond factories in operation and five additional plants
being established, Botswana’s “diamond hub” diversification program is readying
to move beyond the cutting and polishing stage. Jacob Thamage, the diamond hub
coordinator, explains that the diversification strategy hinges on four areas,
namely: the promotion of cutting and polishing, establishing rough trading in
the country, the development of a jewelry manufacturing industry and the
establishment of services that support the diamond industry.
The Botswana government, which has a 15 percent stake in De
Beers and an option to increase that to 25 percent following Anglo American’s
buyout of the Oppenheimer family in November 2011, has been trying to move this
program forward for some time now. Its efforts succeeded with the government’s signing
of a ten-year supply agreement with De Beers in September 2011 that outlined
DTC’s move from London and the prospective launch of the Botswana state-run
rough sales. “This agreement, and the tangible outcomes it will deliver, will
enable Botswana to achieve its aspiration to be a major diamond center engaged
in all aspects of the diamond business,” says Ponatshego Kedikilwe, Botswana
minister of minerals, energy and water resources. For De Beers, the benefit for
agreeing to the move was a secure supply of rough for the next ten years.
The historic deal — after all, diamond rough sales have been
conducted in London since the very first sights in 1934 — will transfer DTC’s
aggregation and sorting activities and sales to international clients to
Gaborone by the end of 2013. A company has been registered in Botswana,
currently under the name De Beers Aggregation Company, to incorporate DTC’s
international business that will take place there. Discussions are underway to
change the company name to reflect the full extent of its operations beyond
just aggregation.
The structure of DTC’s activities in Botswana will therefore
be split between the newly formed company overseeing the international
operation and DTC Botswana, which will concentrate on its core function of
sorting and valuing production from Debswana. DTC Botswana, which, like
Debswana, is a 50-50 joint venture between De Beers and the Botswana
government, will therefore be servicing both its parent companies — DTC and the
government. Eventually, it will also supply the state-owned Okavango Diamond
Trading Company with its rough allotment.
Both DTC’s international unit and DTC Botswana will operate
from the DTC Botswana building in Gaborone, and much of the current
construction work underway there involves refurbishing the building and making
the necessary infrastructure and logistical adjustments to accommodate the two
companies. The three-story structure, which was opened in 2007, has a capacity
to handle 50 million carats of diamonds. Until now, it has processed less than
half of that amount because only Debswana production has been sorted at the
building and then shipped to London. Starting in October 2012, all of De Beers
rough production will be flowing through Gaborone.
A PLATFORM FOR TRADING

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Debswana
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Developing an attractive, efficient rough trading platform
is probably the most vital step to ensure the long-term sustainability of
Botswana’s diamond industry. Thamage notes that the hub program is currently
immersed in establishing rough trading in Gaborone.
Okavango was set up in March 2012 following the 2011
agreement between DTC and the Botswana government to make available a portion
of Debswana’s production for sale independent of DTC. According to the
agreement, the government’s share of Debswana’s production, 10 percent of which
was available retroactively to January 2011, will increase by 1 percent per
year until it stabilizes at 15 percent, which is anticipated in 2016. If the
government — through Okavango — declines to take its entitlement, as it has
until now, DTC has the first right of refusal to buy those goods.
Given current production levels and future projections,
Okavango is expected to have between 3 million and 4 million carats per year
available for local sales. The goods will be supplied by Debswana in a
ten-sight cycle to mirror the one used by the DTC. Significantly, the sales
will mark the first time that Debswana goods are sold in a nonaggregated format
— that is, not mixed with De Beers production from other centers in South Africa,
Namibia and Canada — which Thamage recognizes as an opportunity to sell purely
Botswana branded diamonds for the first time.
Thamage, who also serves as the nonexecutive chairman of
Okavango, acknowledges that the planned launch of rough sales is behind
schedule. The government had envisaged starting at the beginning of 2012. But
at press time, the company was still in the process of appointing a CEO to head
the management team who will design the sales strategy for the company. “We are
open to all options and no sales method has been set up yet,” Thamage says.
“But we would be disappointed if sales did not commence by the end of 2012.”
Paul Rowley, acting CEO of DTC Botswana, notes that his
company still needs to determine how Okavango’s Debswana entitlement will be
handed over since the supply cannot reflect DTC boxes or selling assortments
due to laws regarding competition, given that there is a potential overlap
between the DTC and Okavango operations. “Now that the government has
established its trading organization, we will form a workshop and working group
to determine how to hand over the goods at DTC Botswana,” he says.
THE BOTSWANA BOURSE
Regardless of the method of sales decided upon, the country
is gearing up for its inevitable launch. In May, the Diamond Technology Park
(DTP), a private initiative of South African Diamond Corporation (SAFDICO),
completed construction of the second phase of development at the park, a
three-story bourse building that includes a trading platform with 12 viewing rooms
for tenders and auctions.

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DTC Botswana diamond sorter in Gaborone.
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“The trading platform will attract local and international
producers who want to market their diamonds in Botswana,” says Rutang Moses,
CEO of the DTP and of SAFDICO Botswana. She adds that DTP has been in talks
with the government to use the bourse for Okavango’s sales, but no decision has
yet been made.
Moses reports plans are being made to accommodate demand for
additional office space with a new high-rise building located next to the
bourse building. DTP has 130,000 square feet of land available for expansion,
and occupancy of the proposed phase-three building is expected to start around
the beginning of 2013. “Our business model is to grow with the industry and
make sure that we are aligned with the government’s aspirations to transform
the country into a leading diamond trading center,” she says.
DTC’S CONTINENTAL SHIFT
The industry is betting that such growth will come because
the government sales will incentivize more of the diamond industry to come to
Botswana to buy rough and do business. And the DTC’s shift of its aggregation
and selling and distribution operations from London to Gaborone also will bring
more dealers and sightholders to the country.
By the end of the transition process, approximately 80
London-based DTC employees will have relocated with their families, and
hundreds of diamantaires are expected to travel to Botswana for each DTC sight.
Rowley, who is overseeing the move, notes that DTC is on track to complete the
move by the end of 2013, when the so-called “London sight” will take place in
Gaborone for the first time.
Until then, DTC is moving in stages. Rowley explains that
whatever currently operates out of DTC’s London offices will eventually operate
out of Gaborone, except for DTC’s research and development and pricing
functions.
By August 2012, the quality-assurance team, consisting of
about 20 individuals, will have relocated, and they will be followed by the
aggregation team of about 20 people in preparation for the October 2012 sight,
which is scheduled to be the first with goods aggregated in Botswana.
From the date of that first Botswana aggregated sight, until
the entire transition is completed more than a year later, the sight boxes will
essentially be created in Gaborone and forwarded to the U.K. for distribution
to the 66 London sightholders and two Canadian sightholders. The appropriate
boxes will be sent directly from Gaborone to Johannesburg for the ten South
African sightholders, to Windhoek, the capital of Namibia, for the 13 DTC Namibia
sightholders, with the remainder staying in Gaborone for DTC Botswana’s 21
sightholders.
The behind-the-scenes work, or, as Rowley puts it, “the
number crunching and instructions on how to create the boxes,” will be sent via
IT networks from October until the rest of the planning and logistics staff are
in place in Gaborone, which is expected in the first half of 2013. The final
group to relocate will be the sales team — as well as DTC CEO Varda Shine — and
they will be on location when the “London sight” is launched in Gaborone around
November-December 2013.
RESTRUCTURING
The approximately 80 DTC London employees have committed to
moving to Gaborone with three-to-five-year contracts, after which they will be
nationalized if they stay on, or their jobs will be localized, as is expected
to be the case in most instances. DTC will initially hire another 40 local
Botswana citizens to bring the full employee count to 120. That is in addition
to approximately 430 people, mostly local, currently employed by DTC Botswana.
“Over time, there will be shifts in those dynamics, but for
now, we want to make sure that we move a business that is operational and that
we have a seamless transition,” Rowley says. “That’s why it’s so important that
we bring the skills over from London, where appropriate, because we don’t want
any hiccups in the process.”
REAPING THE BENEFITS
By itself, the additional volume of goods will benefit
Botswana’s economy, and Thamage estimates that the value of the country’s
annual diamond exports will rise from around $4 billion to above $7 billion.
But the real economic benefits will not be immediate. Given the country’s high
unemployment rate of around 18 percent, and its small population size of
approximately 2 million, the additional exports are not expected to give a
major boost to job creation.
“It will have a positive impact but it’s very difficult to
quantify,” says Jefferis. “The broader impact of the sights moving here will
depend on whether the sightholders themselves physically come, how often, how
long they stay and if they spend more than the minimal time required here.”
Jefferis projects that the main beneficiaries will be the
tourism and retail industries. Potentially, he observes, 500 people will be
traveling to Botswana every month, staying at the local hotels and eating at
the city’s restaurants. And, as the industry grows, so, too, will demand for
related ancillary services needed to conduct diamond business. Already, banks,
brokers, freight services and packaging companies have set up offices in
Gaborone.
Rowley agrees, and stresses that the benefits of DTC’s
relocation are not just about the number of diamond jobs, but about what those
jobs will create beyond the industry. “It’s about ensuring beneficiation beyond
diamonds and what it will attract in a broader economic sense — tourism, the
hotel industry, the excitement and commerce that comes with it,” he says.
“Really, the opportunities for Botswana are what this is all about — how we
move into diversification and what our economy looks like beyond diamonds —
that is the catalyst.”
Article from the Rapaport Magazine - July 2012. To subscribe click here.