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Living Up To Diamonds

Editorial

Apr 7, 2011 3:22 PM   By Avi Krawitz
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RAPAPORT... As crazy as it seems, Botswana is struggling to secure a long- term supply of rough diamonds. The country needs to do so if it stands any chance of achieving its beneficiation dream to create a vibrant cutting and polishing industry, with trading in rough and polished, and jewelry manufacturing taking place in Gaborone.     

As a result, the underlying issue at the Diamond Beneficiation Pitso (workshop) which took place in Gaborone this week was that the current talks between De Beers and the Botswana government could represent the next turning point in the country’s diamond journey - even if the subject itself was somewhat of a taboo topic. The two are negotiating terms of a new marketing agreement governing production at their Debswana joint venture. The prolonged deliberations may be proving that “living up to diamonds” is sometimes tougher than it seems for De Beers.

If Gaborone is to compete with the likes of Antwerp and Ramat Gan as a trading center, Botswana will need the volumes of rough that only Debswana can provide to encourage trading and entice buyers to travel to the city. It currently does not have that leverage as only aggregated De Beers rough is supplied to the 16 sightholders through DTC Botswana.

Consider the rough trading that recently began at Firestone Diamonds, which operates the fledgling BK11 mine in the country but is also selling goods from its Lesotho-based Liqhabong mine in Botswana. The company’s first tender in December of just 8,000 carats drew applications from about 55 companies – a vast majority of them foreign entities –, of which 32 were accommodated. Approximately 60 companies applied to view Firestone’s 12,000 carats on tender this week.

Imagine the traffic if Debswana were to tender 200,000 carats, about 10 percent of its production, per month?

While diamonds currently contribute approximately 75 percent of government export revenue through the mining operations, it is vital that the country be able to benefit from the industry once that resource runs dry. Current operations are expected to be depleted in 30 to 40 years.

Therefore, the questions posed at the Pitso are real and urgent. As Keith Jefferis, managing director of econsult Botswana and former deputy governor of the Bank of Botswana, challenged: Are Botswana’s goals to maximize the value from rough production while mining lasts, or to build a long-term sustainable capacity beyond mining?

Most agreed with the latter option, albeit with a trace of skepticism. The odds are not in Botswana’s favor. Jefferis noted that historical efforts by producing nations to build sustainable beneficiation industries have not been successful.

“The cost of transporting diamonds is effectively zero, and hence in a competitive market – where rough diamonds can be readily bought and sold at transparent prices, the location of raw materials would not determine the location of beneficiation,” Jefferis explained. “In such a market there would be no intrinsic economic advantage in beneficiating diamonds where they are mined.”

Therefore, Jefferis stressed that Botswana needs to show that it can provide a comparative advantage for companies to set up their cutting and polishing and other downstream activities in Gaborone. Currently, it has none. The 16 companies operating in the country are there simply because they get the rough.

The good news, as Roman Grynberg, senior research fellow at the Botswana Institute for Development Policy Analysis, explained, is that comparative advantage can be acquired. “Beneficiation is only going to work in the diamond industry if Botswana becomes a better place to do business than other non-producing centers such as Antwerp, Ramat Gan and New York,” Grynberg stressed. 

While most recognized that Botswana cannot compete with India and China when it comes to volumes, labor supply – the country has a total population of just 2 million people – or labor costs, the apparent niche ambition for Botswana is to be for diamonds, what Germany is to cars in terms of both quality and reliability.

That will require an initial focus on other factors to enhance its competitiveness. The Pitso revealed that Botswana needs to place a strong emphasis on skills development and should encourage ex-patriots to come to the country to impart their knowledge to locals. Government needs to fine-tune its tax regime to boost investment and ease any bureaucratic hurdles that may block development of the industry. It must invest in infrastructure to improve the power supply and internet access which enable diamantaires to operate efficiently. For beneficiation to work the country has to expand its auxiliary services that complement the industry such as access to financing, brokerage, shipping and grading services. Botswana also needs to improve its hospitality infrastructure by building new, more upscale hotels and, more importantly, developing an open-skies policy that will allow more foreign airlines to operate in the country and bring direct flights from other trading centers besides Johannesburg.

Minister of minerals, energy and water resources and acting vice president P.H.K Kidekilwe noted that many of these issues are being addressed, and there is evidence of that on the ground. His participation at the Pitso, well beyond his opening remarks, highlighted government’s willingness to listen and make beneficiation work. Indeed, the industry’s access to the government in Botswana may well be unprecedented.

However, while all these factors are vital to create a comparative advantage, it is questionable whether they alone are enough to truly boost the beneficiation program. At the end of the day, enabling access to more rough not only provides Botswana with the leverage to entice diamantaires to the country in the initial phases, but will enhance its competitiveness in the future.

Therefore the ball is once again in the De Beers court and the negotiations must be asking tough questions of the company. While De Beers should be credited for the remarkable impact it has made in the country over its forty-year partnership with Botswana, its legacy over the next four decades and beyond may well be on the line.

At this juncture, it appears that legacy will be determined by De Beers willingness to loosen its hold on Debswana rough and thus deviate from its supplier of choice program.

By freeing 10 percent to 15 percent of Debswana to be sold on the open market in Gaborone, De Beers would facilitate the development of a viable downstream industry in Botswana.

In the same way that sightholders are required to support national economic development in the beneficiation centers, De Beers, despite its proven track record, must also show that it truly is living up to diamonds. In so doing, the company will help ensure a life for diamonds in Botswana beyond mining. 

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

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Tags: Avi Krawitz, beneficiation, Botswana, De Beers, diamonds
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