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Diamonds & Jobs in South Africa

Editorial

Apr 28, 2011 12:00 PM   By Avi Krawitz
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RAPAPORT... In South Africa, job creation is key. While this month the country was accepted as part of the BRICS group of large emerging economies — joining Brazil, Russia, India and China — its unemployment stands at approximately 24 percent. Youth unemployment stands at a staggering 50 percent, according to the International Monetary Fund (IMF).

While the local diamond beneficiation sector was never going to provide the volume of jobs to bring those numbers down, one cannot help but feel that an opportunity is being missed in the industry. Even as South Africa’s beneficiation industry grew by value in 2010, the country’s importance as a diamond-cutting center continues to diminish.

This does not have to be the case. The local industry has fallen victim to ineffective legislative changes, diminishing supplies, and the growth of other competitive emerging beneficiation centers, all of which coincided with the global financial downturn. As a result, there are currently just 1,200 people employed in South Africa’s once burgeoning cutting and polishing sector, down from around 2,000 employed pre-downturn in 2008. Discounting the recession, some lament that the industry has, or had, the potential to employ 5,000 to 10,000 people.

If anything, the country has emerged as a rough trading center. In a recent interview with Rapaport News, Levy Rapoo, chief executive of the South Africa Diamond and Precious Metals Regulator (SADPMR), reported that the value of goods polished by local cutters rose 25 percent year on year to an estimated $354 million in 2010. While the numbers were compared to the weak performance of the trade during the recession of 2009, he acknowledged that dealers were buying more rough than local beneficiators.

This serves contrary to the country’s goals. Indeed, the underlying purpose of the Diamonds Act, 1986, as amended in 2005, and the Precious Metals Act of 2005, was to grow the beneficiation industry and facilitate job creation in South Africa, mainly through the development of small cutting and polishing businesses.

An estimated 70 percent of the aforementioned workers are employed by the 16 Diamond Trading Company (DTC) sightholders operating in the country. Furthermore, of the 100 companies registered to buy goods from the State Diamond Trader (SDT), which was set up in 2007 to distribute rough to local beneficiators, just 15 were active in 2010, Rapoo said. During the fiscal year that ended March 31, 2010, the SDT reported that it had 105 registered clients, of which 34 made purchases.

That’s not to say that the SDT is not profitable. It has been, largely due to its interim sales strategy that enabled its clients to pre-finance their purchases.

Still, small entrepreneurial businesses have long complained that they do not have access to sufficient rough to ensure their sustainability, a point that Ernest Malakoane, chairman of the United Diamond Association of South Africa (UDASA), has often stressed. UDASA represents small diamond business owners in the country. “Many factories are lying idle operating at a barely skeletal level, while the South African diamond miners are exploiting even more of their production,” Malakoane recently told The Star newspaper. 

According to the legislation, mining companies operating in South Africa are required to make 10 percent of their production available to sell to the SDT. In return, they get various discounts on export duty payments. De Beers, for example, as the major producer in the country, gets a full exemption from an export levy of 5 percent, if it supplies 40 percent of its production by value, to local companies. It achieves this by supplying the SDT and the 16 local sightholders.

Similarly, other companies attain this exemption by selling 10 percent to the SDT and allocating a further percentage to sell locally, mainly by tender. It is suspected that large multi-national companies are able to acquire much of these goods through their South African subsidiaries or licensed partners, before they are shipped to be polished elsewhere.

Furthermore, most recognize that the legislation fails in that mining companies can offer 10 percent of their run-of-mine production to the SDT, much of which is not gem quality diamonds. This aggravates the difficulty faced by beneficiators to procure profitable rough which would help grow their businesses.  

The mining landscape in the country is also changing as De Beers has sold off large portions of its portfolio to Petra Diamonds. While De Beers production in South Africa reached 7.556 million carats in 2010, accounting for 85 percent of the country’s total production, the figure will inevitably drop in 2011 and beyond once the sale of the Finsch mine is concluded. Output at Finsch was 1.583 million carats last year.

The result is that De Beers will likely decrease the number of DTC sightholders in South Africa at the start of the next contract period in April 2012 as it will have fewer goods to supply. Reports have already surfaced that some of the local South African sightholders are looking to shift their operations to Botswana, where two or three additional manufacturing licenses are reported to be up for grabs.

As noted previously about Botswana (see editorial 'Living up to Diamonds' published on April 7, 2011), there is little added benefit for companies to be located where the rough is. South Africa therefore needs to provide incentives for multi-national cutting companies to operate in the country. More importantly, it needs to implement a sustainable program to ensure that sufficient, gem-quality rough diamonds are made available to entrepreneurial diamond cutters. It is understood that a program devised by the SADPMR is in the pipeline.

Anything short of success would result in further deterioration of a sector, already plagued by a pessimistic outlook. If, as Rapoo stresses, South Africa is still the land of gold, platinum and diamonds, the industry must be a catalyst for job creation. 

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

This article is an excerpt from a market report that is sent to RapNet members on a weekly basis. To subscribe, go to
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Tags: Avi Krawitz, beneficiation, De Beers, Polished Diamonds, South Africa
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