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South Africa’s Beneficiation Industry Faces Continued Challenges

Q&A with Ilan Kaplan – Chairman of the South African Diamond Manufacturers Association

Sep 14, 2014 2:37 AM   By Rapaport News
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RAPAPORT... South Africa’s diamond manufacturing industry has undergone significant changes in the past few years, resulting in dwindling numbers and less cutting taking place, despite attempts to encourage beneficiation in the country. Ilan Kaplan, chairman of the South African Diamond Manufacturers Association (SADMA), recently sat with Rapaport News to discuss some of the challenges and barriers to industry growth, along with efforts to reverse the trend:

Rapaport News: What is SADMA in the context of South Africa’s beneficiation industry?

IK: SADMA is a constituted body representing anyone who holds a diamond beneficiation license in South Africa, which is a license to cut and polish diamonds. We have an annual general meeting and an elected executive committee, of which I’ve recently been elected to my fourth term as chairman.

We have about 35 member entities and there are approximately 900 people employed in the cutting and polishing sector, which is an all-time low, having shrunk from about 1,200 workers over the past three years. Of those, about 600 people are involved in direct diamond work, while the rest are administration and support staff. Our association represents over 90 percent of those employed in the industry.

Rapaport News: Why did the industry diminish to that extent?

IK: South Africa is a highly regulated business environment and many foreign investors have pulled out of the diamond sector as a result of this. In addition, manufacturing costs in South Africa have escalated to the extent that it no longer makes sense to manufacture a wide range of diamonds in the country.

Another reason is that there was always a strong sightholder network in South Africa that supported employment levels. However, whereas three or four years ago there were around 25 sightholders in the country, today there are only eight.

De Beers sold many of its South African mines so its available supply to local sightholders declined. With diminished supply from De Beers, sightholders could no longer invest in keeping large factories going. The bulk of production from those sold mines is subsequently being sold on tender and exported, rather than being manufactured by sightholders in South Africa.

Rapaport News: Does Petra Diamonds, which bought those mines, not ensure that same consistent supply?

IK: Petra’s marketing model is vastly different to that of De Beers. Whereas De Beers markets its goods via a consistent contract system, Petra sells primarily via tenders, and therefore the supply to any particular customer is inconsistent. There is never any guarantee of success in purchasing on tender, and therefore it is very difficult to make any significant investment in a cutting operation without some form of supply consistency.

Petra holds its tenders at the Diamond Exchange and Export Centre (DEEC), offering its goods to local and overseas buyers. In doing so, a substantial amount of diamonds are being sold to overseas-based customers, and therefore diamonds that were historically manufactured in South Africa by De Beers sightholders are now leaving the country.

Rapaport News: Does the State Diamond Trader (SDT) not ensure that locals receive sufficient supply to grow the industry?

IK: The SDT is entitled to 10 percent of run-of-mine production from local producers. They can purchase up to 10 percent assuming they agree on price but, for whatever reason, the SDT doesn’t always buy the full amount.

Whatever they do purchase is then made available to local manufacturers, but the bulk of the run-of-mine production that is available can’t be profitably cut and polished in South Africa. Therefore the small volume of goods that are left are not serving to promote beneficiation in any meaningful way.

There are really only certain high-end, valuable diamonds that can be profitably cut in South Africa and the SDT is not able to supply enough of those to the local industry. The SDT is in an impossible situation because it has to promote beneficiation but doesn’t have the tools to do so with the mandate given to it by the legislation, namely the purchase of run-of-mine production.

Rapaport News: Of SADMA’s 35 members, how many are small, beneficiation businesses?

IK: SADMA has about five members who are young, historically disadvantaged South Africans, who have beneficiation licenses and now need a boost to help them on their way. There is a trend in government to try and promote historically disadvantaged entrepreneurs. SADMA, together with the SDT and De Beers, is assessing how to go about putting a mentorship program in place to help grow that sector.

For any manufacturer starting out there are four primary entry barriers: access to finance, access to rough diamonds, manufacturing and technical know-how, and sales and distribution ability. A historically disadvantaged South African who has a beneficiation license, might need guidance on how to pay for rough supply, how to get the maximum yield out of the rough, and how to sell the goods. The idea is to break down those barriers.

The SDT would be fulfilling its mandate by supplying rough to these entrepreneurs. SADMA has committed to train them in diamond valuation and manufacturing, and assist them with marketing, and open up avenues to sell their polished diamonds. Financing is still a big question. There are funds available from government bodies but it’s not easy to access. In some cases, our more established members have been willing to finance these entrepreneurs.

De Beers fulfills its corporate social responsibility requirements by participating in such programs. The company has commissioned a study, which came up with various proposals that are now being debated to determine the best way to structure the program.

There is a view that there should be a central hub to house the participants, where they can share equipment and workers and make the economies of scale work for them. Our concern is that the real manufacturing knowledge can only be gained by spending time in the actual factories, and they might miss out on that knowledge by being located in the hub.

Rapaport News: Is there space for entrepreneurs to enter the industry if big sightholders are moving out of South Africa?

IK: It’s a valid question given that the industry has dwindled and manufacturing here is very challenging. However, you can’t only look at this from a business point of view.

South Africa has been transforming over the past 20 years, and our industry has not kept up with that transformation. It’s a dwindling industry and we’re all trying to stay alive. As South Africans who care deeply about our local diamond industry, we believe that we have a responsibility to bring about this transformation in our industry, even if it may not be the optimal business decision.

Rapaport News: Where do the Master Diamond Cutters Association and the Rough Dealers Association fit in today’s structure?

IK: Historically, there were two main entities representing the industry: the Master Diamond Cutters Association and the Rough Diamond Dealers Association of South Africa.

When the new Diamond Act came into effect in 2006, the industry faced many new challenges and felt that it should go to the government and confront those challenges with one unified voice. So the cutters and rough dealers merged to form the Diamond Council of South Africa.

It soon became apparent that the interests of the diamond dealers and the cutters were different. For example, the dealer might want the export levy on rough to be as close to zero as possible so that he can buy rough and export to overseas clients as cheaply as possible. The diamond cutter might support the levy as it serves to keep rough in the country for local manufacturing.

Due to these differences, the manufacturers decided to once again represent their own interests. Therefore in 2011, the Master Diamond Cutters Association was reconstituted as SADMA, while the rough dealers kept their own association. Today, where we do have common interests, the manufacturers and dealers still work together under the umbrella of the Diamond Council of South Africa.

Rapaport News:
Has there been an increase in rough dealing activity in South Africa in lieu of manufacturing?

IK: Generally, diamonds are bought from the source and are either manufactured locally or exported out of the country. Holders of a diamond dealer’s license today primarily facilitate the purchase of rough diamonds in South Africa from foreign-based entities and the export of those diamonds. There is very little traditional rough dealer trading happening in South Africa at present.

The terms of the existing beneficiation license dictate that you’ve got to locally manufacture 80 percent of the rough you buy, which means you can export or sell 20 percent. So the law recognizes that you can’t manufacture 100 percent of every parcel you buy and allows for some flexibility. We’re proposing to make one license, as opposed to separate beneficiation and dealer licenses, and build in more flexibility that would also satisfy the dealers. The terms of one license would dictate the holder’s responsibility to beneficiate as well as deal, which we believe would encourage the foreign based clients of the dealers to invest in promoting beneficiation in South Africa, instead of simply earmarking the rough for export. That’s how you promote beneficiation in South Africa – by attracting true foreign investment to the sector.

Currently, the tenders are flooded with foreign buyers who are accompanied by local license holders. The foreign buyers don’t have licenses but purchase rough through the local dealer’s license and the goods are ultimately exported.

Our aim, together with all of the other industry stakeholders, is to come up with a creative solution to keep more of South Africa’s diamonds at home, to promote beneficiation, while at the same time entitling the producers to maintain top dollar on their rough and create a friendly rough dealing environment.

Rapaport News: How do you expect the South African market to evolve in the coming years?

IK: A lot depends on supply and we expect De Beers local production to stay fairly constant. Similarly, I think that in the best case scenario the industry’s employment numbers will stabilize close to current levels.

I think there might be further consolidation in the industry and that in a few years we could have fewer sightholders than are operating here today. I think there are one or two companies that are in a transitional phase deciding whether or not to stay, and there might be other big companies that will try to come back. Ultimately, short of some significant positive changes in the legislation and regulatory environment, the diamonds will be in fewer local hands.
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