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State Diamond Trader Seeks Partners for Growth

Q&A with Futhi Zikalala, CEO of South Africa’s State Diamond Trader

Jul 31, 2015 1:29 AM   By Avi Krawitz
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RAPAPORT... The State Diamond Trader has faced numerous challenges since its establishment in 2007, with internal and external factors affecting diamond manufacturing and beneficiation in South Africa. Rapaport News spoke with Futhi Zikalala, CEO of the trader, about how the organization has navigated those challenges and its plans for the future:

Rapaport News: What is the function of the State Diamond Trader?

FZ: The trader was established to provide access to rough diamonds for local beneficiation and contribute to industry growth through research and necessary intervention.

Our focus has always been on developing historically disadvantaged individuals in South Africa to transform the landscape of diamond manufacturing in this country to include a more diverse population including people of color, women, youth, people with disabilities and others. A large part of our mandate is to ensure that local beneficiation is not hampered by a lack of available rough diamonds.

Rapaport News: Has the Trader’s role changed given how the industry has evolved since 2007?

FZ: Some companies just didn’t survive the 2008-09 recession. That had little to do with rough supply as there are many other factors required to setting up a successful business.

We also saw a change in global dynamics, particularly with De Beers moving to Botswana. Manufacturing tends to follow rough supply and a large part of the industry has shifted helping Botswana grow. This is good for us as the southern African community. At the same time it meant there has been a shift in where companies are investing in diamond beneficiation and job availability.

Another change has been in our strategy. As we sought ways to ensure growth, we started looking at how we can help the industry grow beyond our rough supply. In 2013 we came up with a marketing and promotion strategy, which involves partnering with government and the industry.

Rapaport News: What’s your marketing focus?

FZ: Essentially it’s about marketing and promoting the diamond industry for our clients. While rough supply is the first stage of opening the market for them, we try to facilitate access in other ways.

One of things we’ve done is to take South African diamond companies to the international jewelry trade shows. We’re now in our third year participating in the Hong Kong show where we assist our companies to set up meetings with international players and networking and marketing in general.

We do the same thing locally where we want consumers to participate in our industry. We try to expose them to our clients as much as possible. We’re organizing our inaugural Diamond Indaba (conference) in Johannesburg on October 27, which will coincide with the Jewellex Africa jewelry and watch fair. We’ll also have a diamond pavilion at the fair for the first time.

The theme that we chose for the Indaba is for South Africa to be ‘the heartbeat of diamond beneficiation in Africa,’ and we are in the process of consulting with other industry players about what issues need to be addressed around that theme.

Rapaport News: How do you measure your success?

FZ: On the face of it we can simply measure how much rough we bought and sold. But the more important question is if our clients’ businesses, particularly the small and medium-size companies, are sustaining themselves because of our contribution to rough supply. We recognize that more still needs to be done, which is how we came to our marketing and promotion strategy.

There are smaller issues such as our relationship with the industry on the supply and demand side and the work that we’re doing together to grow the industry. We feel we’re on the right path even though we may not have reached our goal in terms of the number of beneficiation businesses that are active or in terms of employment. With the strategy and plans that we have in place for the next five years we are going to achieve something.

Rapaport News: How many clients does the trader have and how do they qualify to be clients?

FZ: Currently we have 65 clients that are compliant which range in size from large companies employing more than 50 people, to medium-size clients with 20 to 50 employees, and clients that are one or two person operations.

To qualify as a client, a company must have a beneficiation license. That means it has an operational factory in South Africa and fulfills all the business criteria necessary to operate in this country.

Rapaport News: How many people are employed in manufacturing in South Africa?

FZ: I don’t have an exact number but it’s between 500 and 800 workers. The potential is there to restore the industry to much higher numbers that we had in the past. The government has plans that have a potential to bring about more employment and economic activity around diamond beneficiation.

Rapaport News: What is your level of supply?

FZ: All diamond producers in South Africa are required to offer 10 percent of their run-of-mine production to the trader. However, we are not bound to buy the full 10 percent.

I can’t disclose our figures before government publishes them (editor’s note: the State Diamond Trader’s annual report for 2014-15 will be presented in parliament in September / October). However, in a year when the entire pipeline is operating normally, we’ve found that buying 4 percent of production by volume and slightly higher by value took us a long way toward achieving our goals. Only in one or two years of good market activity were we able to buy up to 8 percent.

During poor market conditions we buy less and it could even be 3 percent because of how the market is performing. We can’t just buy and hold those goods for a long time without them moving.

Rapaport News: How is your buying price determined?

FZ: We’re supposed to buy at fair market value. There’s a process which is stated in the law whereby a producer places his goods before the trader at the end of each production cycle and declares his market value on those goods. The government diamond valuator then assesses if that value is fair. If it is not, then the regulator invokes an independent valuation process which leads to fixing a price which we either accept, and we buy the goods, or we walk away.

Rapaport News: How do clients buy goods from the trader?

FZ: We don’t run tenders, although we have the option to use tenders as a sales method. Instead, the parcels are allocated to a client. They’re invited to see the goods after which they have to make a decision whether or not to buy within 48 hours.

Rapaport News: What percentage of your supply are your clients required to manufacture in South Africa?

FZ: Our clients are required to locally manufacture 80 percent of what they buy from us. They’re allowed to exchange or export up to 20 percent.

Rapaport News: How is the market at the moment from your vantage point?

FZ: When the market is really depressed, we see that companies don’t buy as much as they used to. Those that would typically buy bigger parcels are buying smaller parcels. They’ve cut back this year and some have changed the type of goods they buy. So there’s been quite a bit of change in terms of what companies are expecting from us. The small companies haven’t changed their buying patterns in a significant way as they tend to buy a few stones at a time.

Rapaport News: What are the biggest challenges facing the trader?

FZ: We have a mandate to facilitate industry growth so it’s important for us to act on that. Our marketing and promotion strategy aims to give our clients a fair chance at succeeding, which means that we’re also resolving our own issues and challenges – that the businesses that buy from us are healthier. Part of that involves training – whether it’s in marketing or business skills – because it’s important that these businesses are also set up properly to have a fair chance of succeeding.

Rapaport News: How you foresee the trader evolving in the coming years?

FZ: We see ourselves playing an important role in growing this industry and we’re collaborating with a number of skills development entities, both at a state and private level which will ensure that. We’ll continue to facilitate the establishment of many smaller and medium businesses.

We also see ourselves playing a role in assisting the market to promote diamonds further down the value chain at a consumption and retail level in South Africa and in the southern Africa region and beyond. We see ourselves growing into the wider diamond beneficiation pipeline, to beneficiation sales so that we’re adding value beyond our rough supply. In that way we foresee quite a large mandate for ourselves. We’re partnering with government and our suppliers and clients to achieve that. Through partnerships there’s a lot that can be done.

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