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South Africa’s State Trader Looks to Buy Diamonds Abroad

Profit -45% in Tough Market

Oct 23, 2012 6:35 AM   By Avi Krawitz
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RAPAPORT... South Africa’s State Diamond Trader (SDT) is looking to purchase rough diamonds from other countries, in particular Zimbabwe, as it was unable to procure sufficient local goods to advance South Africa’s beneficiation sector. 

The trader noted shortcomings in its current operations since it can only buy run of mine production from local diamond mining companies, the majority of which is not suitable for cutting and polishing.

The SDT is a government entity mandated to buy up to 10 percent of South Africa’s run of mine diamond production to make available for local manufacturers to develop the country’s cutting and polishing industry. Critics of the legislation governing its operations have long argued that the run of mine production would not provide sufficient gem-quality diamonds to ensure a vibrant beneficiation industry.

Target clients generally require a narrow range of rough diamonds that produce round, 1 carat and larger, SI1+ clarity, I+ color polished stones, the trader explained in its annual report for fiscal year that ended March 31, 2012 published recently.

The trader reported that only 6 percent of South Africa’s production by volume, representing 51 percent by value, was suitable for beneficiation in the fiscal year. While the legislation is unlikely to change in the near future and local producers appear unwilling to supply better quality goods to the SDT beyond what they are required by law, the trader said it is looking at alternative sources from other countries.

“This risk [of unsuitable supply] could be mitigated by purchasing suitable rough diamonds from other countries,” said Yekani Tenza, the chairperson of SDT’s audit and risk management committee. “In this case the State Diamond Trader would not be bound by the run of mine purchasing format, effectively selecting rough diamonds suitable for cutting and polishing in South Africa.”

Tenza reported that progress has been made with regards to the possible purchase of goods from Zimbabwe but these have been held up by a number of logistical issues.

Profitable For Now

During the fiscal year that ended on March 31, 2012 the trader bought just 4 percent of the country’s production, compared with 9 percent in the previous year.

Purchases by value fell 47 percent year on year to $46.9 million (ZAR 410.4 million), while volume declined  65 percent to 293,087 carats.

“As a result of the general price volatility within the diamond industry, the State Diamond Trader had to decline the purchase of a number of productions to ensure maximum trading within such adverse trading conditions,” said Futhi Zikalala, the chief executive of the SDT. “The main reasons for the decline were the prices at which rough diamond were presented and a subsequent lack of demand.”

Sales fell 47 percent to $92.6 million (ZAR 810 million) due to lower available production and an unsustainable rise in prices in the first half of calendar 2011. The trader sold goods to 58 companies during the fiscal year, compared with 60 in the previous period.

Sales to its mandated clients with historically disadvantaged South African (HDSA) backgrounds rose 65 percent to $1.2 million (ZAR 10.6 million), while sales to large and medium sized companies fell 39 percent to $38.9 million (ZAR 340 million). Sales to niche clients - those without HDSA backgrounds that employ fewer than 10 people – increased 44 percent to $9.3 million (ZAR 81 million).

The trader reported that profits fell 45 percent to $1.5 million (ZAR 12.9 million) during the fiscal year. Zikalala noted that profitability was achieved by upholding its operational policies relating to purchasing, production, sales and stock holding, but warned that future performance largely depends on supply.

“In the long term profitability will be ensured through the efficient distribution of those rough diamonds deemed not suitable for local beneficiation,” she said. “The suitability of rough diamond production for beneficiation purposes impacts the sales of the State Diamond Trader.”
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