Thursday, April 2, 2020

Botswana diamond industry in growth pains

The final leg of my De Beers tour of Southern Africa was in Botswana … Visiting here you really get a sense of the great changes happening in the industry and I thought I would summarize the main ones:

For many years, De Beers and Botswana had a symbiotic relationship. Diamonds are, of course, the main engine of Botswana’s economy (more on that in a bit), and Botswana’s massive diamond production accounts for an estimated 66 percent of De Beers’s profits. Many have called the two “Siamese Twins.” But today, as Chaim Even-Zohar said, one twin is stronger than the other.

– Back in the cartel days, Botswana had nowhere else to go. But in its last contract renewal, Botswana was able to extract a remarkable series of concessions from De Beers, including:
– When De Beers first went private, Botswana owned 7.5 percent of the company. Now it owns 15 percent. This is not only a huge gain in profits for the country, but it makes it a crucial swing vote in any possible conflicts between De Beers’ two other owners, the Oppenheimer family and Anglo-American.

– De Beers is setting up DTC Botswana, which will, among other things, sort production from all of De Beers mines.

This function was previously done in London. This will transfer hundreds of jobs from London to Botswana, and, quite possibly, cause the closing of a portion of De Beers’ famed headquarters on 17 Charterhouse Street.

– Perhaps most signficantly for the downstream industry, DTC Botswana has been authorized to sell a certain amount of goods to local factories. The eventual goal is to sell over $300 million locally over the next few years.

At press time, there are only three factories operating in Botswana, but in anticipation of the new order, sightholders have applied for licenses, and in the next year or so there should be 16 cutting factories in Botswana, which will create an additional 3,000 jobs.

As part of our tour of the country, we were taken to the Leo Schachter’s factory in Botswana, which was previously owned by Lazare Kaplan. One of the key issues in all this is whether diamond cutting in Botswana (as well as Africa in general) will ultimately prove profitable. In my last trip here in 1998, officials from Debswana (the joint De Beers-Botswana partnership) emphatically said it would never be. The leadership has changed its tune since then, of course, but it remains to be seen whether they were right the first time.

Schachter has owned its factory here for ten years. When asked if it was profitable, Schachter’s employee, Danny Schachar, said it made money “in 2006,” after it underwent a major upgrade.

Take from that what you will. The problem, of course, is that Botswana has high labour costs ÔÇö at least compared to India and China. In addition, there is no history of diamond cutting here, which means all the employees will have to be trained.

The lack of skilled labour brings up the problem of all the new companies poaching each other’s employees. Since there are only, at this time, a very limited number of skilled cutters in Botswana, the most experienced cutters may find themselves very hot commodities. Schachar said he welcomes all the new companies to Botswana as long as, in his words, “they decide to be gentlemen” and “not steal” his already-trained employees. Rampant poaching will, of course, just drive labour costs higher.

So will this work? One would hope that sightholders would not engage in an unprofitable venture simply to obtain rough, but that has certainly happened in the past. And when Russia and Canada tried to start local cutting industries, the results were unimpressive. But, it should be noted, there will be some savings on shipping and other costs when the goods are produced and sold in Botswana, rather than sold in Botswana, sent to London, and then shipped to an overseas company. In any case, there is immense political will to create a cutting (as well as, eventually, jewelry) industry here ÔÇö and that can sometimes work wonders.

– The final point I want to make is something that, while, it is pretty old news to me and probably too many of you, was the point of this (De Beers-paid for) trip: Diamonds have done a lot for Botswana. It is something many of us know in the back of our minds, but it really takes a visit here to see how diamonds have turned this country from one of the poorest in the world to the most prosperous and stable in Africa (if still poor by Western standards.)

The country’s Permanent Secretary in the Ministry of Finance, Serwalo Tumelo, probably said it best when he told me: “To us, diamond revenue is life. It is the economy itself. They are schools. They are hospitals. They are our lifeline.”

There has been a lot negatives said about the diamond industry recently ÔÇö and certainly much of it was true (at least in the past.) But the industry’s record in Botswana is something we can all be proud of, and it only looks like the industry’s contributions to this country will only increase in the future.