After protracted negotiations, Diamond Trading Company (DTC) operations were finally relocated from London to Gaborone in 2013. The relocation was received with so much glamour and pomp with the hope that it would boost the country’s economic diversification agenda.
With the relocation that is characterised by aggregation and sorting of the world’s diamonds that protagonists have hailed as a positive move, the future of diamond beneficiation in Botswana is grim. Until and unless the government puts in place an appropriate industrial policy to address the imbalances bedevilling the infant industry, the diamond cutting and polishing industry is on the verge of collapsing.
The recent closure of the country’s oldest diamond cutting and polishing firm, Teemane Manufacturing Company that laid off at least 350 workers has triggered a heated debate on whether the diamond cutting polishing industry is commercially viable on the back of falling commodity prices and Botswana’s low productivity compared to established industries, especially in India.
Diamond exports, the country’s biggest revenue earner and economic mainstay hit a record low of P659 million in the month of December 2014 from over P4 billion recorded in the previous month according to central bank figures. It is not only TMC that has been hard hit by crumbling commodity prices that are threatening to affect the country’s projected revenues in the long run. Before TMC closure, Motiganz ceased operations with hundreds of employees losing jobs. Another diamond cutting and polishing firm, Steinetz retrenched part of its staff compliment.
Commenting on the closure of the 20-year-old TMC, Botswana Institute for Development Policy Analysis (BIDPA) economic research Professor, Roman Grynberg, said the closure of the diamond cutting and polishing firm is terrible news for Serowe because the firm is the village’s biggest employer.
“It is terrible news in Serowe. It looks like it will not re-open. All diamond manufacturers have been screaming. The problem started in December when sales slumped. De Beers has been increasing prices of rough diamonds thereby squeezing the margins of the cutting and polishing firms”, said Professor Grynberg.
In his expert view, Botswana’s potential benefits for diamond beneficiation will be permanently lost to India. Namibia and South Africa will not be spared the wrath because production costs in those countries by far surpass those of India.
Professor Grynberg explained that the wages of diamond cutters in Botswana and India are not dissimilar, yet in India there are 800 000 cutters and in Botswana only 3 750; while the difference between the two countries stems largely from the productivity of workers.
“De Beers in its 2014 Insight Report has said that the cost of cutting in 2013 ranged from $60-120 per carat in Botswana, while in India the range varied from $10-50 per carat. In other words, in the smaller diamonds, Botswana is six times more expensive than India and for the larger more expensive stones; it is almost three times as expensive because of low productivity, low cost of ancillary services as well as the number of working days in the year ÔÇô 232 in Botswana as opposed to over 280 days in India. That is the reason why Botswana is limited to commercially cutting one carat rough and above”, said Grynberg.
He said the good news is that at the top end Botswana is becoming a slightly cheaper place to produce than it was five years ago. But the other two smaller southern African diamond producing countries of Namibia and South Africa are actually more expensive locations than Botswana. It is for this reason, along with what the industry considers draconian beneficiation requirements, that employment in South Africa has almost halved in the last five years in diamond cutting from 1 800 workers in 2008 to 1000 in 2013.
According to Grynberg, the situation in Namibia is almost as bad with employment falling from 1 500 in 2008 to 970 in 2013. In other words, with the exception of Botswana, diamond beneficiation is going backwards in the main producing countries of southern Africa. Indeed the cost of cutting in both Namibia ($60-140/ct) and South Africa ($130-150/ct) are higher and tend to be rising faster in Botswana. But the increase in beneficiation and the increase in employment is mandated under a 2006 agreement between De Beers and the government of Botswana.
“If the world’s ‘diamantaire’ had their way, no cutting or polishing would occur in Botswana and southern Africa at all. The answer to why cutting occurs in Africa is as De Beers politely puts it in its publication because of ‘government policy”. In other words if you are a De Beers sightholder and you want Botswana, Namibian or South African rough diamonds then you have to process some of them here. How much? So far the answer is not very much at all. In 2013 about 23 million carats of rough diamonds were produced in Botswana and if the Statistics Botswana figures are to be believed, the total value of polished exports was a mere 273 000 carats in Botswana.
Assuming it takes 2.5 carats of rough to produce one carat of polished diamonds, Botswana is in effect exporting 3% of its rough produce. While the value of cut diamond exports has been rising from Botswana the volume of diamond production has been more or less stagnant over the last five years of the De Beers agreement”, laments Grynberg.
At first the results of the efforts of diamond beneficiation, that is 3% of production look very unimpressive until you consider the low productivity in Botswana and the fact that 80% of diamonds coming out of the ground are very small, that is less than 0.2 carat. Most diamonds have to be processed in low cost centres like Mumbai and Surat in India where there are 800 000 Indians cutting diamonds.
“The employment numbers, costs and general direction of beneficiation are not encouraging in Namibia and South Africa. In Botswana the results are better but require a real assessment by all governments as to what is being done throughout southern Africa. Both Zimbabwe and Angola also have serious aspirations to cut and polish diamonds as well. The failure of diamond beneficiation is a direct result of the failure of industrial policy to address the fundamental issues of productivity in these infant industries. In Botswana, for example, there is not even a diamond school to train cutters and polishers who have been trained by individual firms in the industry.
But a school is the least of the issues. It is necessary to come to terms with workers and unions on the productivity issue or the potential benefits of diamond beneficiation will be lost to India permanently”, said Grynberg.
In his 2015 budget speech that projected a budget surplus of P1.23 billion for the financial year 2015/16, Minister of Finance and Development Planning Kenneth Matambo said despite global economic recovery uncertainty, the outlook for the domestic economy is positive.
The finance minister said real Gross Domestic Product (GDP) was estimated to grow by 5.2 percent in 2014 and is projected to slow down to 4.9 percent in 2015. He said the positive growth will mainly be driven by the non-mining sectors.
To a great extent, Matambo’s assertion implies that the mining sector’s contribution to the national output is doubtful hence the need for intensified diversification in others sectors away from mining.