The Botswana diamond beneficiation dream is turning into a nightmare because of a “regulatory failure” in the agreement between Botswana and De Beers which has left the back door open for diamond manufacturers to legally smuggle diamonds out of Botswana’s beneficiation system.
The deal between Botswana and De Beers which was expected to create jobs in the country is now seeing hundreds of jobs being exported to India and Thailand because of loopholes in the agreement that allows diamond manufacturers to get Botswana diamonds without having to operate factories in Botswana.
It emerged this week that Diarough which recently closed down Teemane Manufacturing Company in Serowe, laying off more than 300 workers will continue to cut and polish Botswana diamonds at its Bhopal factory in India as well as its factory in Thailand.
States Professor Grynberg from the Botswana think tank- BIDPA: “Was this foreseen at the time the agreement with De Beers was signed in 2011? Almost certainly not ÔÇô it was what economists call an ‘unintended consequence’ of the negotiated marketing system.┬á
Similarly Botswana has imposed beneficiation obligations on De Beers but at the same time we are exempting state owned companies like Okavanago or private ones like Lucara and Gem Diamonds from the same obligations. The buyers from these companies can take their stones and cut in India and so it is becoming easier and easier to get Botswana diamonds without any beneficiation. In this way government policy encourages diamond trading but undermines our beneficiation efforts.”
There are fears that more diamond companies will be taking Botswana diamonds and leaving the country because gross margins are falling in the cutting industry and diamond manufacturers are closing their highest cost operations in Southern Africa.
Explainig the regulatory failure, Professor Grynberg states that “the deal that the Government of Botswana made with De Beers in 2004 and revised in 2011 specifically required diamantaire who were DTC (Botswana) sightholders to cut and polish in Botswana. Under this deal these sightholders would eventually get $800 million worth of rough to process here in Botswana. But these sightholders are not fools, they knew at the time that Botswana is a high cost location, so why did they set up here? Industry sources have claimed that in the past the DTCB sightholders would get thrown a ‘special stone’ by De Beers occasionally to compensate them for locating in Botswana.┬á These stones are multi-million dollar diamonds and the profits from one is often enough to compensate producers for low productivity in Botswana. De Beers strongly denied this at the time but now this practice has certainly come to an end. In 2012, the last year before diamond exports figures became confused with re-exports associated with aggregation, Botswana exported some $4 billion of diamonds.
If $800 million or so goes to DTCB sightholders what happens to the other $3 billion that Botswana produces? Well De Beers has many sightholders, 84 according to its web site of which some 21 are in manufacturing in Botswana. The rest take their diamonds in what is one of the other four boxes i.e. Namibia, South Africa and Canada where some of these De Beers sightholders have beneficiation obligations. But a large chunk of all the diamonds produced in southern Africa go into what used to be called the ‘London box’ which, since the move to Gaborone is called,┬á an ‘international sight’. Therefore sightholders may get up to 5 boxes of diamonds at the┬á Gaborone sights every 10 weeks. But the so-called London or international┬á box can be sent anywhere for processing and so in a bear market for polished diamonds, such as is presently the case, the local manufacturers, many of whom have access to a London box, can simply close their factories in Botswana, lose access to their Botswana box but still continue production in India or China.”
Professor Grynberg says, “what has happened to the diamond cutting industry is what economists call ‘regulatory failure’. The closure of the factories in Botswana would probably never have occurred if our agreement with De Beers had said that firms that do not beneficiate a portion of their sites in Southern Africa cannot have access to southern African diamonds … full stop. But instead we have created a complex marketing formula which made the cost of exiting Botswana in the current bear market very low indeed. The firms that closed their doors will continue to have access to Botswana’s diamonds. Thus in a sense the situation where De Beers was claimed to have ‘subsidized rough with rough’ has now been reversed … Botswana provides rough for Indian industry at the cost of our evaporating polished diamond industry. If we had an arrangement which said that only those firms operating plants in Botswana, Namibia and South Africa can have access to De Beers African diamonds the plant in Serowe would probably be open today.
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