The Courier

Production of diamonds in a cutting shop in Antwerp.

Courtesy of the Antwerp World Diamond Centre (AWDC)

Following in the footsteps of the oil and gas producing countries of South America, so-called ‘resource nationalism’ is now being adopted by the diamond-producing states of Africa. They are demanding that the global diamond industry helps them to manufacture their products in their own countries, thus creating a major challenge in terms of profitability for the future.

At the most recent diamond conference requested by the African producer countries (Antwerp, 15–16 October 2007), the focus was on cutting and polishing gems in Africa, which the South Africans term ‘beneficiation’.

These demands for change have come about because leaders of  Southern Africa’s states argue that although Africa supplies most of the raw materials (e.g. diamonds, gold and platinum) to the world’s jewellery industry, it only receives the equivalent of 10% of the overall revenue generated (US$150 billion).

In contrast to a nation like Bolivia (which simply nationalised the petroleum industry by demanding that companies give up their shares to the State), the producers of Southern Africa with their significant shareholdings in mining companies, want to ensure that the added value from the cutting and polishing of diamonds contributes to the improvement of both their balance of trade and the local employment market.

And indeed there is a groundswell of support for this. Africa – including Botswana, South Africa, Angola, the Democratic Republic of Congo and Namibia – accounts for 60% of the volume and value of global rough diamond production, and it intends to take advantage of the oligopoly situation of the mining production companies (the subsidiaries of De Beers and the Angolan state-owned company Endiama) to impose their demands on the market.

Occupying a niche in the market

In order to add value to their products, these States intend to convince the market that they should be given access to a minimum amount of big stones for which labour costs are proportionally lower than for small diamonds. They aim to occupy a niche in the market, leaving the processing of smaller gems to India, Thailand and China where the wage costs are unbeatably low.

In South Africa, an agreement between De Beers and the State Diamond Trader (SDT) grants the latter group the right to acquire 10% of all production so that it can be cut in the country, preferably by companies promoting black economic empowerment. In Namibia, another agreement between De Beers and the Namibia Diamond Trading Company (NDTC) guarantees supplies for 11 diamond-cutting plants between 2007 and 2011. The aim is that these cutting plants would handle quantities of diamonds worth around US$300 million by 2009.

Botswana hopes to increase the turnover of its 16 cutting plants from US$200 million to US$500 million over the next two years, the equivalent of a quarter of its uncut diamond exports (around US$2 billion). This country is taking advantage of the fact that it is the world’s largest producer and that from 2008 its capital city, Gaborone, will be home to the largest sorting and distribution centre of the Diamond Trading Company, the commercial arm of De Beers, which is relocating some of its operations from London to Botswana. The company will also be obliged to supply local cutting businesses under conditions that enable them to be competitive; in other words, by supplying them with both medium-sized and large stones.

Angola is moving in the same direction, boosted by forecasts that current production will double within the next 10 years from around 9 million carats for export, worth US$1.2 billion in 2006.

De Beers, the world’s leading supplier of uncut diamonds, has no choice but to follow the trend. The three countries that still make up the base of its strength on the global market – Botswana, South Africa and Namibia – share the same strategic objective and the renewal of its joint-venture agreements with these States is at stake.

A new oligopoly

An African supply oligopoly is being formed to deal with the mass of the world’s traders and cutters. Its position will grow even stronger from 2008 as demand will outstrip supply and the gap will continue to grow, according to the forecasts of the sector’s other giant, Rio Tinto Diamonds, which admits that beneficiation is inevitable. Even though De Beers is planning to invest some US$2.6 billion in new projects, particularly in South Africa, Botswana, Namibia and Tanzania, there will still be a significant gap between supply and demand. And yet another heavyweight in the global market, Alrosa of Russia, has its president, Sergey Vybornov, estimating that global demand for uncut diamonds will reach US$20 billion by 2020, while supply will only amount to US$9 billion at current production rates. As a result of that, production rates are set to increase.

But, despite all these demands, expectations and changes, Gareth Penny, managing director of De Beers believes that beneficiation can only be achieved under certain conditions: low-wage production costs in Asia must be taken into account; cutters based in Africa must identify the market segments where they can be competitive and, finally, allow the Indian cutters to deal with lower-value production, which cannot be carried out cost-effectively in Africa.

On top of this, African governments have to create an environment to attract direct foreign investment in the sector.

Yet, Antwerp’s diamond traders know that a major challenge lies ahead, in particular the lack of skilled labour currently available in Africa to meet these expectations. To put it in context, training a diamond cutter takes a minimum of five years.

And then there is the geographic component:  prospects are not the same for the main producers (Botswana, Angola, the Democratic Republic of Congo and South Africa) as for the smaller producers like Sierra Leone or Liberia. In day-to-day reality, the first group has much more influence on global markets and finds it much easier to put pressure on the mining companies.