Africa wants to process its own diamonds

After the hydrocarbon-producing countries of South America, the “nationalism of resources” is now extending to Africa’s diamond-producing countries that are demanding that the industry should assist them in transforming their products at home. In terms of profitability, this represents a major challenge.

At the request of Africa’s producer countries, the last diamond congress, held in Antwerp on 15 and 16 October, focused essentially on the debate on transforming gem diamonds on the spot, a practice for which the South Africans coined the term “beneficiation”.

The starting point in this debate is the realization on the part of Southern Africa’s leaders that while supplying most of the world’s raw materials in the jewellery sector (diamonds, gold, platinum, etc.), Africa only earns about 10% of the revenue, around $150 billion.

Unlike a country such as Bolivia – which simply decided to nationalise the oil industry by demanding that companies cede their interests – producing countries in Southern Africa, where the state already has a large stake in the capital of mining companies, plan to act so that the added value that comes from diamond cutting benefits their trade balance and labour market.

There is a groundswell movement. With Botswana, South Africa, Angola, the DRC and Namibia, Africa supplies about 60% of the global volume and production value of rough diamonds and plans to benefit from the oligopoly enjoyed by mining companies such as the De Beers subsidiaries and the Angolan state-owned Endiama to impose its market conditions.

To add value to their products, these countries plan to demand access to a minimum volume of large stones for which wage costs are proportionately lower than for smaller diamonds. In this way they intend to acquire a market niche, leaving the market in “small goods” to India, Thailand and China with their unrivalled wage costs.

In South Africa, an agreement between De Beers and the State Diamond Trader (SDT) authorises the latter to acquire 10% of the entire production for on-site cutting and polishing, preferably by companies that adhere to the strategy of black economic empowerment. In Namibia, another agreement between De Beers and the Namibia Diamond Trading Company (NDTC) guarantees delivery of rough diamonds to 11 cutting and polishing factories during the 2007-2011 period. The aim is for diamonds representing a total value of $300 million to be made available to these cutting factories by 2009.

For its part, Botswana hopes to increase the annual turnover of its 16 cutting and polishing factories from $200 to $500 over the next two years, this representing the equivalent of one quarter of its rough diamond exports (about $2 billion). Botswana plans to benefit from its position as the world’s number one producer and from the fact that, from 2008, its capital, Gaborone, will be home to the Diamond Trading Company’s biggest sorting and distribution centre. The DTC is the commercial arm of De Beers that is transferring a part of its activities from London to Botswana. It will also be under the obligation to supply local cutting factories on terms that enable them to be competitive, which in practice means with stones of medium to large size.

Angola is developing in the same direction, with projections that suggest a doubling of present production – about 9 million carats generating exports worth about $1.2 billion – over the next decade.

De Beers, the world’s biggest supplier of rough diamonds, has no option but to follow the movement given that the three countries that form the basis of its strike force on the world market – Botswana, South Africa and Namibia – share the same strategic objective and that renewal of its joint venture agreements with these countries is at stake.

An African supply oligopoly is in the making, in the face of the many diamond traders and cutters around the world. Its position is all the stronger as, from 2008, demand is expected to exceed supply with a gap that will continue to grow, according to forecasts by the other sector giant, Rio Tinto Diamonds, which regards “beneficiation” as inevitable (sic). Although De Beers plans to invest around $2.6 billion in new projects, in South Africa, Botswana, Namibia and Tanzania in particular, the gap is expected to be considerable. Another major figure on the world market, Sergey Vybornov, president of the Russian company Alrosa, estimates that by 2020 world demand for rough diamonds will be around $20 billion, with supply amounting to only around $9 billion at current rates. The message is that prices will rise.

That said, certain conditions must be met before the wager of “beneficiation” can be assured of success, warns Gareth Penny, managing director of De Beers. The first is the need to take the Asian challenge into account, with its low wage costs. Diamond cutting and polishing factories in Africa will have to identify market segments in which they can be competitive and leave the Indian factories to handle the lower value diamonds that cannot be worked economically in Africa. African governments will also have to create an attractive environment for direct foreign investments in the sector.

Antwerp’s diamond industry admits that it is not going to be easy, if only because of Africa’s shortage of skilled labour given that it takes at least five years to train a diamond cutter.

Also, prospects are not the same for major producers such as Botswana, Angola or even the DRC or South Africa as for more modest producers such as Sierra Leone or Liberia. The former have a much larger share of the global market and can more easily exert pressure on the mining companies.

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