De Beers accused of breaking beneficiation promises
Brian Benza | Friday May 15, 2015 18:04
According to analysts that claim to have intimate knowledge of the ten-year 2010 agreement, the diamond manufacturers’ plight might be lessened if De Beers keeps its promise of supplying local companies with ‘suitable’ stones that are profitable to cut under Botswana’s high cost operating environment. In the better quality ranges, Botswana’s labour costs are competitive with other centres and below some of the other southern African countries.
Due to depressed polished prices set against high rough prices, cutting and polishing companies globally are currently facing difficulties with the local industry’s situation exacerbated by the comparatively higher labour costs.
The combination of high rough prices and market-induced strain on the cutting and polishing business in Botswana has recently triggered severe cutbacks in an industry that employs around 3,700 people.
About 700 workers have already lost their jobs in recent months with companies such as Eurostar, BDM, Diarough, Moti Ganz, Leo Schachter having already laid off workers or have closed altogether. Some analysts feel that if the local industry had access to suitable and viable supplies, many – if not all – of these redundancies could have been avoided.
Renowned Industry analyst Chaim Even–Zohar in his Diamond Intelligence Briefing (DIB) reckons that if Botswana cutting and polishing firms were supplied with the economically viable and domestically suitable stones as in the agreement, the local industry could become competitive and job losses could be avoided. This would require supplying more expensive rough in categories in which the labour cost element would become quite insignificant.
“We believe a correct implementation of the De Beers – Botswana marketing agreement, both in letter and in spirit, could have resulted in a flourishing local industry by now. “Allowing sightholders to make workers redundant because there are insufficient economically viable goods supplied to them may, prima facie, imply failure to meet contractual obligations, even though there may not be a direct penalty imposed for such a situation. It “certainly seems like an issue Botswana’s government ought to look into,” he wrote in the DIB.
In response to the recent layoffs in the industry, De Beers’ spokesperson Lynette Gould said that while the company is committed to beneficiation, focus should be on creating an industry characterised by efficiency and best practice, not artificial measures.
“We see employment as an output rather than an input to the beneficiation process – and as we develop a more sustainable sector, this will improve the employment opportunities created over time, even if there are unfortunately ebbs and flows in employment levels in response to shorter term external factors,” she said.
With local factories constantly looking to improve efficiencies, analysts believe that larger stones with value of $1000 per carat could be cut locally in an internationally competitive manner. Figures availed to BusinessWeek show that due to the non-availability of ‘suitable’ stones, the local sightholders have now resorted to exporting the rough diamonds they are allocated by De Beers instead of cutting and polishing. Indications are that local sightholders are also importing rough acquired from other supply sources and thus end up beneficiating non-Debswana rough.
In 2014, it is estimated that from the $940 million worth of rough diamonds supplied to the 20 local factories by De Beers, only about 40% ($400 million) was cut and polished in Botswana, the development that has contributed to redundancies.
This translates to factories exporting 60 percent of their supply uncut against an officially ‘tolerated’ limit of 20 percent.
Gould could not provide the value of rough supplied to local sightholders citing confidentially clauses between the government and De Beers, but said over $1.56 billion of rough diamonds were sold to Sightholders in all producer countries from a total of US$6.5 billion of rough diamond sales globally, an increase of 11.4 per cent over 2013.
According to one knowledgeable source, “the 2010-2020 agreement clearly spells out that De Beers is obliged to supply only economically viable and suitable stones to the local sightholders.”
In the previous sales contract (2005-2010) between Debswana and De Beers (DTC), there were local beneficiation thresholds measured both by numbers of employment and by value of sales to domestic factories.
“The previous contracts only concentrated on sales and employment thresholds – and if these were not achieved, enormous penalties were to be imposed. In the present agreement, there is no employment threshold, just sales targets. “However the local manufacturers, instead of manufacturing these diamonds, only achieve the sales levels through the exports of rough.
“The fact that these new very specific undertakings became a central feature in the 2010-2020 agreement shows the importance the government gave to it. This makes De Beers’ non-performance far more serious.
The government has the option to demand the full implementation of the relevant contractual obligations if it is to save the industry,” said an executive with a local sightholder company.
Gould said that it was impractical for De Beers to supply large stones to all sightholders all the time as they are bound by the constraints of availability.
“The company always looks to meet demand with supply and where possible larger stones are supplied to those operations that have demonstrated demand in this area.
Limited supply from the mines determines the amount of Sightholders who are able to obtain an allocation,” she added.
Sightholders have in the past blamed the unjustifiably and protracted high rough prices charged by De Beers as contributing to their demise.
“We can live with occasional situations in which the rough prices are out of sync with the resultant polished. We cannot live – and will not survive – if this is protracted multi-year price distortion which only benefits De Beers while hurting all other levels in the pipeline,” said another local manufacturer.