As negotiations between De Beers and Government kick-off, President Mokgweetsi Masisi can either ensure that Botswana makes more money from her diamonds or let the Western countries continue making more from Botswana diamonds, as is the status quo. KEABETSWE NEWEL reports.
Masisi recently arrived from the US where he attended the JCK Jewellers Trade Show in Las Vegas. JCK Las Vegas is the leading jewellery event in North America open to all jewellery professionals. Addressing the press last Friday, Masisi said he wanted to meet the very wealthy individuals who buy Botswana diamonds to inform himself of their tastes and views on Botswana economic mainstay. His visit is ahead of sales agreement negotiation between De Beers and the government. This publication asked Masisi to hint on what is to be expected in the new agreement and whether Botswana will get increased value from the agreement. He was however, cagey about government’s position, even when asked whether he was aware that countries in the West get at least 5 times increased value from the price at which they buy Botswana diamonds. “ We will do anything to the benefit of Botswana,” he said.
It is an open secret that while Botswana is the largest diamond producer by value in the world, the United Kingdom (UK), America, Belgium and Asian countries make at least 5 times more earnings from Botswana diamonds than Botswana itself because it has failed to benefit from the value chain since the discovery of diamonds more than 50 years ago.
Diamonds make money through the entire value chain all the way to retail where diamonds are turned into final products, sold to high net worth, cash rich individuals.
Botswana is no major player in neither stages from the low to no margin space of cutting and polishing, despite being the source of the world’s most valuable stones from under and loses. The excavations is where big diamond conglomerates that are in majority owned by foreigners have the stronghold most notably, De Beers diamond of companies and Lucara Diamonds.
From that all the way to the sorting stage, otherwise known as grading followed by cutting and polishing, where Botswana was brought to its knees by price dictators, and market dynamics. In the diamond value chain, there has been excavation of rough diamonds in Botswana by De Beers, Lucara, predominantly exporting most of it raw because the world’s source of the most valuable diamonds cannot even turn the discovered stones into final products. In a month, Diamonds exported by Botswana constitute between about 90 percent of the total exports according to data by Statistics Botswana. Statistician General Dr Burton Mguni said during February 2019, total exports were valued at P3.1 billion, showing a decline of 33.5 percent (P1.6 billion) from the revised January 2019 value of P4.7 billion. The decrease was mainly due to diamonds, having recorded a fall of 36 percent (P1.5 billion) from P4.4billion in January 2019 to P2.8 billion during the current period.
Post the Diamond Trading Company (DTC) relocation from London to Gaborone, diamonds have become a primary import commodity in Botswana, given that the diamond aggregation process is done here in Botswana. This means that rough diamonds mined in all De Beers operations in South Africa, Canada and De Beers are aggregated here in Botswana.
When the DTC relocation was done, the idea was for Botswana to benefit from the value chain, however, it appears that De Beers only relocated the DTC offices because the diamond value chain is still benefitting London. Cutting and polishing companies were opened here in Botswana, but they collapsed because of pricing monopoly by De Beers which suffocated the local cutting and polishing industry. Only a few companies remain operational. Botswana’s cutting and polishing industry, which actually failed to really take-off means Botswana still exports these diamonds without exploiting the value chain.
At the negotiations, Masisi has the power to squeeze Botswana into the entire value chain, where De Beers has been profiting alone.
Before 2013 the country’s diamonds were sold by De Beers through its Central Selling Organisation (CSO) in London. Botswana was playing no role in the auctioning of her diamonds in London. But an agreement was struck between the government and De Beers which saw Diamond Trading Company International (DTCI) relocate its sights and sales operations to Gaborone. Government thought it was a way to tap into the manufacturing side of the diamond: the cutting and polishing where refining is done before the final product is made by retailers. The diamond and polishing industry employed roughly 4000 Batswana, when commodity prices were favourable. Nearly more than half of the workforce has been laid off in the past 2 years while several other polishing companies closed shop.
A 2017 report by the Natural Resource Governance Institute ranked Botswana 68 out of 89 in value realization, with a score of 40 out of 100 points, arguing that the country’s weakest point is value realization. Additionally, “the government does not require the disclosure of ultimate beneficial owners of extractive projects and public official interests in extractive project-important anti-corruption protections”.
Further, the NRGI said Debswana does not disclose the transfers of funds to the government and details relating to the sale of diamonds. It further says although Debswana provides information in its annual reports, NRGI researchers could not find the core financial details that analysts require to provide effective independent oversight of the company. There are concerns that the agreement between DeBeers and Botswana is shrouded in secrecy and that Botswana might not be benefiting as it is supposed to be from the sale of diamonds.
In the value chain, in terms of where the margins are, the double digits come at excavation. That is where Lucara through Karowe Mine and De Beers through Debswana, a joint venture between government and De Beers play. Lucara owns Karowe 100 percent while Debswana is owned 50 percent each by De Beers and government.
The mining companies do the actual mining from the ground where the biggest value add and margins are. Botswana benefits here by virtue of being the source of diamonds. The mining companies pay royalties, which is why the mineral revenue is the primary key contributor to revenue in the country.
But the government, despite being a joint partner of Debswana is not involved in valuation process but the miners, meaning that mining companies declare royalties at their own discretionary, which leaves a hole for the manipulation of numbers.
Then there is cutting and polishing, where Botswana tried to play a major role.
Margins shrink a bit when you get to the cutting and polishing, in terms of value. The largest polishers are in countries like India, where costs of production are cheaper.
The rough diamond prices are so high that local polishing companies get squeezed margins, and end up exiting the business leaving foreign companies as controlling players.
If you are cutting and polishing you are given packages and it’s a price set by De Beers.” This means that the market does not determine diamond prices but rather De Beers solely does that to its own benefit. It is possible that De Beers could also hike rough diamond prices to push out polishers here in Botswana, who would suffocate because of high production costs plus high rough diamond prices. Because of high rough diamond prices set by De Beers, it is close to impossible for Botswana to profitably partake in cutting and polishing, unless Masisi pushes for government to be involved in setting diamond prices.
Then there is the retail side, the final end where there is actual selling of the diamonds or by products. That is where the final product is produced for end users, typically the celebrities, Kings and Queens. At final product the price volatility is quite minimal because those are high net individuals which don’t compromise on quality hence now huge pressure on the price side. Those are people who believe in price as a sign of value.
Botswana doesn’t do the jewelry here meaning Botswana does not benefit from the diamond finished product.