Diamond crisis looms?
Disturbing events are said to be currently unsettling the diamond trade locally and internationally. Things are happening in the diamond industry. Batswana could find themselves facing massive job losses, a collapse in beneficiation and a crumbling diamond economy as sightholders are busy retrenching and shutting down their factories in the country.
Teemane Manufacturing Co., which had operated in Botswana for more than 20 years and employed 320 people shut down last month, in December 2014 Life Diamonds Botswana also ceased operation while Moti Ganz also retrenched about a 100 employees. Information passed on to The Botswana Gazette by an employee on management level is that SAFDICO has sent a large number of employees packing while Laurelton Diamonds’ staff have been forced on leave while the company prepares for a possible fold.
“We have been retrenching of course but I cannot confirm whether SAFDICO would close or not,” he said. “We were told that the company was under pressure to buy and sell rough diamonds and as you can see that this is not benefitting any of us at all.”
SAFDICO’s production manager Shy Franco refused to confirm or deny that the company has retrenched and could be folding business. “I cannot confirm to you over the phone, send us an enquiry,” he said.
There are also claims that Shrenuj & Co, Julius Klein Diamonds and Pluczenik Diamond Co are feeling the squeeze and preparing for restructuring exercises that could see these sightholders send employees home or close shop. The Botswana Gazette could not confirm these claims but a source at Laurelton dismissed any retrenchment exercises.
A source in the industry has revealed that the combination of high rough prices and market-induced strain on the cutting and polishing business in Botswana triggered these cutbacks and more sightholders could pack their bags due to the low prices for polished stones.
The Rough Diamond Paradox report has detailed that the rough diamond prices have been constantly increasing for the past five years while that of polished stones is on a steep decline. This has squeezed the small diamantaire, the jeweller and other retailers from moving their stones from the shelf despite the high demand for both rough and polished.
The sightholders are making losses and it can be attested by Indian diamond companies absconding from the December 2014 sights.
Diamond Industry expert Roman Grynberg fears that should the status quo remain, as far as pricing and productivity are concerned, sightholders may end up dumping Botswana and moving into the now growing and cheaper synthetic diamond industry.
Other interviewed analysts have conceded that if government fails to convince De Beers to stabilize rough diamond prices the market will look to Russia for better priced rough.
Recently Russia’s President Vladmir Putin, in near desperation for liquidity in the cash-strapped, sanctioned country, signed an MOU with Indian Prime Minister Narendra Modi for direct imports of rough at favourable prices.
India, the world’s biggest gem polisher is looking to bypass traditional dealers and buy diamonds directly from the mines and this could see Alrosa’s lower prices attract sightholders who are closing shop in Botswana, analysts fear.
These dramatic changes in the industry undermine the initial promise to sightholders and industry players at large that the relocation to Botswana would create more opportunities within the industry.
De Beers profiting alone?
In the last quarter of 2014 De Beers has hiked prices across board by up to 7%, although some attest that it may have been up to 20%. None of the industry players could disclose an exact figure and the price hike remains unclear.
It is against this backdrop that De Beers is said to have declared record profits of about US$1, 4 billion, a 36% increase from 2013profits while a significant number of its sightholders are said to have made losses.
Sightholders who did not want to be named for fear of compromising their access to rough diamonds with the cartel cried foul about the hiked prices and these smaller diamond companies are scampering to pay up their overdue loans with banks.
Most companies came to set up factories here because there was a need to secure rough stones. The condition of the sale was that 25% of any sale had to be cut and polished locally
“After all it has been more expensive to process our diamonds here than it is in India, Israel or other places because of productivity and the prices have been pushed up,” said a sightholder who preferred to remain anonymous.
De Beers Midstream Communications Manager, David Johnson denies any price increases but mentions that with the company’s current impressive profits, about $3 billion have been re-invested in the expansion of Jwaneng Cut 8 and Venetia mines in South Africa.
“I agree with you that the last quarter of 2013 was too rough for the industry but the global diamond demand did grow as you can see that most of our profit still goes back into the value chain.”
Johnson conceded that a lot of sightholders could be ceasing operations at the moment but more were still going to come and set up in Botswana because the prices have been adjusted downward this year.
Martin Rapport, industry expert also mentioned in the January edition of Rappaport that De Beers started slashing prices of rough diamonds as sightholders deferred buying 20% to 25% of rough in Botswana and it looks as if the liquidity & rough price concerns are here to haunt the industry well into 2015.
Currently the demand for rough diamonds is rising in India and China but the supply is on the decline.
Diamond Industry expert Roman Grynberg said that it was time for De Beers to recognise that they are becoming a victim of their own success. Their profit before tax doubled during this current recession while sightholders made losses, he said. “They are the shining light of the Anglo portfolio while everything else like copper and gold is performing badly because of low prices,” he added.
“Diamond prices keep on hiking and have actually shot through the roof while every other mined commodity had gone through the floor and this is disastrous. We have created a system where diamond companies can buy diamonds without having to set up factories in Botswana and beneficiate and left them an option to throw us under the bus when prices are not favourable to their business models, ” Grynberg observed.
Grynberg was explaining a process where sightholders are spoilt with a choice of purchasing rough stones from five different boxes during DTC sales; the Botswana box, South Africa box, Namibia box,Canada box and the International box (previously London box). He says by being privy to the international box which has large chunk of diamonds from Southern Africa and can be sent anywhere in the world for processing, 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.
“There is no way they could stay if the prices were also being pushed up, now coupled with high costs of cutting in Botswana, it makes business sense for sightholdersto be leaving, ” he added.
It is estimated that diamond cutting costs $12 to $25 per carat in India, $20 to $30 in China while in Botswana it costs between $60 and $65 per carat.
Banks pull out of Diamonds
A number of major banks have reportedly retreated from financing diamond companies citing that the current business environment is not profitable for the diamond manufacturers. Considering the fact that De Beers sells them rough diamonds at prices that cannot be justified in terms of profitability when in the polished market stone prices are steadily declining. Perhaps the biggest foreboding was the closure of ABN Amro Botswana operation. The Dutch bank has a long history in financing the industry and is perhaps the largest financier of the global diamond trade.
“The is no way the banks could lend money to these businesses looking at the current market trends in diamonds. How would they would be able to pay them back since De Beers is squeezing them,” an expert in the industry said.
Even though other banks are pulling out, Barclay Bank Plc is said to be rigorously seizing the opportunity of financing diamond companies. Johnson attests that De Beers remains confident the market will not crash even if some sightholders go looking for opportunities in Russia and other countries.
“There has been a lot of ceasing of operations but the demand is still strong and we see a lot of opportunities and expansions coming our way.”
Sources say should Botswana government fail to contain the pricing issues, the country could be in line to miss the beneficiation opportunity for the second time since 1972 when the first mines were opened.