A DARK cloud hangs menacingly over the future of Botswana’s nascent diamond beneficiation and the truth must be told and credit given where it is due.
By Donny Dithato
The future of the project hangs in the balance and its failure seems predetermined because of inherent structural problems, choice of the most risky and least profitable part of the diamond value chain, and lack of support and ownership of the idea from those tasked with the responsibility of spearheading it. Diamond cartel, De Beers, motivated by greed and self-interest and opposed to diamond beneficiation from the onset, seems to have found a perfect opportunity to give Botswana a rope to hang and assured the ultimate demise of Botswana’s attempt at diamond value add.
More importantly, Botswana and other diamond producing countries have missed the boat and been overtaken by events simply because the global diamond industry has changed drastically in the recent past. Diamond players are no longer content with concentrating their business on a single segment of the diamond value chain.
Diamond producers such as Botswana agitating for beneficiation, should have learned a long time ago that cutting and polishing are very risky segments of the business not without their own fundamental problems. Now best practices globally now are for more consolidation characterised by more vertical and horizontal integration along the whole diamond value chain. Cutting and polishing segment is globally the least profitable realising the lowest profit margins with some companies earning as little as 1-2%, while by comparison, upstream (mining and exploration) and downstream end of the value chain enjoy the highest profits margins of 16-20% and 11% to 14% respectivel.
Some things just did not add up from the beginning and it has never been difficult to discern that the project was not conceived in good faith. There was a lot of hostility at project conceptualisation by and between Botswana government and De Beers who over decades were vehemently opposed to any calls for diamonds beneficiation dismissing them as both unworkable and illusionary and rubbishing everyone who dared advance a contrary view.
De Beers and their supporters in government and sections of the media pushed the anti-beneficiation paradigm with much vigour seeking to lock Botswana permanently relegated as a backward factor driven, and 19th century mercantilist styled economy selling its diamond raw in the international market while De Beers, trying by all means to keep Botswana in the dark by parroting anti-beneficiation propaganda while it alone participated globally in all stages of the diamond value chain. De Beers’ motive was clear according to diamond industry expert Choim Even Zohar because, “historically Botswana provided up to two-thirds of De Beers profits. In all fairness, one can fully understand that the cartel went to any length to protect its interests, though it is hard to approve its methods”.
There is therefore, a dichotomy that that the very staunch opponents of diamond beneficiation have now assumed the responsibility spearheading the very idea they were opposed to all along and even rubbished anyone who dared to advance opposite view. There appears to be an unavoidable coincidence between the instability and uncertainty surrounding Botswana’s belated and faltering attempts at diamond beneficiation and De Beers’ historical opposition and disdain. Diamond beneficiation proceeded without thorough due diligence, choice of suitable, experienced and capable equity partner with a strong track record in diamond beneficiation.
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De Beers was deeply conflicted and was never the right choice. Just as any project of that magnitude would require an social and environmental impact assessment, so too was a human resources impact assessment required but omitted in order to determine the number and appropriate skills mix to support the project. So no concerted training to deliver the necessary skills mix was done nor were any training institutions identified to provide targeted and appropriate training in all aspects of gemology either locally or abroad. Instead, heavy reliance was put on the benevolence of outsiders and imported workers in critical areas at high cost to the nation rather than the enterprise of citizens.
It is therefore no wonder that the beneficiation was programmed to fail from the onset because of lack of ownership and conviction from those tasked with its implementation and to make the idea work. De Beers derived huge and disproportionate benefits from the status quo and from the Botswana diamond industry in general and it was not surprisingly it had strong interest to keep things that way. While De Beers globally participates in all stages along the diamond value chain, the greatest share of the value of the world diamond production it handles are derived from Botswana yet the company abused this privilege by seeking to hoodwink its leadership by hook or crook to perpetually to lock her in the relatively inconsequential and less profitable mining and rough diamond aggregation and sales.
By contrast, Paul Rowley, De Beers’ executive vice-president of global sightholder sales, let the cat off the bag recently when he told the Dubai Diamond Conference in April that De Beers was active in throughout the diamond pipeline, through targeted investment in diamond equity at the retail end, midstream in rough diamond sales and distribution and in mining expansion.
“At De Beers, we continue to make investments throughout the value chain that we believe will drive our success in the years ahead and all participants in the diamond industry have a chance to of likewise.” Logic dictates that it is simply unbelievable that those who were so vehemently opposed to the beneficiation of Botswana diamonds, namely De Beers and Botswana government supported by some conservative sections of the media and who thoroughly discredited and rubbished anyone who held a contrary view would now by any stretch imagination be convincingly tasked with the responsibility of spearheading the implementation of the very idea they had thoroughly discredited. For decades both De Beers and Botswana claimed that beneficiation was not feasible and that Botswana, a world leading diamond producer of the best quality diamonds by value did not enjoy any comparative and competitive advantage other things being equal,
They shied away from the stark reality that the mark-up of diamonds increases exponentially as it passes through the value chain. Beneficiation is the creation of activities beyond mining the natural resource in producing countries as a means of adding value. Out of the ground, rough diamonds move through the pipeline from dealers to diamond cutters and polishers, to jewelry manufacturers, retail stores and finally to consumers. According to authoritative diamond industry report Bain and Company, the value of diamond increases significantly as they move along the diamond chain from the mine to the final market, nearly quintuple over the course of the journey.
The great value —$25 billion or more in both cases — is added at the jewelry manufacturing and retail stages, Jewelry manufacturing is estimated at approximately 65% of the retail sales based on historic average. By way of illustration, Bain and Company when rough diamond production generates revenues of $14,8 billion, the revenue will grow to $47,2 billion when the diamonds are manufactured into jewelry and grow again to $72 billion when the jewelry is sold at retail, quoting IDEX; Tacy Ltd and Choim Even-Zohar and Diamond Value Chain of 2010.
Maximising return on assets of rough diamonds very valuable, but the ending price of diamond jewelry is worth much more, according to mining academic Rudnicka (2010).The trend in the world is to shorten the supply chain between the rough coming out of the mine and the shop window through vertical and horizontal integration of the production value chain. *Freelance Journalist based in Gaborone, Botswana
