In to Africa

Africa used to be tucked away in the back of the industry’s consciousness. That’s no longer true.

It isn’t just Blood Diamond, which demonstrated how uncontrolled diamond resources can ravage a country. And it isn’t just De Beers’ counterattack, which focused on “the good diamonds do” for the economies of southern African countries like Botswana and South Africa. Today Africa is more than a political prop. It is a serious player in the diamond industry.

Of course, some would argue Africa has always been a serious player in the diamond world, supplying a major part of the industry’s product. But until recently most of those diamonds were cut overseas, in India, Belgium, and Israel.

Now a new generation of African leaders wants to cut more of that production domestically. And in the post-cartel era, where countries have options besides De Beers, the company has no choice but to accede to their wishes.

JCK recently visited Botswana and South Africa, on a trip sponsored by De Beers, to examine the current state of the diamond industry there. We found an industry that anticipates dramatic growth but that also faces many challenges.

BOTSWANA

Much has been said about the symbiotic relationship between De Beers and Botswana. Diamonds are the main engine of Botswana’s economy, accounting for 33 percent of its gross national product, 81 percent of its revenue, and 85 percent of its foreign earnings. The diamond industry has resulted in tremendous economic growth, turning Botswana into one of the most prosperous countries in Africa, if still poor by Western standards.

Sheila Khama, chief executive of De Beers Botswana, remembers her first classrooms were “under trees.”

“Thirty years later, all that is changed,” she notes. “Now the schoolyard is filled with buildings. The road to my village is tarred, there is a school 500 meters from my mother’s house, and the village has access to a health clinic and clean running water. This was made possible by the revenue from Botswana’s diamond mines and Botswana’s responsible leadership.”

“To us, diamonds are life,” Botswana’s finance minister, Serwalo Tumelo, told JCK. “They are the economy itself. They are schools. They are hospitals. They are our lifeline.”

Of course, the diamond industry has also profited from Botswana’s diamonds. Sixty-six percent of De Beers’ profits come from them. And while De Beers and Botswana remain partners, the balance of power has shifted. In its last contract renewal, Botswana was able to extract a remarkable series of concessions from De Beers, including:

  • A GAIN IN OWNERSHIP When De Beers first went private, Botswana owned 7.5 percent of the company. Now that number’s been upped to 15 percent. This is not only a huge gain in profits for the country—and a big loss for De Beers—it makes Botswana a crucial swing vote in any possible conflicts between De Beers’ two other owners, the Oppenheimer family and Anglo-American.

  • THE ESTABLISHMENT OF DTC BOTSWANA De Beers is setting up the Diamond Trading Company Botswana in a new state-of-the-art building in the country’s capital, Gaborone. DTC Botswana will sort production from De Beers’ mines, a function that was previously done in London. This will transfer hundreds of jobs from London to Botswana and will lead to the closing of a portion of De Beers’ famed headquarters on Charterhouse Street. (Sights, however, will still mostly take place in London, and the company’s marketing department and other functions will remain there.)

  • MORE LOCAL PRODUCTION Perhaps most significantly for the downstream industry, DTC Botswana has been authorized to sell a certain amount of goods to local factories. The goal is to sell over $300 million locally over the next few years. At press time, only three factories are operating in Botswana, but in anticipation of the new order, sightholders have applied for licenses, and in the next year or so there should be 16 cutting factories in the country.

All this will create anywhere from 3,000 to 8,000 jobs, with spillover effects for industries like hospitality and tourism. That would be much welcomed in a country that, despite its profits from diamonds, still has over 20 percent unemployment and one of the highest AIDS infection rates in the world.

SOUTH AFRICA

While not as big a producer as Botswana, South Africa is also taking a tougher line toward its diamond resources.

Because of recently passed legislation, next year the country will set up a “state diamond trader,” to distribute rough to local factories (all nonsightholders). In addition, the government has asked that 10 percent of run of mine be distributed to local manufacturers. The definition of “run of mine” apparently is still undecided, since only certain stones—bigger ones—can be profitably cut in Africa.

David Noko, the head of De Beers Consolidated Mines, its South African division, told JCK the company is still getting used to the new order. “The government and citizens are becoming impatient,” said Noko, the first black African to head a De Beers division. “They expect us to move much faster than we are moving now.”

He added, “It’s a journey. Things can always improve, but I can honestly say that our relationship with the government is good.”

How politically sensitive all this is can be seen in the reaction to recent remarks by Jonathan Oppenheimer, son of De Beers chairman Nicky Oppenheimer, and Noko’s predecessor. Speaking to the Gibs business school in Johannesburg, Jonathan noted there was a difference in labor costs between South Africa and India. “Unless the government is determined to subsidize that difference, the net benefit of selling those diamonds locally has to be measured against the net loss,” he said. “I don’t think we’re going to ensure success. We will support government to the fullest extent possible, but we will work diligently to show them the economic consequences of that decision.”

In response, South Africa minerals and energy minister Buyelwa Sonjica, quoted in Mining Weekly Online, said, “I did not take the remarks kindly. I’m reading a double standard in their approach to beneficiation in South Africa and the message that they are sending to other investors out there.”

Noko, however, said De Beers will “support the government” and that the growth in local cutting will be “significant.” “Will [South Africa] overtake India?” he asked. “I am not sure. There are constraints, because of infrastructure, skills, cost of labor. … If the government is serious about creating jobs, then we all support the government’s call for more beneficiation.”

WILL IT WORK?

As Noko notes, the political will to “beneficiate” is clearly there. But that doesn’t mean the laws of business will necessarily obey.

On my last trip to Africa, in 1998, industry officials argued emphatically that cutting in Africa would never be profitable. Their line has changed since then, but it remains to be seen if they were right the first time.

With more than 20 diamond factories sprouting up in South Africa, Botswana, and neighboring Namibia, government officials expressed confidence that diamond companies would not set up an unprofitable venture just to gain rough. “These are business people,” said Tumelo. “They are not here for charity. Businesspeople do not go where they can’t make money. They know they will make money here.”

Still, diamond people have a history of securing rough first and working issues out later. And when Russia and Canada tried to start local cutting industries, the results were unimpressive.

The biggest problem is that there are greater costs in Africa—including labor—than in India and China. But there will be savings on shipping and other costs when the goods are produced and sold in Africa, rather than sold in Africa, sent to London, and then shipped to an overseas company.

My tour visited one Botswana diamond factory, currently owned by Leo Schachter. The factory predates the current beneficiation trend, and for years it was seen as a token effort to create manufacturing jobs in the country. Now, as one of the longest-running factories in Botswana, it has taken on new importance.

When asked if the factory was profitable, Schachter’s Danny Schachar said it made money in 2006 after it underwent a major upgrade. The new arrangements will likely mean more supplies, but also new challenges.

With no history of diamond cutting in Botswana, there are a limited number of skilled cutters, and the most experienced may find themselves hot commodities. That could lead to companies poaching each other’s employees. Schachar said he welcomes all the new companies as long as “they decide to be gentlemen” and “not steal” his already-trained workers. Rampant poaching will, of course, just drive labor costs higher.

What’s happening in southern Africa is being watched throughout the continent. Officials from the Democratic Republic of Congo, which still has pockets of civil war, have visited Namibia and are talking about how to add value to their diamond resources.

Stephen Lussier, director of external affairs for De Beers, admits that building a major cutting industry almost from scratch won’t be easy, but he says De Beers and the various governments are “determined to do it.”

“If we can help create a cutting industry, it will be an extraordinary thing for Africa,” he says. “It will be one of the few minerals that have created added value and employment. It will set diamonds apart.”