Committed Rough

The apparent agreement by De Beers to provide Botswana diamond factories directly with rough from its Botswana mines reflects a considerable shift in the company’s marketing philosophy and, depending on volumes, will profoundly impact the international rough diamond trading structure. These lines are written very cautiously, because there is still an apparent gap between Botswanan expectations and what has actually been agreed. When these “direct supplies” were discussed in the Botswana parliament earlier this week, De Beers reacted saying: “We are in discussions with the Botswana government to find mutual issue of interest, such as extending the sorting operations currently carried out by BDVC (the present sorting operation at Orapa House) and developing certain sales and marketing activities appropriate to Botswana which will further develop the cutting and polishing industry in the country and support local beneficiation.”

Indeed, it was confirmed to us that De Beers and the Botswana government have agreed on the establishment of a Botswana DTC, but what this precisely means is still a matter of continued negotiations. Nevertheless, the historic significance of the shift in De Beers' policy should not be underestimated and the likely ramifications on the rough trading structure should not be ignored.

Close to a decade ago, I coined the phrase “committed rough” and conjectured in my writings that an ever-growing part of the world’s diamond production will have its “cutting destination” predetermined – and that such rough would not enter the market place. This was then mostly in reference to South Africa’s requirement to have all domestically economic cuttable rough processed in that country; it was in reference to Russia’s aspirations to develop a large diamond cutting industry almost at any cost (including the cost of subsidizing rough); and, later, it was in reference to the aspirations of the aboriginal people of the Northwest Territories in Canada. In recent years this also applies to the part of the BHP Billiton production that is being processed by the mining giant and marketed as polished diamonds. Another example of “committed rough” would include the now defunct Aber-Tiffany agreement.

Although the “committed” figures aren’t absolutes – and are changing constantly – it isn’t unreasonable to view close to 20% of world production as actual “committed rough” – though the trend is rising. In terms of De Beers' production, however, it may well grow to more than 30%-40% of its total mining output (certainly in the better goods), all depending on how the Botswana play will evolve and whether the model will be emulated in Namibia. We are not talking about today, but rather about tomorrow. But, before you know it, “tomorrow” becomes “today.”

De Beers has, traditionally, resisted that trend and always insisted that diamonds ought to be mixed in London so that its assortments are universal, and no local rough should go directly to local factories. [In the pre-Supplier of Choice years, it was believed that De Beers’ fears of allowing producers full price discovery was one of the reasons for the policy.]

De Beers successfully convinced consecutive South African governments – and it is trying to persuade the current government as well – that it is in the best interest of producer governments and diamond cutters in these respective countries to accept “London mix”, rather than the locally mined production. Ever since having been cajoled (or almost “forced”) to commit itself to providing 10% of the rough from its (future) Canadian Snap Lake mine to local cutters, it has not ceased trying to get that decision reversed. Much of De Beers’ strength and conviction in maintaining a London mix came from knowing that its most valuable and important joint venture partner, Botswana, wholeheartedly supported that position. Botswana has had some diamond factories for well over a decade – but their supplies have always come from London mix. This, apparently, is now going to change.

A Botswana DTC will supply Botswana factories with goods produced in that country. In the history of “committed rough”, this is a giant leap forward. I am writing these lines somewhat hesitatingly, since the details on the operations of a new joint venture – a DTC company equally owned by De Beers and the Botswana government – have yet to be worked out. In all public statements the terms “direct supply” to local factories have been cautiously avoided, but – from listening to Botswana politicians and officials – it is certainly clear what Botswana wants.

There is talk about Botswana national branding opportunities, which might imply that Botswana factories will optimise value added from Botswana rough – but it isn’t necessarily so.

It isn’t clear how that valued addition is accomplished. Within Botswana there is presently considerable speculation that even international sights could be held in Botswana. Having the international Sightholders coming 10 times a year to Gaborone is good for tourism, for hotels, for airlines – it may make an important contribution to the local economy. Whether this scenario will play out this way we don’t know, but we do know that the “noise” coming out of Botswana sounds rather convincing. 

Thus, not surprisingly, we followed with great interest the clarifications made by Botswana Minister of Mines Charles Tibone recently in his country’s parliament. He expressed hope that through the new sorting and marketing arm of Debswana, formally named DTC (Diamond Trading Company) Botswana, “the local beneficiation (cutting, polishing and jewellery manufacture) of our diamonds would be accomplished.” Charles Tibone told parliament specifically that “DTC Botswana would make diamonds available to local cutting factories; they would no longer have to purchase gems from De Beers’ DTC in London, which markets the entire Botswana production.”

For better or worse (and that is a judgment call I do not want to make) a scenario is evolving in which the two primary sources of De Beers' rough (S. Africa and Botswana) will want to keep their best goods “at home” – earmarked for domestic factories. With supplies from Russia to the DTC gradually shrinking to some $275 million a year, more and more DTC Sightholders (present and future clients) will have to wonder what goods will be left for them.

Mining companies may remind us a thousand times a day that rough will always flow to those places where it is most economical to process the goods, but this is gradually becoming more wishful thinking than a hard fact. DTC Sightholders in Namibia are still getting supplied with London goods, even though the government, on various occasions, has expressed a desire to supply domestic factories with Namibian goods. In the DRC, MIBA’s sole distributor, Dan Gertler’s DGI company, is in the process of setting up a state-of-the-art factory in the country that will provide employment to some 500 workers, cutting locally mined diamonds. That factory might actually lose money – but the distributor recognizes the aspirations of the local government and people and will accommodate. The Leviev Group is building a factory in Angola that will process Angolan rough. It is already processing Namibian rough in Namibia.

Does it all make economic sense? That depends on how one makes the calculation. Even if one barely breaks even on the processing, if meaningful employment is provided, if skills are being learned, and if money is earned on subsequent jewelry manufacturing and marketing, then it may certainly be worth it. Producing countries seem unanimous in their resolve to secure greater benefits from diamonds to their peoples. Both Botswana President Festus Mogae and his Finance Minister Baledzi Gaolathe have been pushing for a greater De Beers presence in Botswana. “We want to maximise the returns from our diamond industry,” Mogae was recently quoted in a local Botswana paper. “Devolving some De Beers/DTC functions to Gaborone and opening cutting and polishing factories would support that.” Will more jobs in Botswana mean fewer jobs in London? You bet. At the DTC there is clearly a sense that jobs are moving to the south – and we may be talking about hundreds of jobs.

Our concern, however, is with the rough market. If a third or so of De Beers own mining production were to consist of “committed rough” – and if we assume that not all these supplies optimise the economic benefits to the producer because of restraints demanded, insisted or even dictated by governments – the share of the De Beers goods on the free, competitive rough market will decline. Players such as DGI (which is slated to become exclusive buyer of the Angola market, complementing its present MIBA production of the DRC), BHP Billiton, Rio Tinto, Alrosa, Leviev etc. may become more significant. The changing trends may well impact the price-setting leadership of De Beers. We don’t know.

It is worth it, however, to listen to the voices from Africa. S.A. President Thabo Mbeki declared in Antwerp last year that Africa is a Diamond’s Best Friend. His remarks were loudly applauded by the mostly Belgian audience. The new South African Diamond Act is still in the making; the 25-year De Beers-Botswana mining lease renewal has been signed, but the discussions on the domestic diamond marketing and processing agreements are only just starting. Expectations are high. Botswana’s deputy permanent secretary in the Ministry of Minerals, Mago Moshashane, said this week that his country’s diamond production would grow some $115 million a year, every year, for the next 25 years…. That’s a lot of diamonds – or a lot of price increases. Either way, the Botswana story which is evolving will affect the entire industry. Those who haven’t yet been to Gaborone ought to contemplate an early visit there. It makes sense to be close to where the action is – or is bound to be.

Have a nice weekend.