Namibia DTC: Testing Ground for the New Rough Distribution System
August 16, 07
On October 29, 2007, the Namibia DTC (NDTC) will announce its rough allocations to local diamond manufacturers under the new distribution system. The NDTC contract period will run from October 2007 to March 30, 2011. In Botswana, the new supply contract will begin only in early 2008.
The government of Namibia has issued some 17 manufacturing licenses (of which, some were purchased from existing companies at prices that vary between $500,000 and $1 million). While 14 of the license applicants are presently Diamond Trading Company (DTC) Sightholders, one doesn’t necessarily have to be a DTC sightholder to get a rough allocation in Namibia. However, it isn’t clear yet how this will work out in practice.
Keep in mind that while Botswana, which has $3.2 billion worth of local production, has awarded only 16 manufacturing licenses, Namibia, with merely $900 million worth of output, has awarded a larger number of licenses… If satisfying Botswana’s rough demand is going to be challenging, Namibia may become a nightmare.
Most of these 17 Namibian manufacturing license holders don’t have local factories yet. Today, six factories are actually operating (of which Lazare Kaplan’s Namgem, Leviev’s LLD and Steinmetz’s Namcor are the largest). Another three or four factories are presently in the building phase, and some of the others have adopted a “wait and see” attitude.
Rough diamond imports for local manufacturing in 2006 totaled 132,337 carats, worth $76,079,134. Thus, the Namibian factories consumed rough costing $575 per carat. There might have been additional goods processed that were supplied directly from Leviev’s Samicor marine mining operations to his factory, but we learned that the Samicor rough production is exported in its totality.
Last year, Namibia’s diamond mines – mostly Namdeb’s – produced 2,402,477 carats valued $900,977,934. Thus, the local production has an average rough export value of $375 per carat. Clearly, no more than 15-20 percent of local production in terms of carats would be suitable for local beneficiation.
There is a commitment by De Beers to supply a total of some $300 million rough for beneficiation in Namibia by 2009. However, when the new client contract period starts, only about $70-$80 million of allocated rough will be unaggregated goods, i.e. diamonds from Namibia’s own mining production.
The remaining $220-$230 million will be so-called London goods, even though in practice they may be aggregated in Botswana. Thus, non international DTC Sightholders, which have factories in Namibia, may actually get London Sights (or non-Namibian goods), through the NDTC. The Namibia “Diamdel” option doesn’t exist anymore as its functions are assumed by the NDTC.
Aiming at Larger End of Market
Recognizing the high labor cost in Namibia, the NDTC’s Sight boxes will consist of larger goods than the allocations to other southern African countries. The unaggregated NDTC boxes will be 5-10 grainers (High and Medium) and 2.5-4 caraters (H and M), as well as 5-8 grainer boxes. In Botswana and South Africa the comparable Sight boxes will start at 4 grainers. We were told that the boxes will be sorted according to clarity and size as opposed to color.
It is expected that the NDTC will have little political choice but to supply to all the manufacturing license holders, provided they have at least a $5 million annual turnover. However, the question is “what” they will actually sell to each. The NDTC had announced a rather specific “weighting” system for its client-selection process. One wonders, though, whether these “weightings” are relevant if political imperatives will make the NDTC supply the goods anyway. However, do they have to indeed?
The Namibia criteria and their “weightings” in the decision-making process are the following:
- Technical Ability (weighting 10%)
- Distribution and Marketing Ability (weighting 25%)
- Core Strengths Market Focus (weighting 15%)
- Direct and Associated Job Creation (weighting 20%)
- Rough Utilization (weighting 15%) i.e. the percentage of allocated rough processed in Namibia
- Equity (weighting 12.5%) i.e. the granting of an equity stake holding to a local partner
- Namibian Branding (weighting 2.5%)
No Commitment to Supply All
One may have paid $1 million for a manufacturing license in Namibia, but it doesn’t mean that any rough supply is guaranteed. The NDTC has enormous discretionary powers:
· It has the right to supply to all licensed manufacturers, but it is not obliged to do so as it also has the prerogative to decide whether applicants meet al the NDTC criteria; and
· It has no obligation to exceed the $300 million 2009 target and in its allocations for 2008, it must keep that ceiling in mind.
Moreover, how many of Namibia’s existing factories do actually qualify by meeting all of the DTC’s usual financial standing and reliability criteria? How many of the factories have a good business reputation? How many of them are compliant with Best Practice Principals (BPP) and its associated Assurance Program? These are “pass” or “fail” items and the NDTC is not going to compromise on these criteria.
Decision-Making Process of NDTC
Ostensibly, the NDTC’s decision-making process is shared on a 50/50 basis between De Beers and the Namibian government. The partners have not appointed a CEO yet. The acting CEO of the NDTC is Kevin Goodrem, who is presently the general manager of DTC Valuations Namibia. Manufacturers believe that Goodrem exerts the greatest influence on the decision-making process.
A fascinating question involves the pricing of the goods. Namibia traditionally sold its output to the DTC at the London Standard Selling Values. Will these export values be maintained when selling unaggregated (i.e. Namibian) goods to local factories? Goodrem has intimated that the selling price of the unaggregated goods will be the same as for the non-Namibian goods; however that may be quite a challenge, given the expected differences in assortments.
Some manufacturers say that the higher per-carat values of the diamonds to be processed in Namibia will require a supply of some $250,000-$300,000 per worker. (I think that $150,000 would be more accurate, but I might be wrong.) If $300,000 is the right figure, then the available rough could not accommodate more than a 1,000 workers. At $150,000 per year, there would be enough for 2,000 workers.
Whatever the figure, the arithmetic doesn’t make sense. Whether there is rough for 1,000 or 2,000 workers, the $300 million ceiling for a domestic beneficiation scene of 17 factories would translate into slightly less than $1.5 million of rough per month per factory. Again, that doesn’t make sense.
The Sightholders who are going to operate in Namibia (which may include Julius Klein, Espeka, Trau and others) are serious companies that are not expected to employ fewer than 100 workers. Where will the rough come from? From “home”?
The allocation decisions to be announced by the NDTC are of incredible importance. In a confusing system, it is the implementation that counts. Whether Namibia will develop a flourishing diamond-manufacturing sector doesn’t depend on “weightings” or on BPP. It depends on the ability of the NDTC to allocate sufficient, economically cuttable rough to the license holders. It requires an enormous degree of skilled juggling. As for some 75% of the allocations, the Namibia DTC depends on London goods. Let’s see whether Kevin and his team will succeed in doing almost the “impossible” – something that ultimately (and certainly initially) will probably be decided outside of Namibia.
If this doesn’t all seem to add up - don’t worry, you are not alone. Much will become clear on October 29, 2007.
Have a nice weekend.