“Every one-man, white-owned diamond dealership or manufacturing unit [in South Africa] must have a black equity partner, otherwise they will not be allowed to operate anymore beyond July 1, 2008. …. If you leak this to the press, the government will respond that ‘the white-owned diamond industry doesn’t want transformation’.” This was said Thursday morning by the operations officer of the Diamond and Precious Metals Regulator (DPMR), Martin Mononela, in a meeting with heads of the industry to settle the last minute hitches, before the “New Order” in the diamond industry will come into effect.

Mononela was echoing similar sentiments expressed by Mineral and Energy Minister Buyelwa Sonjica, who says that some [mining] companies are deliberately “delaying transformation and there is very little we can do but to reject an application that does not comply with the law.” The pressures and emotions seem to run high.

By the end of this month, anywhere between 600 and 900 rough dealing and manufacturing licenses are set to expire in South Africa. Unless the government takes some last minute remedial steps, the further dwindling of the diamond manufacturing sector seems inevitable. The new rough dealers’ community will become fully controlled by either Historically Disadvantaged South Africans (HDSAs), i.e. black entrepreneurs, or non-HDSAs (with HDSA minority partners.)

The CEO of the DPMR, Louis Selekane, remains a voice of reason. “The BEE requirement is part of the Mining Charter which serves as our guidelines. But we do have discretion. We don’t lose sight of our basic objective which is the promotion and growth the diamond business,” he says. “The industry has known for a long time that on June 30th all the existing licenses would expire. They had ample of time to make the required changes.”

It is neither ill-will nor devious designs – but rather unintended consequences of policies that were not thought out well. But more than anything else, the responsibility for the demise of South Africa’s industry rests with the industry’s leaders – and De Beers foremost among them.

Though the industry did submit various proposals to arrive at an industry specific BEE charter, these were not accepted. For the small units, the industry thought that skills transfer and development assistance would be accepted as a substitute to BEE equity requirements. This was not accepted, though this only became apparent rather recently.

Industry is Late in Joining “New Order”

The new democratic South Africa came into being 14 years ago when Apartheid was outlawed. While most industrial sectors spearheaded their own restructuring, the Diamond Act of 1986 remained the longest-surviving Apartheid-era legislation on the books. The country’s diamond manufacturing and trading sector is probably one of the last economic branches to reorganize itself in terms of the new political and social realities.

De Beers, as recently as 2004-2005, considered domestic beneficiation in South Africa a “folly,” void of any economic sense. When some energetic ministers of Minerals and Energy made domestic beneficiation a top priority (Mrs. Phumzile Mlambo-Ngcuka up to 2005; followed by Mrs. Lindiwe Benedicta Hendricks and Ms. Buyelwa Patience Sonjica thereafter), De Beers reluctantly became a “born again” believer – but it was too late for it to assume stewardship of the transformation process. Actually, no one did.

It is therefore that key pieces of legislation such as the Diamond Second Amendment Act of 2005 and the Diamond Export Levy Act of 2007 are rather recent and came mostly at the initiative of government rather than the industry. This has created a situation in which the very same Black Economic Empowerment (BEE) policies that are enshrined in the Mining Charter, and apply to huge corporations such as De Beers, Trans Hex and others, are now also applied to the hundreds of one-man rough dealerships and manufacturers.

It cannot be done, say some. It is the law, says the government. Hundreds of dealers who had applied for a so-called “New Order” license were advised last week that they have a week to find a black empowerment (equity) partner for their business. Unless the government changes its mind in the days ahead, many players will exit the trade later this month. Selekane believes that solutions will still be worked out.

Limits on Rough Purchases by Foreigners

Possibly in violation of WTO (formerly GATT) rules, foreigners will not be allowed to purchase rough anymore at the many tenders and auctions throughout the mining regions. They are allowed to buy in the Diamond Exchange and Export Centre (against payment of a monthly $3,500 license fee), but cannot source rough elsewhere. (Last week, five Indian rough buyers on behalf of Mumbai manufacturers bribed a licensing official to secure domestic dealer licenses. The official was caught while forging the papers.)

After July 1, we expect an exodus of foreign rough diamond buyers out of South Africa. The reduced availability of rough is also impacting the many small non-Sightholding manufacturers who are quietly closing shop after the closure of Diamdel.

In a very real way, the South African diamond policies have contributed to the rapid rise of Botswana’s diamond industry. Just a year ago, the South African industry still employed some 2,500 workers; this has now declined to 1,500 and is still dropping. In Botswana, in contrast, there were 800 workers a year ago, today the country’s diamond plants employ 2,800 cutters. Many South African diamond manufacturers have moved to Botswana or are planning their manufacturing expansion in the neighboring country. Sadly, Botswana manufacturers are poaching workers from South Africa, which further undermines industry stability and raises questions about genuine skills transfer in Botswana’s beneficiation policies.

The South African authority that grants the manufacturing and trading licenses, the DPMR, is also responsible for the government’s beneficiation (and BEE) strategy. In plain English, the beneficiation strategy means that HDSAs should have some 15 percent equity in any diamond business growing to 26 percent in an agreed time framework. BEE is easier for large mining companies or for the large manufacturers like the 18 DTC Sightholders to implement.

It is far more difficult and some say even impossible when you have an old, established manufacturing operation where one owner works with his son and a part-time secretary doing a few large stones a month. How does such a company provide a meaningful role for a black empowerment equity partner? It must be done; it is the law.

Industry Policy Suggestions Rejected

The South African diamond manufacturers and traders had taken the position that the same BEE mining charter that is in effect for diamond producers could not be applied to the downstream activities. These manufacturers and traders have been engaged with the South African government to come up with an industry-specific charter and, in this context, made some innovative suggestions. Without “compromising the intended transformation,” they suggested programs of skills transfer, assistance to small entrepreneurs and other substitutes just to stay away from the need to bring in equity partners.

The government rejected all of these proposals. Some South African industry leaders feel that government repeatedly reneged on promises; other observers claim that the industry hopelessly failed in reading the map correctly and that government never wavered on its BEE equity strategy. Irrespective of who may be right, the net result will be that come July 1, 2008, hundreds of existing companies may find themselves without a license to operate. There is even a question as to whether companies that failed to renew their license can sell off their existing diamond stocks into the market.

DPMR operations officer Martin Mononela (who serves as Selekane’s deputy), will hopefully announce some transformational guidance rules in the week ahead. Under Mononela’s watch, every license application is carefully scrutinized and considered – and those not meeting a checklist of criteria are not even considered.

The South African diamond industry finds itself in a painful transformation process. Maybe it is more accurate to call it a consolidation process as many players may temporarily or completely disappear from the scene. We say temporarily because many of those who may not be licensed in July will probably still find ways back into the industry before the year is over. Diamonds tend to be more than just a profession or a business – to many, they are a way of life, and these people know no other way.

State Diamond Trader: So Far a Disaster

Another transformational feature was the formation of the State Diamond Trader (SDT), a government agency for buying and selling rough diamonds that was set up in October 2007. It is meant to sell rough and to assure any small company that it will have consistent access to rough. The DTC Sightholders, for example, are not allowed to buy there. The SDT was supposed to be selling $12-$14 million worth of rough a month. In fact, it is presently selling only around $3 million worth of rough. By value, only $1.5 million is economically cuttable in South Africa. Before the SDT introduction, Diamdel used to sell some $80 million of economically cuttable rough a year; about $8 million per Sight. This by itself reduced dramatically the available rough for the industry.

The legislation provides for the SDT to purchase up to 10 percent of the nationwide rough diamond output. But clearly, it isn’t doing that yet. What is extremely problematic is that the law provides for the SDT to purchase “run of mine,” the entire range of production. This means that some 80 percent of the goods for sale at the SDT consist of cheap Indian goods in the $20-$30 per carat price range, which is of little interest to the domestic market. In the past, the DTC and Diamdel would provide economic cuttable goods, which included rough mined in other countries. Not any more – all shipments come from the so-called South African production “footprint.”

The SDT is currently funded by the government-owned Industrial Development Corporation of South Africa, which has put a $5 million credit facility at its disposal. This is very little money for financing an operation that also needs to accommodate sales of one or two stones a month to very small players.

What will the “New Order” in the diamond economy bring? “Hundreds of millions of dollars of capital may be removed from the industry,” said one small manufacturer. “Not only will equity disappear but also valuable skills may be lost. And the main actors which could secure the transfer of knowledge to the new HSDA entrepreneurs entering the field will also not be available.”

When fewer rough buyers will come to South Africa, the new local entrepreneurs will have to export the non-economic rough, alongside the polished output. Many of the new players miss the overseas contacts and connections in the international diamond industry.

The first rule, the first imperative and essential prerequisite to successful beneficiation is the transfer of skills, know-how and contacts. Though we must strongly support the governmental aspiration to bring about dramatic change to correct past injustices, ways ought to be found to avoid the loss of so much industry expertise – earned over so many years.

South Africa, itself, will be the ultimate winner – or loser.

Have a nice weekend.