Grynberg, R. 2013. Diamond beneficiation in Botswana. GREAT Insights, Volume 2, Issue 2. February-March 2013. Maastricht: ECDPM
In 2011 Botswana is estimated to have exported 25 million carats of diamonds, making it the world’s largest diamond producer by value, and the second largest by volume, after the Russian Federation. This production is however down from 35 million carats in 2007, the last normal year of production, prior to the global financial crisis. While unit export prices have risen from USD 91/carat to USD 218/carat, government revenues from diamonds have fallen.
However, there has been an important policy shift in 2012. Indeed, in 2012, Botswana has cut 18-20% of its own rough diamond production domestically and has signed a new marketing agreement with De Beers, its partner (1), whereby all its diamonds will be sold through the Diamond Trading Corporation Botswana (DTCB) by December 2012. This implies that all sorting of De Beers diamonds, that once took place in London, will now be done in Gaborone.
At present, the diamond cutting and polishing industry employs 3,200 workers, 94% of whom are nationals. This is the single largest manufacturing activity in Botswana. Employment in the industry has however remained at this level since the beginning of the global economic crisis.
The domestic sorting and processing of diamonds has been a major political and economic objective of the more nationalist elements of Botswana’s Government since 20 years. Originally, De Beers had been strongly opposed to any domestic processing, arguing, correctly, that Botswana had no comparative advantage in the cutting and polishing of diamonds. Following the demise of De Beers as a cartel in 2000, and with the move to its ‘Supplier of Choice’ strategy, the company was commercially weakened and the new management policy is now supporting the development objectives of the countries in Africa in which the company operates.
Why Beneficiation occurs in Botswana?
The beneficiation of diamonds is a direct result of the conditions required to be a DTCB sightholder (2). One of the criteria is indeed that local processing should take place. Simply put, no processing, no access to rough diamonds.
This policy required rough diamond traders to move down the value chain if they wanted access to rough diamonds. It has been estimated that the implicit tax placed on sightholders, as a result of the obligation to process domestically, is equivalent to USD 31/carat (see figure 1). Botswana sightholders would import rough diamonds of sufficient value in order to make domestic processing profitable. According to the government, it is estimated that 84% of the allocation that was given to sightholders is processed in Botswana. The remainder is exported to low cost-cutting centres such as India. Thus, the implicit tax is countervailed by access to rough diamonds, which is 4 times larger than the volume actually cut in Botswana. The economics of the decision to absorb the beneficiation tax is that the access to rough provides a sufficient economic rent, so that absorbing the cost still means that production remains commercially viable. It is for this reason that beneficiation, which is not predicated on commercial advantage by the country, remains viable and has not resulted in serious objections from the De Beers sightholders.
Source: Data on actual costs of cutting come from various Diamond Hub presentations 2008-2009. The estimated maximum is based on the standard rule of thumb in the industry that diamond cutting cost should be no more than 10% of the value of the rough. Rough values are based on Botswana import data, Kimberley Process website. http://mmsd.mms.nrcan.gc.ca/kimberleystats/public_tables/Annual%20Summary%20Table%202008.pdf
The World Bank and Beneficiation
The World Bank remains opposed to beneficiation on what appear to be practical economic and commercial grounds. The Bank has funded a number of interventions in the last three years, attempting to give governments an alternative perspective on what has emerged as a consensus view on industrial policy in Southern Africa (3). The Bank has funded the travel of Professor Hausmann, a lead expert opposed to the concept of beneficiation, in Southern Africa and has also funded reports in Zambia attacking government policy on beneficiation of copper (4). A more subtle criticism of beneficiation is found in the recent work by authors such as Professor Kaplinksy, who generally advocates upstream policies in the mining sector (5).
While some of the World Bank’s criticisms of the beneficiation approach are justified, the proposals often made to governments do not reflect a serious analysis of what constitute commercially or even economically viable alternatives. Beneficiation, as an approach to industrial policy stems from a very justified concern by small landlocked states that are at a competitive disadvantage because of higher transport costs, often to the benefit of the large dominant producer in a regional grouping, a phenomenon largely overlooked.
Is Diamond Beneficiation Sustainable in Botswana?
Unless there is a very substantial lowering of production costs in Botswana or an increase in productivity or there are other external benefits provided by the government, then diamond beneficiation is unlikely to continue beyond the life of the existing mines, which are amongst the most profitable in the world. However, this is not to suggest that Hausmann and the World Bank’s conclusions are necessarily correct. If the government does not move to establish linkages between the domestic economy and beneficiation processes then, in the words of Hirshman, ‘one thing leads to another’. However, without a clear sectoral plan, which devotes real resources to increasing local participation up and down the diamond value chain, along with appropriate policies to strengthen domestic capacities, then diamond cutting will prove unsuccessful. The country has at least 20 more years of significant diamond production from known deposits to establish these linkages.
For a more complete discussion, see Grynberg, R. (2013), They Prefer it Rough: The Future of Diamond Beneficiation in Botswana, ECDPM Discussion Paper 142, March 2013, www.ecdpm.org/dp142
1. Botswana owns 50% of Debswana which is said to generate 70% of the profits of De Beers. The government of Botswana also own 15% share of De Beers.
2. A ‘sightholder’ is a company on the Diamond Trading Company‘s (DTC) list of authorized bulk purchasers of rough diamonds.
3. The SADC draft industrial policy as well as the one of central planks of South African government policy rest on beneficiation of base and precious metals. See ‘Zero Draft SADC Industrial Policy’- SADC Secretariat 2010.
4. Nathan Associates (2011) ‘World Bank -Zambia 2011‘How Can Zambia Increase the fabrication of copper products? Dispelling the Myth that domestic production of copper is an advantage’.
5. Morris M., Kaplinsky . & Kaplan D. (2012) ‘One Thing Leads To Another: Promoting Industrialisation by Making the Most of the Commodity Boom in Sub-Saharan Africa p. 24 www.commodities.open.ac.uk.
This article was published in Great Insights Volume 2, Issue 2 (February-March 2013)