South Africa's State Diamond

tarting out as a vehicle to drive beneficiation in South Africa – and possibly serve as a model for other southern African nations – the country's State Diamond Trader (SDT) appears to have run into a roadblock. Traditionally a producer and exporter of rough diamonds, South Africa wants to increase the value of its diamond trade by further developing its cutting and polishing industry in line with black economic empowerment policies.


Instead of simply having its rough diamonds exported, South Africa aimed to manufacture a proportion of its diamonds within its borders – as well as developing a diamond jewellery business – in order to create jobs, stimulate economic activity, and enjoy higher export revenues. For a country that produces more than $1 billion annually in rough diamonds, it was only employing 2,300 workers. Unfortunately, however, although its intentions were far-reaching and logical, a combination of political turf wars and a flawed business model have created an organisation that is struggling financially and unable to achieve its aims, according to many analysts.

In addition, South Africa, as with Botswana and Namibia, which had also started along the beneficiation road, has been hit by the impact of the global financial crisis which slashed their revenues and ability to press forward with developments. With 70 percent of South Africa's exports being commodities or beneficiated commodities, and about 50 percent of its export earnings being derived from the mining industry, the impact on its economy of the steep fall in demand for diamonds and precious minerals is clear.

The core of the SDT's aims is to ensure a supply of rough diamonds to the country's diamond manufacturers. According to its charter, it can buy up to 10 percent of run-of-mine goods from the country's producers. But, it has become clear that the SDT cannot both buy rough diamonds at fair market prices and then sell them at fair market levels. As a result, the SDT is unable to cover its costs. This situation became worse when the South African Treasury Department said it was not willing to provide financing for the SDT’s purchases.

In addition, the reported friction between the first SDT chief executive, Abbey Chikane, and SDT Chairperson Linda Makatini over implementation of the law ensured the scheme got off to a bad start. Makatini apparently insisted that the law be followed to the letter and refused to change it. Consequently, tenders were cancelled because the SDT didn’t see the goods in advance, and one DTC South Africa sight was even postponed and many sightholders were not able to see the goods they were expected to purchase.

Meanwhile, there were issues pertaining to the licensing of small business that could not afford an extra partner as required by Black Economic Empowerment laws. Meanwhile, Chikane's contract was not extended after it ran out in September 2008, and after several months without an official replacement Futhi Zikalala was appointed

The SDT was established by the government in 2007 with strong support from De Beers and the Industrial Development Corporation (IDC). Indeed, De Beers seconded a number of key technical staff to the SDT, while the IDC provided funding through a $8 million rollover loan. The SDT is mandated to buy up to 10 percent of South Africa's rough diamond production at "market-related" prices.

Criticism of the SDT has come from the very top of De Beers, with David Noko, who steps down as Managing Director of De Beers Consolidated Mines at the end of March, saying changes are badly needed, although he expressed confidence that the scheme could be turned around. Asked about widespread diamond industry dissatisfaction with the SDT, Noko told Miningmx, "That area is a mess. It needs to be fixed and I believe government is committed to fixing it. This is a temporary setback."

With the establishment of the SDT, De Beers' Diamdel unit was to provide rough diamonds to smaller cutting and polishing firms. But the result has not been successful because the SDT has not carried out its role of supplying the diamonds. As a result, there have been extensive job losses in the local cutting and polishing industry.

Noko said the problem was due to the bureaucracy within the SDT, and that a different approach was called for. "The emphasis must be placed on efficient access to diamonds, whereas at the moment the emphasis in the SDT sits on legal compliance issues and issues around the operations of the government diamond valuator. They need to get the rough diamonds to the buyers. It will be fixed," he said.

Industry analyst Chaim Even-Zohar believes the SDT cannot be run realistically at the moment. Companies wanting to buy rough must first pay the entire amount in advance at which point the SDT buys goods from De Beers, which is its only supplier. Diamond manufacturers then receive the package and pay a 4 percent commission to the SDT.

"The SDT’s purchases from De Beers are a straight 10 percent run-of-mine goods," said Even-Zohar. "In other words, the huge majority of the volume is unusable rubbish or diamonds unfit for local processing. But the SDT sells run-of-mine parcels, thus the targeted beneficiation clients – the small manufacturers – are not able nor do they need to purchase those goods. In fact, a handful of rough diamond dealers are the only buyers. One way or another, for the buyer, it is a blind date with nature. He will not see the goods before he has paid for them."

Criticism has also come from the Diamond Council of South Africa. The council said that restrictive regulations and obstacles have led to the decline of South Africa's diamond manufacturing and trading sectors. At a town hall meeting of more than 150 industry stakeholders last year, the council said the feeling was that the SDT was not fulfilling the functions for which it had been formed.

The council complained that South Africa's diamond trade had not been thoroughly consulted in establishing the concept of the State Diamond Trader. "For the South African diamond industry to compete effectively, there is a need to ‘level the playing field' and collectively to talk to the South African government as one voice," the council said.

Meanwhile, Ernest Malakoane, the chairman of the United Diamond Council of SA, an organisation that represents around 150 black-owned gem cutting and polishing businesses, said the SDT's policies had led to job losses and business failures in the diamond manufacturing sector. He accused the SDT management of not having sufficient knowledge of the workings of the diamond industry.

In addition, he said some small miners had been put out of business due to licensing regulations, including requirements to take on black empowerment partners. As a result, smaller diamond manufacturers are not able to secure a steady supply of gems. His comments were supported by former World Federation of Diamond Bourses President Ernest Blom, who is the chairman of the Diamond Council of South Africa. He also said the SDT was not supplying the small diamond players that it had planned to supply.

Malakoane said the SDT had not been able to buy the right diamonds that manufacturers wanted because it bought them directly from local mines, and had not rejected unviable stones. Its problems were also compounded by financial problems. SDT CEO Futhi Zikalala rejected the claims, saying it has more than 100 clients on its books, including Malakoane's company Ma-Afrika Diamonds. As for financing, that was not an issue, either, since it has a loan facility from the Industrial Development Corporation.

Changes to the SDT are likely to be implemented, according to South Africa's Minister of Mineral Resources Susan Shabangu in a budget speech to parliament last year. She said that the challenges facing the SDT have been made worse by its financial model. The minister added that her department was "assessing the possibility of a new business model to enable it to continue implementing its main role of promoting equitable access to and beneficiation of diamond resources, addressing distortions in the diamond industry and correcting historical market failures to develop and grow South Africa’s diamond cutting and polishing industry.”

from -antwerpfacetsonline.be

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