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Diamond business losing its glister
By Bambina Wise |
January 18, 2009, Sunday
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AS diamond behemoth De Beers celebrates its 120th anniversary this year, the diamond industry, particularly in South Africa, is facing tough times.
The economic downturn, shortage of supply, softening worldwide demand, wildly fluctuating exchange rates and the rapidly diminishing skilled work force all have contributed to a less-than-glittery state of the industry.
"In a year, we have seen the labor work force of diamond cutters and polishers shrink from 3,500 to around 1,500 today," said Ernest Blom, chairman of the Diamond & Jewelry Federation of South Africa and honorary life president of the World Federation of Diamond Bourses.
Many of these skilled laborers, Blom added, have relocated to nearby countries such as Botswana, Namibia and Mauritius. The local cutting and polishing industry in these countries are thriving, while in South Africa, "it is in steep decline." Botswana now has a work force of around 3,000 cutters and polishers, while Mauritius has 1,200 and Namibia a few hundred.
A local industry source whose family has been involved in all aspects of the diamond business for three generations, and who requested anonymity, stated bluntly: "The diamond industry is a complete mess at the moment. In many ways, the industry is overregulated by the government, which is not always a bad thing, except that a lot of these regulations were implemented abruptly and without thorough consultation with the industry."
One such regulation is the establishment of the State Diamond Trader in January 2008. This, apparently, was one of the factors that led to the drop in supply of rough diamonds in the market, which has had a snowball effect on labor and output.
Previously, Blom explained, De Beers, through its subsidiary, Diamdel, supplied the South African market with more than US$100 million worth of rough diamonds every year. However, De Beers decided to close down Diamdel in South Africa, which left a gap in the market, and the government created the SDT in the hope that "it would fill in the void left by Diamdel."
The unidentified source said, "Under the new regulations, SDT has mandated that diamond producers, big and small, are obligated to supply 10 percent of their output, or run of mine, to the SDT at a price dictated by the government body."
Blom said this had resulted in the SDT supplying the market with up to 85 percent of undesirable rough diamonds - "diamonds that are uneconomically cuttable or polishable. There already is a shortage of (salable) rough (diamonds) in South Africa. This just exacerbates the problem."
A Rapaport News story in September reported that the United Diamond Association of South Africa was preparing to sue the government for "hundreds of millions of rand for losses incurred by the industry as a result of the SDT's failures."
Despite De Beers projecting an output of 800,000 carats a year from Voorspoed, its newest, most modern mine in South Africa, the country is ranked fourth worldwide in diamond production, long overtaken by its smaller neighbor, Botswana, the world's biggest supplier of rough diamonds.
Another government policy is beneficiation, which, Blom said, simply means that, "as much as possible, rough stones should be cut and polished in South Africa to increase their value."
This policy also is fraught with problems not only because of the lack of supply, but also because labor costs in South Africa are higher than the rest of the continent, if not most of the world. In India and China, labor costs average between US$5-8 a carat. In South Africa, a cut and polished stone often represents labor costs of between US$50-100 a carat.
"Clearly, this is not an economically viable option," asserted the insider source. De Beers is clearly one of the firms operating from a position of strength. This year alone, the company has invested in four major capital-intensive projects, including the Voorspoed mine in the Free State province of South Africa that first opened in 1906 and produced diamonds until 1912, when it was bought by De Beers and soon shut down.
De Beers Chairman Nicky Oppenheimer admitted a special attachment to this mine, the first major new diamond mine in South Africa in almost two decades. He recalled his father, Harry, recounted how his own father, De Beers founder Ernest Oppenheimer, used to tell him that "there were some very nice diamonds from Voorspoed mine."
Since limited production began in June, the mine already has yielded 60,000 carats with a value of about US$120 a carat, above the South African average of US$100 a carat.
De Beers considers Voorspoed to be a benchmark mine. And although Oppenheimer conceded, "The world's financial institutions are in chaos," he believes that diamonds will retain their desirability. "Diamonds are scarce and rare," he said.
"Nature has decreed that they are not everywhere to be found, and diamonds have emotion stored in them. They will always stand in good stead as an investment."
The economic downturn, shortage of supply, softening worldwide demand, wildly fluctuating exchange rates and the rapidly diminishing skilled work force all have contributed to a less-than-glittery state of the industry.
"In a year, we have seen the labor work force of diamond cutters and polishers shrink from 3,500 to around 1,500 today," said Ernest Blom, chairman of the Diamond & Jewelry Federation of South Africa and honorary life president of the World Federation of Diamond Bourses.
Many of these skilled laborers, Blom added, have relocated to nearby countries such as Botswana, Namibia and Mauritius. The local cutting and polishing industry in these countries are thriving, while in South Africa, "it is in steep decline." Botswana now has a work force of around 3,000 cutters and polishers, while Mauritius has 1,200 and Namibia a few hundred.
A local industry source whose family has been involved in all aspects of the diamond business for three generations, and who requested anonymity, stated bluntly: "The diamond industry is a complete mess at the moment. In many ways, the industry is overregulated by the government, which is not always a bad thing, except that a lot of these regulations were implemented abruptly and without thorough consultation with the industry."
One such regulation is the establishment of the State Diamond Trader in January 2008. This, apparently, was one of the factors that led to the drop in supply of rough diamonds in the market, which has had a snowball effect on labor and output.
Previously, Blom explained, De Beers, through its subsidiary, Diamdel, supplied the South African market with more than US$100 million worth of rough diamonds every year. However, De Beers decided to close down Diamdel in South Africa, which left a gap in the market, and the government created the SDT in the hope that "it would fill in the void left by Diamdel."
The unidentified source said, "Under the new regulations, SDT has mandated that diamond producers, big and small, are obligated to supply 10 percent of their output, or run of mine, to the SDT at a price dictated by the government body."
Blom said this had resulted in the SDT supplying the market with up to 85 percent of undesirable rough diamonds - "diamonds that are uneconomically cuttable or polishable. There already is a shortage of (salable) rough (diamonds) in South Africa. This just exacerbates the problem."
A Rapaport News story in September reported that the United Diamond Association of South Africa was preparing to sue the government for "hundreds of millions of rand for losses incurred by the industry as a result of the SDT's failures."
Despite De Beers projecting an output of 800,000 carats a year from Voorspoed, its newest, most modern mine in South Africa, the country is ranked fourth worldwide in diamond production, long overtaken by its smaller neighbor, Botswana, the world's biggest supplier of rough diamonds.
Another government policy is beneficiation, which, Blom said, simply means that, "as much as possible, rough stones should be cut and polished in South Africa to increase their value."
This policy also is fraught with problems not only because of the lack of supply, but also because labor costs in South Africa are higher than the rest of the continent, if not most of the world. In India and China, labor costs average between US$5-8 a carat. In South Africa, a cut and polished stone often represents labor costs of between US$50-100 a carat.
"Clearly, this is not an economically viable option," asserted the insider source. De Beers is clearly one of the firms operating from a position of strength. This year alone, the company has invested in four major capital-intensive projects, including the Voorspoed mine in the Free State province of South Africa that first opened in 1906 and produced diamonds until 1912, when it was bought by De Beers and soon shut down.
De Beers Chairman Nicky Oppenheimer admitted a special attachment to this mine, the first major new diamond mine in South Africa in almost two decades. He recalled his father, Harry, recounted how his own father, De Beers founder Ernest Oppenheimer, used to tell him that "there were some very nice diamonds from Voorspoed mine."
Since limited production began in June, the mine already has yielded 60,000 carats with a value of about US$120 a carat, above the South African average of US$100 a carat.
De Beers considers Voorspoed to be a benchmark mine. And although Oppenheimer conceded, "The world's financial institutions are in chaos," he believes that diamonds will retain their desirability. "Diamonds are scarce and rare," he said.
"Nature has decreed that they are not everywhere to be found, and diamonds have emotion stored in them. They will always stand in good stead as an investment."
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