Botswana still betting on its diamonds

The renewal of De Beers’ sales agreement with Botswana, which is due in 2020, will provide the country with an opportunity to use its diamonds to further boost its economy.

The partnership between De Beers and Botswana has undergone major changes recently due to the 2011 renewal of the sales agreement between Debswana Diamond Company and De Beers.

The 2011 deal saw De Beers move its global sightholder sales division from London to Gaborone, meaning that 90% of its diamonds are now sold from there, including stones from South Africa, Namibia and Canada.

De Beers sells most of its diamonds to between 70 and 80 so-called sightholders – preapproved buyers with long-term off-take agreements.

De Beers CEO Bruce Cleaver said: “They all have different kinds of businesses. Some can deal with big diamonds, some can deal with different shapes and colours, and so on.”

Every five weeks these sightholders come to “sights” to inspect and collect their specially compiled boxes of diamonds.

Instead of going to London, these companies now send 150 to 200 people to Gaborone 10 times a year for sights that last for up to a week.

“The government was interested in doing that given the obvious economic spin-offs. The hotels, taxis, catering companies – all those things that drive growth in a city,” said Cleaver.

Another development from the 2011 deal was the creation of the state-owned Okavango Diamond Company, which is essentially a small version of global sightholder sales division that gets to sell 15% of Debswana.

This complements the 15% stake Botswana has in the overall De Beers group.

Botswana has also drawn in a number of cutting and polishing operations. Before 2008, there were two in the country, and now there are 20.

Mineral revenues amount to about a third of Botswana’s national budget, but can fluctuate wildly.

In this year’s budget, mineral revenue was projected at 17 billion pula (R22 billion) compared with 19 billion pula last year and 15 billion pula the year before.

Debswana, De Beers’ mining entity in Botswana, is owned 50-50 with the government. The government, however, gets 80% of its mining profits due to royalties.

Those profits derive from selling 85% of Debswana diamonds to De Beers’ sales arm.

The other 15% of Debswana’s diamonds gets sold to the Okavango Diamond Company.

This new part of the partnership gives the government 15% of the trading profits, which previously all went to De Beers.

Big marketing spend

“Diamonds do not sell themselves,” De Beers CEO Bruce Cleaver told City Press this week in Gaborone.

“You have to work hard to sell diamonds, to move diamonds. A huge amount of investment goes in there.”

On the other hand, Stephen Lussier, the CEO of diamond giant De Beers’ in-house Forevermark jewellery brand, claimed that: “A diamond’s value has nothing to do with marketing ... It is inherently rare and valuable.”

However, De Beers spent about $130 million (R1.7 billion) on marketing last year and has created the Diamond Producers’ Association, a diamond marketing body.

Connecting diamond rings to marriage, particularly in the American market, “served us well for the better part of 70 years”, Lussier said.

That no longer works – not least because the institution of the wedding ring does not really exist in major emerging markets such as China, and is being eroded in the US.

He was speaking at a diamond conference outside Gaborone this week and outlined the Diamond Producers’ Association’s attempts to “embed diamonds in the culture” of non-Western markets.

Up to the 1990s, the US and Japan together constituted 75% of the global diamond market.

Now, according to Cleaver, the US, China, India and Japan together account for about 73%.

De Beers is increasingly collaborating with rivals and this demonstrates how much the company has changed from its erstwhile status as master of a global diamond cartel.

In the past, almost all the world’s diamonds moved through De Beers. Its estimated share of the global diamond trading market was still about 80% in the early 1990s. Now, it is in the region of 33%, with second place going to Russia’s state-owned Alrosa
with 27%.

The cartel collapsed in the 1990s, partially due to the Russians pulling out.

De Beers has responded to a weak market by slashing supply.

“In 2015, we took decisive action and reduced production across the world. That had a very good effect and in 2016 the rough market has been far more stable than it was in 2015,” Cleaver said.

Global diamond production was about 160 million carats in 2008, but fell to 120 million carats within a year due to the economic crisis. Production will probably reach 137 million carats this year. De Beers cut its own production from 33 million carats in 2014 to 29 million last year.