22nd April 2015
By Roman Grynberg
DIAROUGH, which owns Teemane in Serowe, will continue to operate its Bhopal factory in India as well as its factory in Thailand and neither they nor De Beers will suffer the consequences of the job losses in Botswana.
For the diamond cutting industry the news last week could hardly have been much worse. In January the press reported that MotiGanz and Leo Schachter had laid off 150 workers. Then last week a bombshell was dropped that Teemane Manufacturing Company owned by Diarough would close with the loss of some 320 jobs in Serowe.
With a total reported employment in the diamond cutting and polishing industry of 3 750 in 2014 this was a massive retrenchment and will cause real pain to many thousands of low income Batswana. This is a time of great sorrow and pain in many households in Botswana.
In 2013 Botswana is reported to have exported of polished diamonds making it by far the biggest manufacturing exporter in the country. Two reasons are commonly given for the sudden rash of closures in Botswana’s diamond sector. The first is quite correctly a structural one – Botswana, like Namibia and South Africa, is simply not competitive in comparison to low cost and high productivity locations like Surat and Mumbai where most of the world’s diamonds are cut. The second is the squeezed margins. Wages in Botswana are about the same as they are in India but the differences are in the productivity. Indian cutters will produce 2-3 times as much as those in Botswana.
Botswana has become more competitive over time but it just cannot compete with India yet but it is a more competitive location than either South Africa or Namibia.
This structural lack of competitiveness of Botswana and the rest of southern Africa has meant that, despite growth in employment in Botswana over the last few years, they are now all going elsewhere in terms of employment in the industry. But what has changed to make it necessary to close so many factories and to lay off thousands of workers across the continent?
Even in good times it is said that Botswana’s diamond manufacturers are not able to make a profit on diamonds that are much smaller than half a carat polished. The diamond cutting industry has also fallen victim worldwide to a limiting of bank credit to the industry which has made it even more difficult to operate. Gross margins are falling in the cutting industry and diamond manufacturers are closing their highest cost operations in Southern Africa. No surprises in any of this except for the fact that the deal that the Government of Botswana made with De Beers in 2004 and revised in 2011 specifically required diamantaire who were Diamond Trading Company (DTC) -Botswana – sightholders to cut and polish in Botswana.
Under this deal these sight holders would eventually get US$800 million worth of rough to process here in Botswana. But these sight holders are not fools, they knew at the time that Botswana is a high cost location, so why did they set up here ? Industry sources have claimed that in the past the DTCB sightholders would get thrown a ‘special stone’ by De Beers occasionally to compensate them for locating in Botswana.
These stones are multimillion dollar diamonds and the profits from one is often enough to compensate producers for low productivity in Botswana. De Beers strongly denied this at the time but now this practice has certainly come to an end. In 2012, the last year before diamond exports figures became confused with re-exports associated with aggregation, Botswana exported some US$4 billion of diamonds. If US$800 million or so goes to DTCB sight holders what happens to the other US$3 billion that Botswana produces? Well, De Beers has many sight holders, 84 according to its website of which some 21 are in manufacturing in Botswana. The rest take their diamonds in what is one of the other boxes that is Namibia, South Africa and Canada where some of these De Beers sight holders have beneficiation obligations. But a large chunk of all the diamonds produced in southern Africa go into what used to be called the ‘London box’ which, since the move to Gaborone is called an ‘international sight’. Therefore sight holders may get up to five boxes of diamonds at the Gaborone sights every 10 weeks.
But the so-called London or international box can be sent anywhere for processing and so in a bear market for polished diamonds, such as is presently the case, the local manufacturers, many of whom have access to a London box, can simply close their factories in Botswana, lose access to their Botswana box but still continue production in India or China.
What has happened to the diamond cutting industry is what economists call ‘regulatory failure’. The closure of the factories in Botswana would probably never have occurred if our agreement with De Beers had said that firms that do not beneficiate a portion of their sites in Southern Africa cannot have access to southern African diamonds, full stop.