The year 2019 presented a difficult sales path for diamond mining giant De Beers Group, the lucrative industry behemoth has to date sold about $ 1.2 billion less worth of polished diamonds this year.
During the first half of the year, sales portrayed steeper downward trajectory in the wake of muted manufacturing sector resulting in a backlog of polished diamond inventories in the midstream and weaker trading conditions. The company which ethically sources about 60 % of its diamonds in Botswana through Debswana, a 50-50 partnership with Government of Botswana conducts 10 cycles in a year at its high rise magnificent Global Sight Holder Sales block in Gaborone.
Ten times a year, sight holders descend Sir Seretse Khama International Airport from Belgium, United States, India, China & the Gulf amongst others markets for about a week long auction sale of rough diamonds from Botswana, Namibia & Canada and South Africa. De Beers Global Sight holder Sales relocated from London to Botswana in 2011.
In the year 2018 De Beers’s rough diamonds sales amounted to US$5.39 Billion, approximately P54 Billion, this was a slight pickup from the 2017 sales value of US$5.31 Billion. For the year 2019 nine (9) cycles have only gathered total sales provisional value of US$3.60 billion, way below the 2019 value of the same period by over $1.2 billion. The slow start was evident right from the beginning of the year with 2019 Cycle 1 registering actual value of US$544 million , US$128 million less than the 2018 cycle 1 which hit heights values of US$672 million.
The first quarter of the year showed slight upward trajectory with cycle 2 sales a bit higher than cycle 1 and cycle 3 showing improvement from cycle 2 as well, however still below the same cycles in the previous year 2018. Right from after cycle 3 De Beers Rough diamonds sales graph started showing steeper downward gradient with Cycle 4 registering US$416 million compared to $US554 million recorded in 2018. De Beers Group Chief Executive Officer attributed the low performance to macroeconomic uncertainties as well as the period‘s seasonally slow trends owing to Indian factories closing temporarily for the traditional holiday period.
A major decline was registered at Cycle 6, which only managed to sell rough diamonds worth US$250 million, way below the 2018 cycle 6 values of $533 million. This was the lowest amount earned from a sale since December 2015, spilling over from cycle 5 value which were also below the 2018 corresponding cycle by about 32 %. De Beers explained that the trend was attributable to sluggish rough diamond trading circumstances in China, the second largest economy and one of its major markets
“While overall retail sentiment for diamond jewellery in the US remains solid, a more challenging environment in China and higher than normal polished diamond inventories in the midstream resulted in a cautious approach from rough diamond buyers during the fifth cycle of 2019," said Bruce Cleaver De Beers Group Chief Executive in June this year. For cycle 6 the group explained that sales were significantly low also because of persisting macroeconomic uncertainty, with retailers managing inventory levels, and polished diamond inventories in the midstream continuing to be higher than normal.
De Beers Group then provided customers with additional flexibility to defer some of their rough diamond allocations to later in the year. Rough diamond sales continued to be very slow in August (cycle 7) with sales revenue totaling to US$287 million, a slight increase from cycle 6 but still significantly lower that the corresponding cycle in 2018 mirroring 44 % decline when gauged against 2018 cycle 7 value of $503 million.
De Beers continued with its flexibility offer into cycle 7 and 8 giving its clients the opportunity to leave up to 50% of available goods on the table to lower the pressure on buyers without lowering their prices. The company announced in an internal communiqué to sight holders in August De that it would buy back up to 20% by carat weight of customers’ purchases instead of the typical 10%, specifying that they could not use both options on the same box of goods.
The company offered several options to increase the flexibility for manufacturers and traders struggling with an oversupply of rough and polished: in addition to the higher level of buybacks – whereby customers purchase the diamonds and then sell them back to De Beers at an agreed price, while having those purchases count toward their 'demonstrated demand' which determines future allocations. De Beers also enabled buyers to make additional deferrals of goods to later sights, and set an earlier date on the annual opportunity for customers to reschedule their purchases.
When commenting in August after cycle seven Bruce Cleave said “With midstream participants continuing to work down polished diamond inventory levels and reduced levels of manufacturing in the key cutting centers, De Beers Group provided customers with further supply flexibility during the seventh cycle of 2019.” To further respond to market pressures De Beers decreased its rough diamond production in Q2 by 14% to 7.7 million carats and revised its full-year guidance downwards to 31 million carats in response to a backlog of polished diamond inventories in the midstream and weaker trading conditions.
INCREASED MARKETING SPEND
In November De Beers Group announced that its marketing spend in the entire 2019 will be totaling to $180 million (around P1.9 billion). This was revealed by De Beers Group Chief Executive Officer Bruce Cleaver on the sidelines of the Diamond Conference held in Gaborone. Bruce said the $180 million dispatch is De Beers largest marketing spend in 10 years.
“This illustrates how difficult the market was in 2019 , and contrary to what many may think ,when the global demand is subdued we may cut down any expenditure for cost containment but not the marketing spend ,that is actually when you have to increase the marketing budget,” he said.
REDUCED PRODUCTION FORECAST FOR 2020 & 2021
When giving a business update in London this week Group Chief Executive Officer of Anglo American, De Beers’s parent company Mark Cutiffani said during 2019 the diamond industry didn’t have it easy, trade wars sparked uncertainty, depressing manufacturing inventories and slowing down the polished diamonds market uptake.
Anglo reported that De Beers sales fell 26 percent this year amid challenging market conditions adding that this will result in the company lowering its lowering its sights on production in the near future.â€¨â€¨Following its revised full year guidance Anglo noted that De Beers is expected to mine approximately 31 million carats of diamonds in 2019, down 11 percent from 35 million last year.â€¨â€¨Prices on a full-year basis have dropped about 20 percent while the diamond price index is down about 5 percent. De Beers’ mix is down in terms of quality (by price) about 15 percent, due in part to the company holding back some higher-quality goods in hopes market conditions improve.
Anglo has cut its diamond production forecast for the next two years. In 2020, it expects De Beers will mine 32-34 million carats, down from its previous outlook of 33-35 million. For 2021, the forecast was cut from 35-37 million carats to 34-36 million carats. Production guidance for full year 2022 is 33 to 35 million carats.
The recent study on youth entrepreneurship in Botswana has identified difficult access to funding, land, machinery, lack of entrepreneurial mindset and proper training as serious challenges that continue to hamper youth entrepreneurship development in this country.
The study conducted by Alliance for African Partnership (AAP) in collaboration with University of Botswana has confirmed that despite the government and private sector multi-billion pula entrepreneurship development initiatives, many young people in Botswana continue to fail to grow their businesses into sustainable and successful companies that can help reduce unemployment.
University of Botswana researchers Gaofetege Ganamotse and Rudolph Boy who compiled findings in the 2022 study report for Botswana stated that as part of the study interviews were conducted with successful youth entrepreneurs to understand their critical success factors.
According to the researchers other participants were community leaders, business mentors, Ministry of Trade and Industry, Ministry of Youth, Gender, Sport and Culture, financial institutions, higher education institutions, non-governmental institutions, policymakers, private organizations, and support structures such as legal and technical experts and accountants who were interviewed to understand how they facilitate successful youth entrepreneurship.
The researchers said they found that although Botswana government is perceived as the most supportive to businesses when compared to other governments in sub-Saharan Africa, youth entrepreneurs still face challenges when accessing government funding. “Several finance-related challenges were identified by youth entrepreneurs. Some respondents lamented the lack of access to start-up finance, whereas others mentioned lack of access to infrastructure.”
The researchers stated that in Botswana entrepreneurship is not yet perceived as a field or career of choice by many youth “Participants in the study emphasized that the many youth are more of necessity entrepreneurs, seeing business venturing as a “fall back. Other facilitators mentioned that some youth do not display creativity, mind-blowing innovative solutions, and business management skills. Some youth entrepreneurs like to take shortcuts like selling sweets or muffins.”
According to the researchers, some of the youth do not display perseverance when they are faced with adversity in business. “Young people lack of an entrepreneurial mindset is a common challenge among youth in business. Some have a mindset focused on free services, handouts, and rapid gains. They want overnight success. As such, they give up easily when faced with challenges. On the other hand, some participants argue that they may opt for quick wins because they do not have access to any land, machinery, offices, and vehicles.”
The researchers stated that most youth involved in business ventures do not have the necessary training or skills to maintain a business. “Poor financial management has also been cited as one of the challenges for youth entrepreneurs, such as using profit for personal reasons rather than investing in the business. Also some are not being able to separate their livelihood from their businesses.
Lastly, youth entrepreneurs reported a lack of experience as one of the challenges. For example, the experience of running a business with projections, sticking to the projections, having an accounting system, maintaining a clean and clear billing system, and sound administration system.”
According to the researchers, the participants in the study emphasized that there is fragmentation within the entrepreneurial ecosystem, whereby there is replication of business activities without any differentiation. “There is no integration of the ecosystem players. As such, they end up with duplicate programs targeting the same objectives. The financial sector recommended that there is a need for an intermediary body that will bring all the ecosystem actors together and serve as a “one-stop shop” for entrepreneurs and build mentorship programs that accommodate the business lifecycle from inception to growth.”
Botswana Housing Corporation (BHC) is said to have recorded an operating surplus of P61 Million, an improvement compared to the previous year. The housing, office and other building needs giant met with stakeholders recently to share how the business has been.
The P61 million is a significant increase against the P6 million operating loss realized in the prior year. Profit before income tax also increased significantly from P2 million in the prior year to P72 million which resulted in an overall increase in surplus after tax from P1 million prior year to P64 million for the year under review.
Chief of Finance Officer, Diratsagae Kgamanyane disclosed; “This growth in surplus was driven mainly by rental revenue that increased by 15% from P209 million to P240 million and reduction in expenditure from P272 million to P214 million on the back of cost containment.” He further stated that sales of high margin investment properties also contributed significantly to the growth in surplus as well as impairment reversals on receivables amounting to P25 million.
It is said that the Corporation recorded a total revenue of P702 million, an 8% decrease when compared to the P760 million recorded in the prior year. “Sales revenue which is one of the major revenue streams returned impressive margins, contributing to the overall growth in the gross margin,” added Kgamanyane.
He further stated professional fees revenue line declined significantly by 64% to P5 million from P14 million in the prior year which attributed to suspension of planned projects by their clients due to Covid-19 pandemic. “Facilities Management revenue decreased by P 24 million from P69 million recorded in prior year to P45 million due to reduction in projects,” Kgamanyane said.
The Corporation’s strength is on its investment properties portfolio that stood at P1.4 billion at the end of the reporting period. “The Corporation continues its strategy to diversify revenue streams despite both facilities management income and professional fees being challenged by the prevailing economic conditions that have seen its major clients curtailing spending,” added the CEO.
On the one hand, the Corporation’s Strategic Performance which intended to build 12 300 houses by 2023 has so far managed to build 4 830 houses under their SHHA funding scheme, 1 240 houses for commercial or external use which includes use by government and 1 970 houses to rent to individuals.
BHC Acting CEO Pascaline Sefawe noted that; BHC’s planned projects are said to include building 336 flat units in Gaborone Block 7 at approximately P224 million, 100 units in Maun at approximately P78 million, 13 units in Phakalane at approximately P26 million, 212 units in Kazungula at approximately P160 million, 96 units at approximately P42 million in Francistown and 84 units at approximately P61 million in Letlhakane. Emphasing; “People tend to accuse us of only building houses in Gaborone, so here we are, including other areas in our planned projects.”
Researchers from some government owned regulatory institutions in the financial sector have projected that the banking sector’s profitability could increase, following Bank of Botswana Monetary Policy Committee recent decision to increase monetary policy rate.
In its bid to manage inflation, Bank of Botswana Monetary Policy Committee last month increased monetary policy rate by 0.50 percent from 1.65 percent to 2.15 percent, a development which resulted with commercial banking sector increasing interest rate in lending to household and companies. As a result of BoB adjustment of Monetary Policy Rate, from 1.65 percent to 2.15 percent commercial banks increased prime lending rate from 5.76 percent to 6.26 percent.
Researchers from Bank of Botswana, the Non-Bank Financial Institutions Regulatory Authority, the Financial Intelligence Agency and the Botswana Stock Exchange indicated that due to prospects of high inflation during the second half of 2022, there is a possibility that the Monetary Policy Committee could further increase monetary policy rate in the next meeting in August 25 2022.
Inflation rose from 9.6 percent in April 2022 to 11.9 percent in May 2022, remaining above the Bank of Botswana medium-term objective range of 3 – 6 percent. According to the researchers inflation could increase further and remain high due to factors that include: the potential increase in international commodity prices beyond current forecasts, logistical constraints due to lags in production, the economic and price effects of the ongoing Russia- Ukraine conflict, uncertain COVID-19 profile, domestic risk factors relating to possible regular annual administered price adjustments, short-term unintended consequences of import restrictions resulting with shortages in supplies leading to price increases, as well as second-round effects of the recent increases in administered prices “Furthermore, the likelihood of further increases in domestic fuel prices in response to persistent high international oil prices could add upward pressure to inflation,” said the researchers.
The researchers indicated that Bank of Botswana could be forced to further increase monetary policy rate from the current 2.15 percent if inflation rises persistently. “Should inflation rise persistently this could necessitate an upward adjustment in the policy rate. It is against this background that the interest rate scenario assumes a 1.5 percentage points (moderate scenario) and 2.25 percentage points (severe scenario) upward adjustment in the policy rate,” said the researchers.
The researchers indicated that while any upward adjustment on BoB monetary policy rate and commercial banks prime lending rate result with increase in the cost of borrowing for household and compnies, it increase profitability for the banking sector. “Increases in the policy rate are associated with an overall increase in bank profitability, with resultant increases in the capital adequacy ratio of 0.1 percentage points and 0.2 percentage points for the moderate and severe scenarios, respectively,” said the researchers who added that upward adjustment in monetary policy rate would raise extra capital for the banking sector.
“The increase in profit generally reflects the banking industry’s positive interest rate gap, where interest earning assets exceed interest earning liabilities maturing in the next twelve months. Therefore, an increase of 1.5 percentage points in the policy rate would result in industry gains of P71.7 million (4.1 percent increase), while a 2.25 percentage points increase would lead to a gain of P173.9 million (6.1 percent increase), dominated by large banks,” said the researchers.