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How a tough Indian market is making De Beers change its policy

According to industry circles, De Beers has recently allowed sightholders to return around a fifth or more of what they purchased across certain categories as its sight’ (as the ritual is called), besides cutting prices of the roughs by 5 per cent on average, to support them amid a crisis in India’s midstream, or diamond polishing industry.

For the first time, De Beers- once known for its formidable clout- is changing a quaint practice that marked the secretive world of diamonds. In a major shift, the 31-year-old De Beers is letting diamond houses return some of the rough stones sold by the group. It’s a sign, traders say, of a slow market and a probable decline in De Beers’ control over the supply of roughs.

For decades, representatives of chosen diamond houses assembled in a room, and each was given a box of diamonds- a mix of good and lesser quality rough stones. The buyers, called ‘sightholders’, took the box without a word- accepting whatever stones De Beers offered. The ritual, which took place in London, later moved to Botswana after the family that controlled the group sold a chunk of its stake. India is the global hub for cutting and polishing roughs, with an estimated 9 out of 10 diamonds processed by the country being polished in Surat, and to a much lesser extent in Mumbai.

According to Economic Times, buyers allowed to return up to 20 per cent of stones. Thanks to this over concentration, the industry has been grappling with an oversupply of polished inventory and tight liquidity conditions that have plagued other sectors as well, including auto and realty. ‘’Traditionally, the rejection rate has been 10 per cent and that too is very select category of roughs. This month, sightholders had the flexibility to return around 20 per cent of the stones across more categories’’ said Anoop Mehta, Director of Mohit Diamonds, one of over 30 Indian sightholders.

Another sightholder said rough prices this month were reduced on average by 5 per cent, in addition to the higher rejection rate permitted. In the October cycle, the rejection rate was 30 per cent, he said. Sightholders cannot reject the entire box. However, they were given the flexibility to defer the purchase of the full box by a few months.

De Beers sells rough diamonds through 10 events ‘sights’ annually in Botswana where its 80-odd sightholders are given a box containing diamonds filled in plastic bags. In each of the past three sales cycles, culminating in the one on October 2, De Beers made less than 300 Million US Dollars- which Bloomberg termed as being unprecedented citing data going back to 2016. This is being attributed to the financial stress and oversupply in India’s midstream industry.

While De Beers did not comment on the reduction in prices or rejection rate cited by the diamantaries, a company official said the group had ‘’provided its sightholder customers with a range of flexibility options to support them during a challenging period for rough diamond buyers, this is according to Economic Times.

ET said the official added that the flexibility was ‘’not in relation to a slowdown in consumer demand for diamond jewellery, but rather some challenges specific to the industry’s midstream including high levels of wholesale diamond inventories and tightness in midstream liquidity’’.
Reflecting the stress in the system, India’s exports of cut and polished diamonds dipped by 14 per cent to a provisional 13.9 million carats in the first half of FY19, from 16.1 million carats in the same period of FY18, according to the commerce ministry-sponsored Gem and Jewellery Export Promotion Council (GJEPC). In value terms, exports in April-September 2019 shrank 19 per cent from a year ago.

Given the acute stress in the midstream industry over the past year, sightholders such as publicly listed AsianStar said De Beers’ move to allow return of stones was ‘’welcome’’. ‘’There has been a slowdown globally owing to the US-China trade war, weak economic growth in the Euro zone, closure of Hong Kong and slower growth back home,’’ said Vipul Shah, Managing Director of Asian Star. ‘’Given the multiplicity of these adverse factors, the move by De Beers is welcome.’’

From a monopolistic control of the market until the 1980s, De Beers’ hold has loosened with the discovery of new mines in Russia, Australia and Canada. Russia’s Alrosa is the world’s largest miner by caratage. In 2018, Alrosa mined 36.7 million carats as compared to 35.3 million carats by De Beers and 18.4 million carats by Rio Tinto. Pranay Narvekar, partner at gems and jewellery consulting firm Pharos Beam, estimates global output of roughs at 140-145 million carats this year, down from 148.4 million carats in 2018, owing to reduced production by De Beers.

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Botswana on high red alert as AML joins Covid-19 to plague mankind

21st September 2020
Botswana-on-high-alert-as-AML-joins-Covid-19-to-plague-mankind-

This century is always looking at improving new super high speed technology to make life easier. On the other hand, beckoning as an emerging fierce reversal force to equally match or dominate this life enhancing super new tech, comes swift human adversaries which seem to have come to make living on earth even more difficult.

The recent discovery of a pandemic, Covid-19, which moves at a pace of unimaginable and unpredictable proportions; locking people inside homes and barring human interactions with its dreaded death threat, is currently being felt.

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Finance Committee cautions Gov’t against imprudent raising of debt levels

21st September 2020
Finance Committe Chairman: Thapelo Letsholo

Member of Parliament for Kanye North, Thapelo Letsholo has cautioned Government against excessive borrowing and poorly managed debt levels.

He was speaking in  Parliament on Tuesday delivering  Parliament’s Finance Committee report after assessing a  motion that sought to raise Government Bond program ceiling to P30 billion, a big jump from the initial P15 Billion.

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Gov’t Investment Account drying up fast!  

21st September 2020
Dr Matsheka

Government Investment Account (GIA) which forms part of the Pula fund has been significantly drawn down to finance Botswana’s budget deficits since 2008/09 Global financial crises.

The 2009 global economic recession triggered the collapse of financial markets in the United States, sending waves of shock across world economies, eroding business sentiment, and causing financiers of trade to excise heightened caution and hold onto their cash.

The ripple effects of this economic catastrophe were mostly felt by low to middle income resource based economies, amplifying their vulnerability to external shocks. The diamond industry which forms the gist of Botswana’s economic make up collapsed to zero trade levels across the entire value chain.

The Upstream, where Botswana gathers much of its diamond revenue was adversely impacted by muted demand in the Midstream. The situation was exacerbated by zero appetite of polished goods by jewelry manufacturers and retail outlets due to lowered tail end consumer demand.

This resulted in sharp decline of Government revenue, ballooned budget deficits and suspension of some developmental projects. To finance the deficit and some prioritized national development projects, government had to dip into cash balances, foreign reserves and borrow both externally and locally.

Much of drawing was from Government Investment Account as opposed to drawing from foreign reserve component of the Pula Fund; the latter was spared as a fiscal buffer for the worst rainy days.

Consequently this resulted in significant decline in funds held in the Government Investment Account (GIA). The account serves as Government’s main savings depository and fund for national policy objectives.

However as the world emerged from the 2009 recession government revenue graph picked up to pre recession levels before going down again around 2016/17 owing to challenges in the diamond industry.

Due to a number of budget surpluses from 2012/13 financial year the Government Investment Account started expanding back to P30 billion levels before a series of budget deficits in the National Development Plan 11 pushed it back to decline a decline wave.

When the National Development Plan 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at budget deficits.

This  as explained by Minister of Finance in 2017 would be occasioned by decline in diamond revenue mainly due to government forfeiting some of its dividend from Debswana to fund mine expansion projects.

Cumulatively since 2017/18 to 2019/20 financial year the budget deficit totaled to over P16 billion, of which was financed by both external and domestic borrowing and drawing down from government cash balances. Drawing down from government cash balances meant significant withdrawals from the Government Investment Account.

The Government Investment Account (GIA) was established in accordance with Section 35 of the Bank of Botswana Act Cap. 55:01. The Account represents Government’s share of the Botswana‘s foreign exchange reserves, its investment and management strategies are aligned to the Bank of Botswana’s foreign exchange reserves management and investment guidelines.

Government Investment Account, comprises of Pula denominated deposits at the Bank of Botswana and held in the Pula Fund, which is the long-term investment tranche of the foreign exchange reserves.

In June 2017 while answering a question from Bogolo Kenewendo, the then Minister of Finance & Economic Development Kenneth Mathambo told parliament that as of June 30, 2017, the total assets in the Pula Fund was P56.818 billion, of which the balance in the GIA was P30.832 billion.

Kenewendo was still a back bench specially elected Member of Parliament before ascending to cabinet post in 2018. Last week Minister of Finance & Economic Development, Dr Thapelo Matsheka, when presenting a motion to raise government local borrowing ceiling from P15 billion to P30 Billion told parliament that as of December 2019 Government Investment Account amounted to P18.3 billion.

Dr Matsheka further told parliament that prior to financial crisis of 2008/9 the account amounted to P30.5 billion (41 % of GDP) in December of 2008 while as at December 2019 it stood at P18.3 billion (only 9 % of GDP) mirroring a total decline by P11 billion in the entire 11 years.

Back in 2017 Parliament was also told that the Government Investment Account may be drawn-down or added to, in line with actuations in the Government’s expenditure and revenue outturns. “This is intended to provide the Government with appropriate funds to execute its functions and responsibilities effectively and efficiently” said Mathambo, then Minister of Finance.

Acknowledging the need to draw down from GIA no more, current Minister of Finance   Dr Matsheka said “It is under this background that it would be advisable to avoid excessive draw down from this account to preserve it as a financial buffer”

He further cautioned “The danger with substantially reduced financial buffers is that when an economic shock occurs or a disaster descends upon us and adversely affects our economy it becomes very difficult for the country to manage such a shock”

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