When the true history of Botswana diamond beneficiation is finally written, the names of Israeli diamond billionaire Lev Leviev and Greek gemologist Yianni Melas will feature prominently as the main architects who provided the initial blue print that formed the basis of the current experiment in diamond value add.
Their business case presented to the Botswana media at Hotel Mondeo on that auspicious day in 2004, enabled Botswana to gain confidence to proceed to negotiate better – but not the best – terms with De Beers which resulted, among others, in the relocation of the Diamond Trading Company from London to Gaborone.
From that day onwards Botswana’s diamond beneficiation debate gained momentum and intensity despite much negative publicity and opposition from both government and De Beers. De Beers and Botswana Government finally somersaulted in their opposition in a rather strange turn of events due to intense public debate and concerted media onslaught in support of diamond value addition.
The change of heart was clearly opportunistic, self serving and mere face saving in the light of mounting public condemnation and debate. The real reason seemed to have been De Beers’ paranoia and the need to block its strongest and most feared and effective international rival billionaire, Lev Leviev from entering Botswana’s diamond beneficiation market.
This was after Leviev had made a compelling business case in support of beneficiation which in turn exposed De Beers and some of its harmful business practices against Botswana. De Beers apparently had not been acting in good faith in its opposition to diamond value add.
Indications are Botswana's diamond beneficiation is a poor and half hearted plagiarism of billionaire Lev Leviev's original business model presented in 2004 at various media briefings in Gaborone through his gemologist consultant, Yianni Melas at a time when Botswana government and De Beers dismissed the idea as nonsense and unworkable. De Beers sought to keep Botswana out of diamond beneficiation for its own benefit.
Leviev was able to demonstrate how Botswana was probably being cheated and not realizing the true value of its rough diamonds because there was no independent way of grading and determining the price at the time. De Beers over decades was conflicted for having had a hand in the appointment of a sole diamond valuer to grade and price Botswana diamonds, which in turn were all sold to its wholly owned marketing arm in London- the Central Selling Organization.
It was a national shock to learn that Botswana’s leadership and the public for long did not know the true price and value of their diamonds in the absence of an independent and competent grading and valuing system as De Beers alone was a player and referee at the same time.
Leviev and his Greek consultant, Yianni Melas recommended for the first time that Botswana should engage the Gemological Institute of America (GIA) to provide an independent and credible grading, valuing and pricing for her diamonds as well as provide training in all aspects of diamond beneficiation as a basis for building a strong foundation for the emerging beneficiation industry.
â€¨â€¨Unable to find a coherent, cogent and convincing reason against Leviev’s proposal, the Botswana government, De Beers and their supporters in the media resorted to mudslinging, conspiracy theories and a smear campaign against Leviev and his supporters.
As a test case for those in doubt, Melas and Leviev had proposed for the first time, that Botswana set aside only ten per cent of her rough diamond production, a basis for a local diamond cutting and polishing segment to support an emerging jewelry manufacturing and retail industry.
Unlike local supporters of beneficiation who tended to appeal to nationalistic sentiments and rhetoric of patriotism, Leviev argued from an informed position as a practitioner with deep gemological knowledge, experience and understanding of the entire diamond value chain.â€¨â€¨
According to Melas, cutting and polishing segments were not meant to be stand alone but to be fully integrated through backward and forward linkages in the entire diamond value to move Botswana diamond industry a step further as a new and emerging diamond jewelry manufacturing and retail center in order to derive maximum returns from rough diamond production.
Melas and Leviev were advocating for branding Botswana internationally as a major diamond producer, by producing locally, "made in Botswana" an assortment of diamond jewelry, in turn creating new synergies and supporting new enterprises and other sectors of the economy such as air transport and tourism.
Leviev’s business case envisaged a scenario where international jewelry buyers would be persuaded through marketing and advertising to travel to Botswana to buy "made in Botswana" branded diamond jewelry at shops set up at major tourism and urban centers in Botswana like Kasane, Maun and Gaborone, at the same time, promoting the country as a premier retail, tourist, wedding and honeymoon destination.
For instance, for sentimental reasons, newlyweds were to be more pursued through advertising and marketing to prefer to travel to buy their piece of diamond jewelry where it is produced and probably wed and honeymoon at one of Botswana's world renowned and unique ecosystems such as various game reserves and the Okavango.â€¨
Other spinoffs of his business model was support for the development of hotel accommodation and bringing the huge investment and budget in marketing, advertising and promotions of diamonds and their transactions to Botswana which is currently done overseas. â€¨
However instead of seriously considering Leviev’s proposal and according him the opportunity to spearhead the new beneficiation industry because he was more competent than most, Botswana missed the boat by making the wrong policy choices by succumbing to the hostility and rivalry from De Beers.
There was no cogent reason for Botswana to have turned down Leviev’s business case since he was more competent and world renowned to deliver because he was already active and successful at participating in all levels of the diamond chain worldwide.
Botswana’s beneficiation model has been overtaken by events, because the trend now is for greater consolidation and integration through backward and forward linkages of the entire segments of the diamond value chain. In fact other African countries and Industry players are no longer content with specializing in mining and selling diamonds raw at low prices but to add value to them and invest in the entire value chain.â€¨â€¨
Because of lack of transparency in the valuation /and pricing of diamonds generally, Leviev also recommended use of other independent authorities to improve transparency and create an electronic trading platforms for diamonds such as IDEX, Guaranteed Diamond Transactions (GDT system, Rapport Net and DIAMDAX, which collects and supplies polished diamonds price data to a number of firms and utilizes online exchange that offers online trading platforms for polished diamonds using real time spot prices.
Leviev has a track record of being De Beers' most feared competitor after pulling the rug under the feet of De Beers on many occasions for lucrative diamond deals in Russia and successfully putting an end to De Beers' pervasive spell, dominance and gridlock hold on Southern Africa's diamond resources in Namibia and Angola.
Leviev called De Beers' bluff by demonstrating that indeed beneficiation was indeed not only desirable and overdue but also feasible as demonstrated by his impeccable track record internationally at all levels of the diamond value chain. Leviev’s proposal to Botswana diamond value add was unprecedented, more detailed, ambitious and innovative than what Botswana and De Beers ultimately settled for.
Unlike Levier's well thought out proposal, a reluctant De Beers gave Botswana a rope to herself by choosing to concentrate not only on cutting and polishing, but in venturing into the equally risky area aggregation and selling of selling rough stones. This is so because every diamond valuation is subjective.
Two appraisers can differ in their valuations of the same diamond by as much as 30%. A key consideration in diamond pricing is a stone's grade – not a monetary value – which is by no means an exact science but a subjective consideration, so that the same diamond often receive markedly different grades from different laboratories, resulting in large variations in the prices of comparable stones. â€¨
Tracing the diamond value chain is not the only way of measuring how African diamond producers lose on revenue and miss vast opportunities to diamond processing countries overseas.
By way of illustration, Botswana produces an estimated 33% of global diamond production and 75% by value of all the global diamond production and profit enjoyed by De Beers. Jwaneng mine in Botswana is the largest diamond mine in the world by value and third largest by carat volume.
In 2015, industry sources reveal that it is estimated to produce 11.0 million carats valued at $2.4 billion. The second largest diamond producer by value and volume, Orapa also in Botswana is estimated to produce 12.0 million carats in 2015 or $1.2 billion worth of diamonds up from 12.1 million in 2013.
Rio Tinto owned Argyle mine in Australia is the world’s largest in terms of production volume and is estimated to produce 17.5 million carats in 2015 up from 9.2 million in 2014 and expected to reach 20 million carats per annum in 2016. But Arygle diamonds, like those in Zimbabwe’s Marange, are of relatively low quality and colour are expected to fetch much less revenue than both Jwaneng and Orapa.
Yet the so called world diamond hubs have no significant diamond mines but where most of the diamonds from diamond producing countries like Botswana are sold and fully beneficiated makes such diamonds producers a laughing stock of the world and a shame to present future generations.
For example there are six major diamond hubs which aggregate a variety of industry activities in a single venue, including diamond trading centers, dealers and sales offices of cutting and polishing companies.
Spot trading of rough and polished diamonds between a buyer and a seller takes place in the sales offices. By contrast, Botswana generates revenues roughly of between US$1-2 billion on average per annum from its massive diamond production, and yet the traditional hub of New York, produces $35 – 40 billion turnover per year, hosts about 2600 diamond businesses.
Dubai with no single diamond mine, makes $40 -45 billion per year, and provides services to more than 500 regional and international diamond companies and is the fastest growing hub in recent years, according to the Bain report and INDEX.
Antwerp generates $50-56 billion per year, hosts four major diamond exchanges and 1500 diamond companies and is the largest diamond hub in the world. Mumbai attracts between $25-30 billion in turnover, is home to 2500 diamond offices and handles 60% of diamond exports from India.
The diamond hubs of Dubai and Hong Kong are luring trade with zero taxes on imports and exports and by exploiting their proximity to the cutting and polishing industry in China and India, while the traditional hubs on Antwerp, New York and Tel Aviv have opted to specialize by focusing on high value stones, well developed infrastructure and favorable tax revenues.â€¨
Botswana's potential to grow into a major cutting and polishing center is therefore limited on the basis of the opinion of Bains and Company report. It argues among others that the country's labour costs are high compared to those of China and India and its cutters lack expertise comparable to that of the craftsmen in Europe, Israel and the US.
The growth of Botswana's cutting industry may well be limited until it is better able to compete on cost with the industry in India and China. Cutting and polishing costs average range from approximately $100 per carat in Antwerp, New York and Tel Aviv, to $20 to $56 in China and Thailand and $10 to $30 in India.
However, Botswana still enjoys much competitive advantages to excel in diamond beneficiation across the entire value chain because unlike other cutting and polishing centers, she has access to secure supplies of rough diamonds and ability to resell.
But cost competition amongst cutters and polishers has intensified, making new investments in efficiency necessary while financing for working capital is growing harder and harder to obtain. Competition for access to key customers in jewelry manufacturing is heating up, while there is a never ending challenge of securing stones at prices that make economic sense.
At the upstream end of the value chain, the key challenges for retailers are to secure a supply of diamonds jewelry appropriate to their customer base and ensure that the diamonds in their jewelry are ethically secured, forcing many firms into more consolidation and integration of the entire value chain, according to the Bains and Company report.â€¨
Moreover, Botswana beneficiation model in aggregation and the sale of rough diamonds has severe limitations because there is no spot market for rough or polished diamonds, which are primarily sold through private contracts, with no public disclosure of negotiated prices.
Diamond producers have a compelling motivation to realize the highest possible price as prices directly affect their profitability. This desire may negatively affect the profitability of cutters and polishers who are in need of secure access to supplies of rough diamonds and ability to resell at competitive prices.
Cost competition among cutters and polishers has intensified naming new investments in efficiency necessary at a time when financing for working capital growing harder and harder to obtain. Competition for access to key customers in jewelry manufacturing is heating up.
There is also a never ending challenge of securing access to stones that make economic sense on the evidence of the Bains and Company report.â€¨â€¨Unlike Leviev's well thought out proposal, a reluctant De Beers has been calculative and seems to have given Botswana a rope to herself by choosing to concentrate not only on cutting and polishing, but in venturing into the equally risky area aggregation and selling of selling rough stones. This is so because every diamond valuation is subjective.
Two appraisers can differ in their valuations of the same diamond by as much as 30%. A key consideration in diamond pricing is a stone's grade – not a monetary value – which is by no means an exact science but a subjective consideration, so that the same diamond receives markedly different grades from different laboratories, resulting in large variation in the prices of comparable stones.
Although a substantial mark- up occurs at the cutting and polishing stages, it is only the countries and firms that are able to find the most cost effective, quality assured and increasingly safest means of doing so that will be globally competitive in the future.
Moreover, says Bains and Company, there is no spot market for rough or polished diamonds, which are primarily sold through private contracts, with no public disclosure of negotiated prices. Diamond producers have a compelling motivation to realize the highest possible price as prices directly affect their profitability.
This desire may negatively affect the profitability of cutters and polishers who are in need of secure access to supplies of rough diamonds and ability to resell at competitive prices. Cost competition among cutters and polishers has intensified naming new investments in efficiency necessary at a time when financing for working capital is growing harder and harder to obtain. Competition for access to key customers in jewelry manufacturing is heating up.
Following a devastating first half of the year 2020 due to COVID-19, the global diamond industry started gaining positive momentum towards the end of the year as key markets entered into thanks giving and holiday season.
However Bruce Cleaver, Chief Executive Officer of De Beers Group cautioned that the industry is not out of the woods yet, citing prevailing challenges ahead into 2021.
The first half of 2020 was characterized by some of the worst challenges in history of global diamond trade.
The midstream, where rough diamonds are traded in wholesale and bulk to cutters and polishers, was for the most part of second quarter 2020, suffocated by international travel restrictions as countries responded to the contagious Corona Virus.
This halted movement of buyers and shipment of the rough goods , resulting in unprecedented decline of sales, in turn ballooning stockpiles as the upstream operations produced with little uptake by the midstream.
The situation was exacerbated by muted demand in the downstream where jewelry industries and tail end retailers closed to further curb the spread of COVID-19.
However towards the end of third quarter getting into the last quarter of the year, demand in both midstream and downstream started to steadily pick up as countries relaxed COVID-19 restrictions.
De Beers, the world’s largest diamond producer by value started reporting significant recovery in sales in the sixth and seventh cycle, figures began to reflect an upswing in sentiment as well as increase in uptake of rough goods by midstream.
Sales for the sixth cycle amounted to $116 Million, following a sharp downturn in the previous cycles, significant jump was realized during the seventh cycle, registering $320 million, an over 175 % upswing when gauged against the proceeding cycle.
De Beers noted that diamond markets showed some continued improvement throughout August and into September as Covid-19 restrictions continued to ease in various locations.
“Manufacturers focused on meeting retail demand for polished diamonds, particularly in certain product areas, accordingly, we saw a recovery in rough diamond demand in the seventh sales cycle of the year, reflecting these retail trends, following several months of minimal manufacturing activity and disrupted demand patterns in all major markets,” said De Beers Chief Executive, Bruce Cleaver in September last year.
The diamond mining behemoth continued to register impressive sales in the eighth and ninth cycle signaling the industry could end the year on a positive note.
The momentum was indeed carried into the last cycle of the year. The value of rough diamond sales (Global Sightholder Sales and Auctions) for De Beers’ tenth sales cycle of 2020 amounted to $440 million, a significant increase from the 2019 tenth sales cycle value.
Against what seemed like a positive year end that would split into the New Year Bruce Cleaver, CEO, De Beers Group, however warned the industry not to count eggs before they hatch.
“Positive consumer demand for diamond jewellery resulting from the holiday season is supporting the continuation of retail orders for polished diamonds from the diamond industry’s midstream sector. This in turn supported steady demand for De Beers’s rough diamonds at our final sales cycle of 2020,” Cleaver had said in December.
In caution the De Beers Chief noted that “While the diamond industry ends the year on a positive note, we must recognise the risks that the ongoing Covid-19 pandemic presents to sector recovery both for the rest of this year and as we head into 2021.”
All segments of the supply chain were severely impacted by the global lockdown measures introduced in response to the Covid-19 pandemic in the first half of 2020.
After a strong US holiday season at the end of 2019, the rough diamond industry started 2020 positively as the midstream restocked and sentiment improved.
However, from February 2020, the Covid-19 outbreak began to have a significant impact on diamond jewellery retail sales and supply chain, with many jewelers suspending all polished purchases and/or delaying payments to their suppliers.
Rough diamond sales were materially affected by lockdowns and travel restrictions, delaying the shipping of rough diamonds into cutting and trading centers and preventing buyers from attending sales events.
These resulted in significant decline in total revenue for the business in the first six months of 2020. Total revenue decreased by 54% to $1.2 billion from $2.6 billion registered in the prior half year period ended 30 June 2019.
For the entire first six (6) months of the year 2020 De Beers Rough diamonds sales fell drastically to $1.0 billion from $2.3 billion in the prior H1 period ended 30 June 2019. Sales volumes decreased by 45% to 8.5 million carats compared to 15.5 million carats registered in the prior period.
Next month Minister of Finance & Economic Development, Dr Thapelo Matsheka will face the nation to deliver Botswana‘s first budget speech since COVID-19 pandemic put the world on devastating economic trajectory.
The pandemic that broke out in late 2019 in China has put the entire world on unprecedented chaos ,killing over P1 million people across the globe , shattering economies and almost rendering the year 2020 – a 12 months stretch of complete setback.
The 2021/22 budget speech will come at time when Botswana’s economy is still trying to emerge out of this.
National lockdowns and local travel restrictions have hit small medium enterprises hard, while international travel restrictions halted movement of both good and people, delivering by far some of the heaviest and worst catastrophic blows on the diamond industry and tourism sector, the likes of which this country has never seen before on its largest economic sectors.
As Minister Matsheka faces parliament next month, the reality on the ground is that Botswana’s national current cash resource, the Government Investment Account (GIA) is depleting at lightning speed.
On the other hand the COVID-19 economic mess is prevailing, the virus is reported to have taken a new dangerous shape of a deadly variant, spreading like fueled veld fire and causing some of the world’s super powers back to tough restrictions of lockdown.
According official figures released by Bank of Botswana, in October 2020 the GIA was running at P6 billion compared to the P18.3 billion held in the account in October 2019.
However reports indicate that the account could be currently holding just about P3 billion. The draw down from the GIA has been by exacerbated by declining diamond revenue, the country‘s largest cash cow. The sector was experiencing significant revenue decline even before COVID-19 struck.
When the National Development Plan (NDP) 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at a 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.
Taking into account the COVID-19 economic mess in 2020/21 financial year, the budget deficit could add up to P20 billion after revised figures.
Drawing down from government cash balances to finance these budget deficits meant significant withdrawals from the Government Investment Account, hence the near depletion of this buffer.
Meanwhile should Botswana’s revenue streams completely dry up to zero levels; the country would only have 11 months, before calling out for humanitarian aids and international donors, because foreign reserves are also on slow down.
During 2019, the foreign exchange reserves declined by 8.7 percent, from Seventy One Billion, Four Hundred Million Pula (P71.4 billion) in December 2018 to Sixty Five Billion, Three Hundred Million Pula (P65.3 billion) in December 2019.
The reserves declined further in 2020, falling by 2.3 percent to Sixty Three Billion, Seven Hundred Million Pula (P63.7 billion) in July 2020. This was revealed by President Masisi during State of the Nation Address in November last year.
The decrease was mainly due to foreign exchange outflows associated with Government obligations and economy-wide import requirements.
However latest statistics(October 2020) from Bank of Botswana reveal that Botswana’s foreign reserves are estimated at P58.4 billion, with government’s share of these funds significantly low.
Government has since introduced several measures to contain costs and control expenditure with the most recent intervention being the halting of recruitment in government departments and parastatals.
Furthermore, Value Added Tax has been signaled to go up from 12% to 14% in April this year with more hikes and service fees anticipated as government embarks on unprecedented domestic revenue mobilization.
Botswana Stock Exchange listed hotel group Cresta Marakanelo Limited (“CML” or “the Company”) announced the signing of a lease agreement for Phakalane Golf Estate Hotel & Convention Centre, which will see CML extend its footprint by adding the 4 star Gaborone property to its already impressive portfolio. The agreement is subject to regulatory approvals therefore the effective date of the transaction is expected to be 1 February 2021.
CML brings a wealth of expertise to the lease and despite the difficult year for the tourism and hospitality industry, due to the impact of the COVID-19 pandemic, CML remains confident in the recovery of the sector and the need to invest in expanding the Company’s footprint.
CML Managing Director, Mr Mokwena Morulane commented: “Our continued efforts to improve our offerings, understand the market dynamics and modern day trends in the face of global challenges, means we are ready for the changing face of tourism and international travel, and this addition to the Cresta portfolio signals our confidence in the future.
“Despite the headwinds faced in 2020, Management has continued to focus on projects that enhance CML’s product offering such as the refurbishments at Cresta Mowana Safari Resort & Spa in the tourism capital Kasane and the ongoing refurbishment of Cresta Marang Residency in Francistown. The signing of the lease for the 4 star Phakalane Golf Estate Hotel & Conference Centre is a great addition to the Cresta portfolio and will unlock shareholder value in the future.
“We remain vigilant to value-enhancing opportunities including acquisitions or leases, after having reconsidered our pipeline against current and expected market conditions.”
Commenting on the lease agreement, the Chief Executive Officer, Mr S Parthiban, speaking on behalf of Phakalane noted; “No hotel chain holds as much expertise in the region, understands our local culture and tastes and what hospitality is about better than Cresta Marakanelo Limited. We believe that the renovations done to the property has made Phakalane Hotel and Convention Centre a unique product in Botswana and at par with international facilities. We believe that this lease will benefit not only us as Phakalane , but the market in general as Cresta has run hotels successfully in Botswana for over 30 years and is therefore expected to bring new offerings that appeal to the local and international markets as well as the residents and visitors to the Golf Estate. We look forward to a long mutually beneficial relationship with Cresta.”
CML like the rest of the tourism and hospitality industry and the entire value chain was hard hit by lockdowns with the surge of COVID-19. By investing during the low period, the company hopes to realise the future value of spending time in preparing for the new consumer dynamics and behaviour. Despite business interruptions as a result of a six-month long state of emergency and several lock-down periods declared by the Government of Botswana to limit the spread of COVID-19, the Company is starting to record an increase in occupancies, which bodes well for the recovery of the industry and the Company’s future prospects.