Things are not so good for the leading diamond producer De Beers as sight holders refused about half of their allocated supply last week, reducing the estimated value of rough sold at the sight to $200 million.
The move extends a trend of refusals from previous months, turning the mood at the event somber even though the mining company kept prices stable. At the previous sight in August, De Beers allowed sight holders to defer up to 75 percent of allocated supply whilst cutting prices by 8 percent to 10 percent. The company also allowed sight holders to re-phase their in-plan allocations for the six sights from October to the end of the current contract year in March.
Reports indicate that rough trading on the secondary market was “extremely quiet” following the sight and boxes sold at a discount to De Beers list prices after additional costs such as value-added services and broker fees.
“The mood is the worst I’ve seen over the past few sights,” Harari said. “It’s no longer just a question of price; there are no buyers for polished and only demand for a few items, according to Guy Harari, chief executive officer of Bluedax, an online rough trading brokerage”
Polished prices dived in September, with the RapNet Diamond Index (RAPI™) for 1-carat GIA-graded diamonds sliding 3 percent for the month and 6.3 percent in the third quarter.
De Beers reduced prices in August but it wasn’t enough because polished prices continue to fall. Diamond brokers have noted that there are enough polished goods for the season. “There’s no point in buying rough when you can’t make a profit,” one broker stated.
Sight holders were unsurprised as De Beers kept prices stable in October even though they struggled to garner a profit from its supply of rough diamonds.
“The main concern in the market is no longer prices. It is a lack of buyers for the polished that’s worrying,” said an Antwerp-based sightholder. He would rather see rough prices remain stable until the end of the year as another bout of cuts may result in a further drop in polished prices.
“We need to wait and hope that end-of-year sales are strong and that China comes back into the market – even if that seems unlikely at this point,” the Antwerp sight holder said. “Right now, there are plenty of goods on the market and no confidence to buy.”
Okavango Diamond Company, the Botswana parastatal which is entitled to sell 14 percent of Debswana’s production, has sold reduced volumes in response to market conditions. Okavango only offered diamonds in the 10-plus carat range at its October auction and has canceled its sale in November.
In the midst of falling prices and higher inventory levels, some traders spotted better buying opportunities on the auction and tender circuit. One manufacturer reported that prices of 3 to 6 grainer rough –which are generally cut into 0.25-carat to 0.40-carat polished offered by Petra Diamonds dropped by around 17 percent at its October sale as the goods couldn’t sell at the previous high prices.
The value of rough diamonds exports from Botswana's mines continues to fall. In the first six months of the years rough diamonds exports fell 15 percent in the to $1.7 billion, official data showed.
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.
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.
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”