As Botswana continues to see declines in diamond receipts on the back of weakening global economy, the country has been urged to diversify away from mining to guard against future volatilities. The industry, where Botswana is a major pipeline player, has lately seen slow movement of diamond stocks throughout the entire pipeline which has negatively affected sales by producers throughout most of 2015.
This in turn affects the country’s revenue streams as mining especially diamonds makes the bulk of the exports. Equally, other analysts point out that reduced diamond production and exports have a direct impact on the balance of payments and fiscal balance, pushing both into deficits that would become a major problem if sustained over a period of time.
Portfolio Manager at Afena Capital South Africa, Shoaib Vayej said although Botswana’s diamond industry still has reserve life of 20 years, the country should be looking to diversify the economy.
“My advice is to diversify from diamonds,” Vayej said at Afena Capital Press club seminar. He added that diamond beneficiation is no panacea with advantages not obvious. He cited examples of South Africa, which he said is learning the hard way.
“South Africa’s costs are four times that of India and China,” he said. In India costs are about $10/ carat while in China the figure ranges between $15-20/ carat.
According to Vayej, the cutting a polishing industry is owned by India (72%) and China, the argument that was previously supported by Professor Roman Grynberg.
“Botswana provides rough for Indian industry at the cost of our evaporating polished diamond industry. If we had an arrangement which said that only those firms operating plants in Botswana, Namibia and South Africa can have access to De Beers African diamonds, the plant in Serowe would probably be open today,” Grynberg said.
Media reports revealed that in the 2014/ 15 period, two cutting & polishing companies closed while other reduced their staff sizes. It was reported that MotiGanz and Leo Schachter had laid off 150 workers followed on the heels by the closure of Teemane Manufacturing Company owned by Diarough that came with the loss of close to 320 jobs in Serowe.
Outlook for 2016
De Beers said it expects the US market to remain the main driver of growth in consumer demand in 2016. The rough diamond producer noted that the extent of global growth will, however, be dependent upon a number of macro-economic factors, including the strength of the dollar and economic performance in China and its impact worldwide.
“Longer term, the sector is likely to continue to see benefit from a continuing rise in the world’s middle classes in emerging markets, particularly in China and India,” the company said on commentary of its latest results. However, Vayej observed that the outlook is not looking positive.
He said the market is expected to remain oversupply. His comments follow the De Beers first rough diamond sales of year which improved dramatically from the last sight of 2015 buoyed by a number of factors including good response from the U.S which resulted in the firming of polished prices. The US remains the largest consumer of diamonds, accounting to between 42-45 percent of the market.
The company stated that it realised a sales value of US$540 million in the Cycle 1 of 2016. This was better that US$248 million raised from Cycle 10 2015.
“It remains to be seen whether De Beers can maintain the sales momentum from January sight,” stated Vayej.
Botswana mines well placed on cost curve
Debswana, 50/50 owned by Botswana government and De Beers, had streamlined production at its operations as per instructions from parent company, Anglo American.
The company has decided to produce more from the Jwaneng Mine which is the company’s highest revenue and lowest cost operation while reducing production from Orapa, Letlhakane and Damtshaa Mines (OLDM) which offer us the most optimal production flexibility options.
The Jwaneng Mine will produce an average 12 million carats per year while production at OLDM will average 8 million carats per year for the 3-year period.
“Key mines are very well placed on cost curve. Strike balance between optimal rent extraction, fiscal stability and reinvestment,” stated Vayej.
De Beers’ underlying EBIT decreased by 58% to $571 million (2014: $1,363 million). This was the result of weaker rough diamond demand and lower revenue, offset in part by tight operating cost control and favourable exchange rates.
Total De Beers revenue fell by 34% to $4.7 billion (2014: $7.1 billion), mainly driven by lower rough diamond sales, which declined by 36% to $4.1 billion. This was due to a 39% reduction in consolidated sales volumes to 19.9 million carats (2014: 32.7 million carats), partly offset by a 5% increase in the average realised diamond price.
Rough diamond production decreased by 12% to 28.7 million carats (2014: 32.6 million carats) as De Beers reduced production in response to prevailing trading conditions.
Debswana’s production decreased by 16% to 20.4 million carats, driven by a reduction in tailings production at Jwaneng, combined with the bringing forward of planned maintenance at both Jwaneng and Orapa. Debswana is focusing on improving reliability and cash costs, while maintaining flexibility, with Damtshaa, a satellite of Orapa, being placed onto temporary care and maintenance from 1 January 2016, affording the option of efficiently resuming production when market conditions allow.
The group cut production when the other big 5 club members decided to increase output; namely ALROSA. The state –owned company said it diamond production is expected at up to 39 million carats in 2016.