CHAPTER 5

THE SUPPLY OF ROUGH AND UNPOLISHED DIAMONDS TO THE LOCAL PROCESSING INDUSTRY.

According to Mr L A Lincoln, a director of De Beers, (submission 15), although South Africa is a comparatively minor player in terms of diamond production (with less than 10% by volume of the world total of around 105 million carats) the mechanisms developed to protect and support the industry, have shown themselves to be of longstanding value to the industry, and for the other producers who subscribe to it. De Beers states in submission 18 that the South African mines are no longer major producers of all the desired qualities, and thus in 1992, it was agreed that rough destined for South African factories could be provided from the CSO’s full range of diamonds available in London, from sources world-wide. A system, monitored by Government through the Diamond Board, and the GDV, is in place to ensure its proper working.

5.2.1 De Beers operates approximately 12 alluvial, kimberlite and marine diamond mines in South Africa, organised into 7 operating entities in 5 provinces, namely, Finsch, Kimberley and Namaqualand in the Northern Cape, De Beers Marine in Cape Town, Koffiefontein in the Free State, Premier near Cullinan in Gauteng and Venetia in the Northern Province. The company dominates production, producing in excess of 90% of South Africa’s annual production of rough diamonds. It is also a significant contributor to social and community development, an important employer of labour and holds substantial investments in South Africa. De Beers is also involved in mining in several other countries, most notably Botswana, Namibia and Tanzania. It is believed that De Beers produces 50% by value of world production. The world’s diamond industry can thus be described as an oligopoly with De Beers and its marketing arm the CSO as the dominant firm. De Beers, through the CSO, provides the majority of rough diamonds to the South African industry.

Under the stewardship of the Diamond Board, South African production from De Beers mines was previously split at Harry Oppenheimer House in Kimberley into three categories referred to as "South African", "Conditional" and "Unconditional". Unconditional diamonds (in 1997, about 86,2% by weight of total production), are those which are deemed by representatives of the industry to be uneconomic for polishing locally. South African category diamonds (in 1997, about 3,5% by weight), are those which are considered economic for polishing locally and which, on a carat for carat basis, must be made available to the South African industry. The balance of Conditional diamonds (some 10,3% by weight) comprise goods which the local cutters may wish to cut and polish, subject to market conditions. In terms of the Section 59 agreement, all stones of South African origin which weigh over 10,8 carats are reserved exclusively for South African cutters, as are stones known as "fancies", which are of unusual or rare colour. (Remark: the section 59 agreement with the De Beers has been amended in February 1998 and the names of categories have been changed.)

The diamonds are valued in accordance with the CSO’s price list in Kimberley. Once the valuation of the diamonds has been approved by the GDV, the diamonds are shipped to London free of the 15% export duty provided in terms of section 59 of the Diamonds Act.

5.2.2 The Diamond Workers’ Union (submission 34) argues that De Beers has a near monopoly of approximately 95% of the total rough production. The State permits the near monopoly of De Beers, and the State becomes involved in the control thereof (e.g., through the Diamond Board and the Diamonds Act). This, according to the Union, is a departure from the principle of free enterprise.

5.2.3 “G” Diamond Cutting Works (submission 43) is of the opinion that De Beers’ sightholders get their diamonds at a lower rate than non-sightholders.

5.2.4 Trans Hex (submission 75) is of the opinion that both De Beers (through its systems of “sights” and Diamdel) and the free world market of rough diamonds over which it presides can more than adequately provide for any and all needs of the diamond cutting industries world-wide.

The Diamond Producers’ Association (DPA) was formed in 1934 with the participation of government including the South West Africa Administration and De Beers to take control of the production of all major diamond producers to avert the potential collapse of the diamond industry world-wide. DPA’s function was to pool all production on a quota basis and to market it through the Diamond Trading Company (Pty) Ltd. and to share the proceeds proportionately among the producers. The emergence of Russia and Botswana as major producers and the threat of sanctions by the U.S.A. against government controlled industries in South Africa led to the dissolution of DPA and the formation of the CSO as the organ for a system of single channel marketing of the world-wide production of diamonds and the encouragement of the diamond industry through the cutting industry and the manufacture of jewellery. The CSO consists of a group of interrelated companies which manage the marketing of most of the world’s production of rough which it acquires through long term agreements with the major producers. This rough is sorted and valued under the scrutiny of the GDV and then amalgamated into the London Mix for sale to the dealers, cutters and polishers world-wide according to their needs and the ability of CSO to satisfy their requirements. The strength of the CSO lies in its ability to spend enormous sums annually in the encouragement of the market for diamonds in its guarantee to buy all its producers’ production at market related prices and to hold such purchases against a favourable and orderly time for its marketing.

De Beers feels strongly that the mechanism (CSO) developed to protect and support the industry has proven to be of longstanding value to the whole industry and for the producers who voluntarily subscribe to it (Mr L A Lincoln, De Beers’ submission 15A).

Mr G Penny informs the Commission (submission 16) that the precise needs of each cutting centre are matched by blending together a selling mixture from the combined intake of rough from the various producers. He says that polished market trends, economic trends and consumer demand are also taken into account when preparing a selling mixture for a client. He adds that every producer is subject to a quota provision within its contract. Producers are afforded the security of guaranteed sales and consistent prices, which was vital, considering the immense investment that goes into developing a diamond mine. CSO prices are raised when the CSO is satisfied that the market is in a position to absorb and sustain them over a long period. The price of rough sold through the CSO has shown a steady and sustained pattern of growth (submission 24). The CSO also buys diamonds in the open market, in Africa and in Antwerp, to protect prices.

Mr J Hughes of De Beers informs the Commission that De Beers spends nearly R1 billion per annum, promoting diamond jewellery world-wide to “cultivate” consumer demand so as to accommodate the output of new producers and where possible to encourage “trading up” by consumers (submission 22).

5.4.1 De Beers’ claim that in good times as much as 80% (by value) of the world-wide production of diamonds passes through the CSO where it is sorted into the more than 6 000 categories of diamonds as determined by CSO’s appraisal of the physical qualities of the diamonds. These are then sorted and prepared, by the CSO, into parcels or rough-boxes for sales called sights in a mix judged by the CSO to be appropriate to and suitable to the needs of the cutter or dealer for whom they are intended. Reference is made to tailor made boxes for these clients.

Such clients are described as sightholders of whom there were 18 in South Africa and about 170 world-wide, in 1997. Sales or sights take place simultaneously in London, Lucerne and Johannesburg 10 times a year. A price book is maintained by the CSO which records the world market price largely established by the CSO for the particular categories of diamonds and for which the CSO pays the producer that market price discounted by 10% while its price to sightholders is the market price. But the sightholder’s offer must be for the entire sight which has already been made up in accordance with the CSO’s opinion of that sightholder’s particular needs, his own statement of his needs and what it is able and prepared to supply him at least out of the CSO’s stock of South African rough whether held here or in London where the CSO has its main headquarters.

5.4.2 The Diamond Workers’ Union (submission 34) does not approve of allocating rough through the sightholders. Members of the Union prefer the old system where rough diamonds were allocated directly to the cutters or toolmakers through the Diamond Board. According to the old system, every cutter had a sight and every cutter had an allocation of rough.

5.4.3 The Diamond Merchants’ Association believes that the South African diamond industry should receive a larger percentage of the De Beers’ world allocation of diamond rough than it has enjoyed to date (submission 32).

An essential feature of the CSO’s marketing and pricing policy has always been to hold in stock any quantity of diamonds purchased by it and to market such stock only under favourable conditions. By limiting the quantity of diamonds put on to the market in accordance with demand and selling through one channel, the CSO maintains the stability of the diamond market.

Botswana, Russia, Namibia, Angola, Australia and the Democratic Republic of Congo are large producers and it was through the marketing policies of the CSO that all this production was absorbed by it in an orderly way to avoid the destabilisation of the diamond market to the obvious great advantage of the producers of whom South Africa is one. It is quite apparent that it is the producer in South Africa whose interests must be served primarily by the CSO and it does so by maintaining the market and protecting it from the slump in prices that the uncontrolled selling of world production would bring to the eventual disadvantage as well of the manufacturers whose market for their product is made by the demand for jewellery.

Other important diamond producers in South Africa include Trans Hex, Alexkor Ltd, Rex Diamond Mining, Messina Diamonds and Benguela Concessions. Then there are also approximately 1 500 alluvial diamond diggers who as a group are also significant suppliers of rough diamonds.

Proval, the former GDV (submission 65), suggests that diamond productions exceeding 1 000 carats per annum should be valued by the GDV. The company is of the opinion that substantially the same controls which are currently imposed on diamonds of South African origin marketed through the CSO, should also be imposed on larger producers who are not contracted to the CSO. This, Proval feels, will extend the “auditing” function of the GDV for the purposes of ensuring that the prices at which diamonds are sold or exported are realistic when measured against market valuations. This would, in turn, ensure that royalties, value-added tax and income tax payable to the State would be based in all such cases on the proper value of the diamonds concerned.

Sightholders are large cutting concerns (diamond cutting and polishing firms including their marketing companies) contracted to De Beers. There are also 2 dealer sightholders in South Africa. The main purpose of these dealing allocations is to supply new licensees who are not sightholders with De Beers the opportunity of acquiring goods in a manner which suits their financial status (Rough Diamond Dealers’ Association, submission 68). The 2 dealer sightholders in South Africa are Diamdel and B & E Diamonds CC.

Non-sightholders comprise smaller cutting firms that do not qualify as De Beers’ sightholders. These cutting firms rely on Diamdel, the non-De Beers producers (including to a large degree the alluvial diggers), rough diamond dealers, imports and the Diamond Bourse for cuttable supplies.

Diamdel is a wholly owned subsidiary of The Diamond Corporation (Pty) Ltd (Dicorp) itself a wholly owned subsidiary of De Beers. Diamdel can be described as the wholesale selling arm of CSO and as a sightholder, but whose function is simply to supply the needs of South African non-sightholders.

Ø The Section 59 agreement (Section 59 of the Diamonds Act) between the Diamond Board and De Beers and its associated companies concluded in December 1992 and renewed from time to time thereafter, provides as follows:

“(v) De Beers will ensure that subject to the availability of diamonds; non-sightholders are offered through Diamdel sufficient rough supplies for their operations”

Ø Diamdel obtains supplies from the following sources in decreasing order of magnitude:

DTC
The Diamond Trading Co Ltd Luzern
Dealers
Trans Hex
Sundry Imports
Diggings Wolmaransstad
Diamdel has some 100 clients, comprising 87 non-sightholders (including 6 dealers) and 13 sightholders.

From submission 29, it appears that Diamdel considers no request to be too small. Assortments are made to individual needs. Diamdel ensures that non-sightholders have priority in viewing rough requirements and if required Diamdel requests CSO’s London Polished Division to supply a polished buyer. Mr G Penny (submission 18), adds that Diamdel has developed a policy of selling parcels as small as a single stone.

In 1996 Diamdel supplied rough to 90 non-sightholders and dealers to the value of $25,297 million, and to 13 sightholders to the value of $16,832 million.

*YEAR*	*CARATS*	*R000’S*	*NUMBER OF CLIENTS*
1994	50 255	78 188	59
1995	52 406	94 732	73
1996	72 753	177 288	103
1997	76 955	213 363	116
1998	67 474	171 723	107
1^ST half 1999	39 874	137 216	98
TOTAL:	359 717	872 510

However some cutters who are largely supplied by Diamdel expressed their dissatisfaction with its pricing and qualities offered to them. (Diamond Workers’ Union, submission 34; Mr J Gaddie, submission 41).

5.10.1 Mr J Gaddie (owner of a diamond cutting factory) in submission 41 suggests that diamonds from outside the country could be sold through the Diamond Board on tender. He also added that confiscated illegal diamonds should be given to the Diamond Board for tender and should not be sold to De Beers. He is of the opinion that the diamond industry should be more regulated and further suggests that all producers, except the small diggers, offer their rough on tender at the Diamond Board.

5.10.2 Mr T Mfazwe (submission 13) argues that the movement or transfer of unpolished diamonds from one province to another be prohibited.

5.11.1 De Beers states that its Section 59 agreement came about as a result of the continuing decline in production from De Beers’ South African mines of suitable rough diamonds for the South African cutting industry, and because it had become obvious that the local cutting industry could no longer rely exclusively on allocations from local production (De Beers, submission 26). The local shortfall in the quantity of suitable diamonds is now made available to South African cutters from sources world-wide.

The current Diamond Board agreement with De Beers provides for the following (De Beers, submission 24):

Ø DIAMOND CATEGORIES: “Special stones” (+10.8 carats and “fancy” colours), “South African”, “conditional” and “uncondi-tional” goods. (Remark: amended in 1998)

Ø Rough uneconomical to manufacture in SA may be exported by sightholders, duty free.

De Beers illustrated this with 1996 figures. In that year the Company says that the equivalent of 48% by value of the rough diamonds exported in terms of the Section 59 agreement was re-imported by the CSO for sale to South African cutters. In the “South African” category, De Beers re-imported the equivalent of 105% by value of the diamonds which De Beers had exported in that category, while in the “conditional” and “unconditional” categories, it re-imported the equivalent of 29% and 0.4% respectively (De Beers, submission 26). De Beers calls for the changes to sections 59 to 63 of the Diamonds Act dealing with the supply of rough diamonds to the cutting industry so as to conform to the changing rules and legislation governing the industry.

5.11.2 In submission 12, Advocate N Cassim mentions, as previously discussed, that section 59 should be utilised to ensure that local manufacturers who are serious in developing the manufacturing industry are encouraged. They should receive proper and adequate supplies of rough from De Beers. There is no reason for special protection of the local industry through a guaranteed allocation of rough. He also recommended that loyalty must be with De Beers in the section 59 context. According to Adv Cassim section 59 has been used in the past to procure the supply of rough diamonds to manufacturers in South Africa, assuming that the purpose was to promote the manufacturing industry.

5.11.3 As previously mentioned, see paragraph 2.5.14, Trans Hex also entered into a Section 59 agreement with the Diamond Board. All Trans Hex’s South African production is sorted into “cuttable” and “non-cuttable” production. Non-cuttable diamonds are those diamonds that are not processed by the cutting industry in South Africa. The “non-cuttables” are exported free of duty at a valuation submitted by Trans Hex which is subject to random testing by the GDV. The “cuttables” are sorted and classified into a number of parcels to be offered in terms of an agreed sealed tender procedure (submission 75). The Diamond Board is advised of the dates and location (Trans Hex offices or SA Diamond Board) of a planned tender offering. The Diamond Board then notifies all licensed dealers and cutters in South Africa. The Tender parcels are normally open for viewing for a period of about 2 weeks.

5.12.1 Mr L A Lincoln of De Beers (submission 21) commented on proposals made by the Rough Diamond Dealers’ Association, where the Association suggests to have all production offered on the Diamond Bourse. The Diamond Bourse would become a major trading centre for, in addition, diamonds from Botswana and Namibia which could be offered on the Diamond Bourse. “SA goods” category diamonds of Alexkor Ltd should also be offered on the Diamond Bourse, the remainder being offered to De Beers. (submission 68)

According to Mr L A Lincoln it is a practical impossibility for all diamonds produced by De Beers, mines in South Africa (amounting to some 10 million carats per annum), to be offered on the Diamond Bourse. Furthermore, he is also of the opinion that it is unconstitutional for a producer to be forced to sell its diamonds in a manner which it disapproved of and which could also lead to a disruption of a market which that producer has largely created and of which South Africa is a continuing beneficiary. Botswana and Namibia have long term contracts with the CSO to channel their diamonds and it is unlikely that they would forsake this system. Responding to the suggestion that the “SA goods” category of Alexkor Ltd diamonds should be offered on the Diamond Bourse and the remainder offered to De Beers, Mr Lincoln is of the opinion that the CSO does not favour contracts where it is a buyer of last resort. In such a case the sightholder’s allocations should be reduced.

5.12.2 DIAMOND SALES BY THE DIAMOND BOURSE OF SOUTH AFRICA (SOURCE: THE DIAMOND BOURSE OF SOUTH AFRICA)

YEAR	SOLD LOCALLY (R)	QUALIFIED FOR EXPORT (R)	LOCAL SALES/EXPORTS AS%
1987	522 670,92	1 041 456,08	50,2
1988	10 769 299,25	35 601 760,83	30,2
1989	15 469 392,79	95 164 789,89	16,3
1990	20 487 647,44	116 395 965,00	17,6
1991	11 967 358,90	138 705 396,41	8,6
1992	11 300 475,00	267 412 345,75	4,2
1993	21 450 271,24	299 405 788,79	7,2
1994	23 656 748,00	231 151 545,00	10,2
1995	26 869 040,32	200 590 249,00	13,4
1996	22 913 222,00	377 434 254,44	6,1
1997	64 447 143,00	646 192 014,29	10,0
1998	103 712 596,50	807 402 321,46	12,8
1999*	75 950 526,50	531 753 426,00	14,3
TOTAL	409 516 391,86	3 748 251 312,94	10,9

5.12.3 The Rough Diamond Dealers’ Association (submission 68) noted from the above statistics that the vast majority of goods put up for tender on the Diamond Bourse are eventually exported free of export duty.

5.13.1 In submission 8, Mr T Barnes, who previously owned a diamond cutting factory from 1979 points to the problem of getting supplies of rough diamonds for cutting. In his oral submission he mentioned that he eventually sold the factory. He is now running the Diamond Education School.

In submission 2, Mr J A Absolom, a factory worker, suggests that export of rough diamonds be restricted in order to increase beneficiation, which would lead to more employment, wealth and state revenue.

5.13.2 Mr G M Ralfe, now Managing Director of the De Beers Group (submission 25), believes that there is plenty of rough available to South Africans. Some of this is exported which suggests that there is not enough rough that is always profitable, becoming available on the South African market.

5.13.3 Mr C van der Merwe of D & G Diamond Cutting Works (submission 27) suggests that rough diamonds should be available in smaller (less expensive) parcels to the local smaller-scale diamond cutter. In submission 10, Mr A J Bond of Laser Optronic Technologies (Pty) Ltd is of the opinion that rough diamonds should be offered to the local industry at more favourable prices, in order to develop the local industry further, rather than exporting rough overseas. “G” Diamond Cutting Works is also of the opinion that rough diamonds should be readily available at more realistic prices to smaller factory owners and manufacturers.

5.13.4 Hanani Diamonds (Pty) Ltd (submission 44) is of the opinion that the major problem encountered by the cutters was to get a sufficient supply of rough diamonds at a profitable price. He adds that prevailing unlawful practises also contributes to making the business unprofitable for many cutters and dealers. He feels that a large percentage of diamond deals is done “off the book”. Cash is being paid for diamonds but no formal documentation is made out. Some buyers even try to evade taxes by doing business deals in cash and without completing documentation. He concludes that other dealers and cutters of rough diamonds are disadvantaged by these unlawful practises; it renders it unprofitable for them to compete lawfully in this business.

5.13.5 Mr S W Hübener (submission 47) expresses the opinion that rough diamonds of above 0.3pt should not be allowed to leave the country, but should rather be cut in South Africa.

5.13.6 Mr P Lappeman (submission 53) also complains about the lack of rough and unpolished diamonds to the local industry and added that De Beers should support the local industry. He suggests that there should be discounts on the smalls, as an incentive to get the cutting and polishing industry going.

5.13.7 In submission 68 of the Rough Diamond Dealers’ Association and submission 56 of the Master Diamond Cutters Association the following is suggested in the supply of rough and unpolished diamonds to the processing industry -

Ø That enough rough and unpolished diamonds should be supplied to the local cutters.

Ø That the licensed diamond cutters and dealers may obtain rough diamonds through:

The CSO
The independent diggers
On tender from Trans Hex
On tender from the Diamond Bourse
Imports
The Diamond Board
Dealers’ sights

5.13.8 According to the Diamond Merchants’ Association (submission 32) additional supply of diamonds should be received from a larger percentage of De Beers’ world allocation of diamonds rough than it has enjoyed to date.

5.13.9 In submission 3, Mr S Golovey, who gave oral evidence on behalf of AG Diamond Cutting Works (Pty) Ltd, explained that AG Diamond Cutting Works (Pty) Ltd, Perfect Diamonds (Pty) Ltd and Quality Diamonds (Pty) Ltd form part of the “Kaszirer group of companies”. All three companies held diamond cutting licences. AG Diamond Cutting Works (Pty) Ltd and the Kaszirer group became CSO sightholders, in 1985 an 1987 respectively. The companies had cutting factories in Johannesburg and Bloemfontein, and employed approximately 250 people (1991) in Johannesburg and approximately 450 in Bloemfontein. De Beers suspended AG Diamond Cutting Works (Pty) Ltd’s sight in 1992, and the company had to import rough diamonds from abroad, resulting in an irregular supply. The sight was suspended, according to Mr Golovey, because De Beers did not like Kaszirer’s operation in Russia, where diamonds were exported from Russia. AG Diamond Cutting Works (Pty) Ltd then placed orders for rough through Diamdel (as other non-sightholders) to which they received no reply. As a result the factory ceased to manufacture diamonds in 1995. Mrs E Adriancem, previously an employee of the factory, confirmed the closure of the Bloemfontein factory during oral evidence before the Commission.

5.13.10 In submission 7, Mr M J Ball, suggests the use of rough, natural diamonds in jewellery. He also supports free trading and marketing of rough, natural diamonds.

The Diamond Workers’ Union states that the supply of constant volumes of rough diamonds at consistent periods is essential to the effective management of a cutting factory. About 250 licensed cutting concerns are active in the South African cutting industry and constitute two groups:-

Ø Sight holders which are larger concerns or groups of concerns which are contracted to De Beers for supplies of rough diamonds (during 1988 there were 24 sightholders; currently 13 only), totalling about 49 concerns.

Ø Non–sightholders (about 200) comprises smaller firms that do not “qualify” as sightholders. They must import rough diamonds supplies or rely on non-De Beers producers, diamond diggers, dealers or the Diamond Bourse for supplies.

The Diamond Workers’ Union is of the opinion that the greater majority of the non-sightholders are struggling to acquire suitable rough diamond supplies the non-availability of which is aggravated by the export of 95% of South Africa’s rough diamond production by De Beers, for the period 1988-1990,

Ø sightholders sales of unpolished diamonds to dealers, other cutters and exports amounted to 13 percent of their purchase total; and

Ø non-sightholders sales and exports of unpolished diamonds were some 28 percent of their purchases.

The Diamond Workers’ Union thus concludes that it would appear that cutters, whose function it is to cut diamonds are finding it more profitable to trade/export rough diamonds than to cut them.

Ø there is a shortage of suitable rough diamonds available to the local cutting industry due to the bulk of rough diamonds being exported;

Ø both sightholders and non-sightholders are exporting unpolished diamonds. (In the past, cutters had to process their entire volume for cuttable purchases); and

Ø less rough diamonds are available for labour (commencing June 1990 employment for diamond workers has reduced from 3 500 to the current 1 500).

Based upon 10 sights purchased by sightholders for the period ended 18^th November 1993, the volume of rough diamonds (carats) imported from the CSO, in terms of the agreement entered into by the Diamond Board and De Beers, represented 5,5% of the total diamond production for De Beers in the Republic of South Africa.

During the said period only 14% (274 401 carats) of exports were made available to the local cutting industry.

In relation the allocation to sightholders by the CSO the large volume of rough diamonds (other that sight goods), imported during the first quarter of 1994, is an indication that currently insufficient local goods are being made available for requirements of the local cutting industry.

As previously mentioned, production of De Beers is classified into three categories, being:-

Ø South African; which are diamonds that can be economically processed locally including ‘specials’.

(Remark: The descriptions of the categories were amended in 1998, when the Section 59 agreement was renewed).

It appears strange, despite the above classification and claim by representatives of De Beers that sightholders purchase only those rough diamonds required by them, that sightholders export unpolished sight diamond i.e. unpolished diamonds which are cuttable in the Republic of South Africa.

In terms of the Diamonds Act, section 62, export duty levied upon export of unpolished diamonds is 15% of their value. In terms of section 63 exemption may in certain circumstances be granted from payment of the said export duty. If an unpolished diamonds has been offered to a local cutter for purchase, at a price fixed by the seller, unsuccessfully, the seller is entitled to export the diamond duty free. It is obvious that in terms of the above duty free export of a substantial volume of rough diamonds suitable for local processing is taking place and which is neither in the national interest nor that of the local cutting industry.

Furthermore, during the three year period 1988 to 1990 sightholders imported 232 000 carats of rough diamonds (R422,3 million), and exported 207 000 carats (R74 million), which does not exclude the possibility of importation of ‘low quality’ over-invoiced rough diamonds to be classified as uneconomical to cut locally and then exported. (“schlepping”).

Ø Employment available to diamond workers employed in the local cutting industry has reduced from 3500 to 1500.

Ø Notwithstanding such reduction insufficient local rough is available for requirements of the local cutting labour complement.

Ø De Beers produces about 95% of South Africa’s’ rough diamond production the total of which is exported rough.

Ø Sightholders supplied by De Beers through the CSO from London export rough contrary to the interests of the local cutting industry which action results in less diamonds being available to the local cutting industry.

In response to written request to the Diamond Board, to furnish all members of the Diamond Board with detail of exports of sight rough by sightholders, the Diamond Board conceded to furnish detail requested but expressed as percentages in coded form only. It was also agreed to furnish members of the Board with imports of rough of non-sight goods by sightholders.

The table below shows that in proportion to sight purchases it is necessary for sightholders to import substantial volume of non-sight goods for requirements of that portion of the local cutting labour complement employed by sightholders.

(Note: There were two sightholders dealers during 1994 and three sight holders dealers during 1995).

PERIOD: JANUARY TO DECEMBER 1994
SIGHTHOLDERS WHO PROCESS		SIGHT ROUGH EXPORTED			NON-SIGHT ROUGH IMPORTED
		CARATS		RAND VALUE	CARATS		RAND VALUE
12		19%		17,5%	39,5%		59,7%
PERIOD: JANUARY TO MARCH 1995
11	22,5%		24,3%			33,1%		29%

According to the Diamond Workers’ Union the above detail confirms insufficient local rough is being made available for requirements of the local labour complement.

During 1993, 13 410 273 carats in total were exported and some 990 113 carats in total were imported (sight goods 525 063 carats).

During 1994, 11 392 092 carats in total were exported and some 982 329 carats in total were imported (sight goods 501 909 carats).

In De Beers’ letter to the Diamond Board dated 19^th February 1996, it is claimed that the Company has fulfilled all of its obligations in terms of the Section 59 agreement. Such claim is not supported by statistics supplied by the Diamond Board which indicates a decline in sight rough imported, this does not reflect conditional goods which can be processed in South Africa and which makes up a large proportion of exported goods.

The above category of Conditional goods should be offered to all sightholders, non-sightholders and temporary licensees prior to exportation, according to the Diamond Workers’ Union.

Temporary licensees’ (43 cutters/30 dealers) rough diamond purchases during 1995/1996 – totalling 90 198 carats (valued at R5,6 million) – were principally sourced from cutters (some 38%) followed by producers (24%) and another 24% from imports.

Temporary licensed cutters purchased mostly from other cutters – some 45% in volume terms – followed by purchases from natural producers (27% in volume), i.e., so called ‘diggers’.

Of the unpolished diamonds purchased by cutters only 6% in volume or 16% in value were manufactured for their own account. The balance was mainly exported (45% in volume) and sold to dealers (38% in volume) and other cutters (18% in volume).

Dealers disposed of their goods, in the main, to cutters (63% in volume). The balance was exported (248 in volume) and sold to other dealers (12% in volume).

Ø there is a shortage of suitable rough diamonds available to the local cutting industry due to the bulk of rough diamonds being exported,

Ø both sightholders and non-holders are exporting unpolished diamonds. (In the past, sightholders had to process their entire purchases or rough cuttable locally).

The Diamond Workers’ Union is also of the opinion that a recent great influx of foreign buyers has pushed the price of rough to unrealistic limits because of their access to foreign currency. Newly licensed dealers have pushed their total number from about 30 to nearly 80 and most of whom are foreigners. These are difficulties which were made known to the Diamond Board.

Mr E Blom is a sightholder and is supplied with sufficient rough by the CSO to satisfy the requirements of cutter and dealer non-sightholders who are his customers. One of his companies B & E Diamonds CC is a sightholder supplied by the CSO with the requirements of those non-sightholder cutters and dealers who are his customers. He became a sightholder in 1994 with the purpose, supported by De Beers, to buy his allocation of diamonds sufficient for his own needs and to enable small cutters to buy from him. He has about 25 customers to whom he sells up to 76% of his sight purchases. He is also a buyer of rough at the diamond diggings for his own requirements, but is also an exporter of such rough as he acquires in his sights that is not suitable for himself or his customers.

In submission 9, Mr E Blom explains that B & E Diamonds CC is one of two legal entities that receive a dealing sight from the DTC (the other being Diamdel), providing small parcels for non-sight holders. In his opinion there is a sufficient supply of rough diamonds on the local market. Complaints of a lack of rough should in fact be a lack of profitability and a lack of expertise. Diamonds are priced too highly.

He further submits that the supply of rough, regulated by Section 59 agreements is important to the South African diamond industry. Without these agreements the industry would be crippled, affecting dealers, cutters and producers.

The CSO, by encouraging the development of cutting centres outside traditional ones, notably India and the Far East for the manufacture of small cheaper diamonds, and with it, the promotion of the consumption of jewellery containing small diamonds (with a resulting enhancement of their value), has created a market for the production of the older mines in South Africa (which would probably have closed down).

It is said that India has complained of a two-tier marketing system adopted by the CSO to cope with the large quantity of near gems (Indian goods which are small and of poor quality) entering the market by allowing such goods to find their own price level at the expense of the producers while continuing to maintain the market in respect of larger goods. This has been denied publicly by the CSO but it shows how different market strategies benefit some producers and cutters and not others.

After De Beers, Trans Hex is the next major source of rough diamonds in South Africa (Rough Diamond Dealers’ Association, submission 68). As with De Beers, Trans Hex has entered into an agreement in terms of section 59 of the Diamonds Act whereby they make goods available to the South African industry and the balance of their production can be exported free of the 15% export duty. The major difference between the agreement entered into between Trans Hex and the Diamond Board and De Beers is that of the role of the Government Diamond Valuator. Trans Hex goods are not valued for export purposes by the GDV. All the group’s “conditional” goods are sold through the Diamond Bourse (on tender), a system which allows for the valuation of the goods through market forces.

Alexkor Ltd is a 100% State-owned company which is engaged in the recovery of alluvial and marine diamonds along and off the coast of the Northern Cape. Diamonds produced by Alexkor Ltd are currently sold to Dicorp at a value determined by the GDV. The Rough Diamond Dealers’ Association, (submission 68) believes that if Government wishes to advance the local diamond processing industry in South Africa, the goods which originate from Alexkor Ltd should be made available to the holders of diamond cutting or dealing licences by way of tender or sale on the Diamond Bourse.

5.19.1 The Rough Diamond Dealers’ Association (submission 68) notes that rough diamonds can be imported into South Africa and that these imports have become a very important source of goods for the local processing industry. The Association observes that there are basically 2 types of imports:

Ø Imports by manufacturing companies of rough diamonds specifically for processing in their establishments

Ø Imports by foreign dealers who wish to sell their goods to the local processing industry in general.

The party importing rough into South Africa will pay value-added tax on the value of the goods being imported. The majority of the goods being imported into South Africa for specific licensees originates from Europe. The Association believes that rough diamond imports should be banned or seized only when authorities have proof that theft is involved.

5.19.2 According to the Masters Diamond Cutters Association, the Diamond Board has, in order to assist the non-licensed importers of goods, introduced a system where imported goods are offered for sale from the premises of the Board. This is the case mainly with goods coming in from the rest of Africa. The Board facilitates the sale of such goods to licensees in South Africa.

According to the Association the recent action by the SAPS and Customs and Excise of, inter alia, discouraging the importation of rough diamonds ex-baggage or a temporary import permit, has had, and will have a negative effect on the industry. The result of this action is that the party importing rough diamonds into South Africa with the intention of selling these goods to the local industry has to leave the goods overnight at the Customs Warehouse and pay 14% value-added tax on the value of the goods before they can be released. At this point, the prospective importer has no confirmation that the goods will be sold. This action on the part of the relevant authorities will discourage foreigners from bringing goods to South Africa and encourage them to take their goods to countries such as Israel, Belgium or even the United Sates of America, where the procedure is extremely user friendly and efficient. (submission 56) The above views were shared by the Rough Diamond Dealers’ Association.

5.19.3 The Non-Sightholders Group (submission 62) says that better buying opportunities must be created for the small dealers if they stand any chance of survival. They propose the set up of a monthly “African Sight Day” when all African diamond producers must be allowed to bring in (unrestricted) all diamonds they wish to sell. The State is losing a lot of revenue and valuable resources through theft and/or loss of diamonds, gold, jewellery and other valuable cargo during importation into the country.

5.19.4 In order to become internationally competitive in the importation of valuable goods and minimise the security risk (both transit and financial risk), Ram International Transport (Pty) Ltd (submission No 66) highlights the need to improve the import system and he proposes stricter control measures.

Ø The Diamond Board, according to Ram, employs a staff of highly qualified diamond personnel whose main duties are the checking, stamping and sealing of diamonds. Ram proposed that the Diamond Board should take over the role of the South African Customs and Excise "SARS", of checking the cartage and the true value of the imported goods at the international airports.

Ø Ram further recommends a well structured outlined plan that will attempt to streamline the procedure and improve the current security situation for the two models of importing.

Ø The clearing agent should know 12 hours in advance of a diamond import by fax.

Ø The Diamond Board, after being informed of the shipment, should issue a document to the airline housing the said goods, to release the sealed goods ‘in bond’ to the agents concerned.

Ø The clearing agent will then hand the letter to the airlines concerned and receive the sealed parcels.

Ø The forwarding agent will then arrange delivery of the scaled parcel to the Diamond Board, who deals with the goods under 3 kinds: temporary imports, re-importation and duty paid.

Ø Once the Diamond Board has inspected the goods in front of the importer, they should provide a written report on how these goods are to be cleared.

Ø The clearing agent should then proceed back to the SARS and put its entry into customs.

Ø The clearing agent should know 12 hours in advance of a diamond import by fax.

Ø The Diamond Board will give the clearing agent a specially designed bag and a seal together with a release letter for Customs Officials at the airport.

Ø The courier declares the goods upon arrival to the custom with his documentation.

Ø The custom official will seal the goods in the bag brought by the clearing agent from the Diamond Board, and will then release to the agent present, upon receipt of the Diamond Board’s letter.

Ø The agents would then arrange delivery of the sealed bag to the Diamond Board.

Ø Once the Diamond Board has inspected the goods in front of the importer, they should provide a written report on how these goods are to be cleared.

Ø (h)The clearing agent then should proceed back to the SARS and put its entry into customs.

The main advantages of these proposals, according to Ram: the goods will be dealt with under the direct supervision of the Diamond Board. This will therefore put the Diamond Board in a good position to control the importing of diamonds and hence avoid the theft thereof. This will also minimise the need for Customs involvement and unnecessary SAPS involvement.

5.19.4 According to Senior Superintendent P J Otto (submission 71), diamonds in transit should be declared at the border and the holder or dealer of the diamonds should have a licence to possess them and a permit (to trade) obtained legally from the country of origin. This will hopefully eliminate the risk of unfair police practices such as wrongful seizure of goods and/or arrest of innocent persons. These measures will result in efficient collection of value-added tax from the proceeds and improve South Africa's competitiveness in the international import and export market. Senior Superintendent Otto also suggests liaison and the formation of a pact with other countries to have a joint control over cross-border smuggling of diamonds. He says there is a need to employ diamond experts at transit or custom in order to examine the diamonds properly after they have been declared, and then issue invoices.

There are approximately 1 500 registered small alluvial diamond diggers operating in the North West, Northern Cape and Free State provinces. Licensed diamond dealers and cutters have established diamond buying offices in Wolmaransstad, Barkly West and Schweizer-Reneke. Independent diggers offer their diamonds for sale at these dealing offices.

The Diamond Merchants’ Association (submission 32) suggests that the Commission re-examines the functions of State alluvial diggings and independent producers with a view to making a larger supply of diamond rough available to the South African diamond industry.

Mr J Gaddie alleges that De Beers is buying rough diamonds directly from the diggers and thus competing with the small dealers and cutters (submission 41).

Itereleng Minerals and Energy Consultancy (submission 48), observes that diamond buyers are very far from communities and that diamond buyers pay Black sellers lower prices than their White counterparts.

Comments of De Beers Consolidated Mines Ltd on the submissions of Mr S Golovey of AG Diamond Cutting Works (Pty) Ltd – see Chapter 5, paragraph 5.13.9, are as follows:-

De Beers confirms that AG Diamond Cutting Works (Pty) Ltd and the Kaszirer Group became CSO sightholders to enable the companies to cut and polish rough diamonds in South Africa.

The DTC was concerned about the export of rough diamonds by the companies. It is mentioned that the work force of AG Diamond Cutting works (Pty) Ltd and Quality Diamonds (Pty) Ltd (Johannesburg and Bloemfontein respectively) decreased during the period 1990 to 1992, before the sight was suspended.

The CSO was concerned as to how much of their rough diamond supply to AG Diamond Cutting Works (Pty) Ltd was actually being polished in South Africa.

The CSO had entered into an exclusive selling arrangement with Russia, in terms of which the CSO had the exclusive right to purchase all rough gem diamonds available for export from Russia. According to De Beers the Kaszirer group contravened the agreement when they exported rough diamonds from Russia from 1991.

The AG Diamond Cutting Works (Pty) Ltd and the Kaszirer sights were suspended in 1992.

AG Diamond Cutting Works (Pty) Ltd subsequently placed a big order for rough diamonds with Diamdel. Diamdel requested to visit the factories, which was declined by AG Diamond Cutting Works (Pty) Ltd. As a result, no diamonds were sold to AG Diamond Cutting Works (Pty) Ltd.

Ø Persistently facilitated, from 1991 onwards, the breach by the Russian Government of its sales agreement with the CSO;

Ø Attempted, in 1995, to persuade the Russian Government to supply it with rough Russian gem diamonds for Quality Diamond’s (Pty) Ltd polishing operations in Bloemfontein, in further breach of the sales agreement;

Ø Is currently in liquidation in Belgium and Israel and has very limited, if any, operations in Russia;

Ø Was party to conduct which was perceived at the time to be inimical to the diamond industry internationally and, consequently, to jeopardise both the continued viability of the marginal South Africa diamond mines and with it thousands of jobs in the mining industry. In the light of the above, it is submitted that the CSO’s withdrawal of the AG Diamonds’ sight in 1992 was reasonable and justifiable in its interests, in those of the international diamond industry and in the interest of the South African diamond industry.

In his verbal submission to the Commission on 1997-12-23, Mr G M Ralfe, expressed the view that the reinstatement of the sight of AG Diamond Cutting Works (Pty) Ltd will be reconsidered, if the company can produce the money to pay for the sights.

Hence from Mr Ralfe’s verbal submission it can be concluded that the reinstatement of the sight of AG Diamond Cutting Works (Pty) Ltd will be reconsidered, if the company can produce the money to pay for the sights.

The issue of export duty is currently being investigated by the Department of Finance, see Chapter 2, paragraph 2.12.1.

5.1 The issue about the supply of rough diamonds to the local industry, be it adequate or not will be considered when the Diamonds Act is reviewed in its entirety. Various opinions have been highlighted on this issue. The large producers are of the opinion that the supply of rough diamonds to the local industry is sufficient. Other, mainly dealers and smaller cutters, are of the opinion that the supply of rough diamonds to the local industry is insufficient, a view shared by the Diamond Workers’ Union.

5.12.2 DIAMOND SALES BY THE DIAMOND BOURSE OF SOUTH AFRICA (SOURCE: THE DIAMOND BOURSE OF SOUTH AFRICA)

YEAR

SOLD LOCALLY

AS%

NON-SIGHT ROUGH IMPORTED

CARATS

RAND VALUE

CARATS