CHAPTER 7
International models RELEVANT TO THE LOCAL INDUSTRY.
7.A WRITTEN AND ORAL EVIDENCE RECEIVED BY THE COMMISSION
7.1 INDIA, ISRAEL AND BELGIUM
In submission 12, Advocate N Cassim refers to some international aspects. He submits that he learnt in India that the Government relaxed provisions of the law to promote diamond manufacturing in order to earn foreign currency; such foreign currency being used to subsidise petroleum among other necessities for transportation. In the State of Gujerat, manufactures were given carte blanche to determine hours and conditions of work to promote the manufacturing industry. The result was that some 800 000 to a million persons are directly engaged in the manufacturing of diamonds through labour market flexibility. Similarly, in Israel the leading manufacturers were emphatic: that their past success in manufacturing was owed to Government co-operation and not to intervention. The diamond industry was exempt from foreign exchange regulation and the flow in and out of diamonds was in dollar accounts. Antwerp’s success story lay in the support of specified Banks who were prepared to invest the large quantity of money required to deal in the product itself, based on the integrity of the client and not on collateral. The Belgian Government too set out to promote the manufacturing industry, having observed the potential of the polished and trading markets in diamonds. In this sense, it would be fair to say that the Government of South Africa embarked on a programme to promote manufacturing of diamonds and used as an instrument sections 59 to 64 of the Diamonds Act.
Mr M J Ball, in submission 7, is of the opinion that it must be a national disappointment that the South African diamond industry is of such insignificant economic importance to the nation, relative to the vast wealth extracted from the soils and sea-beds of South Africa for more than a century. Exported South African diamonds and gold have contributed to vast wealth creation outside the country. The diamond and jewellery industries of Israel and India are the biggest single earners of foreign exchange for these countries. The Indian industry alone earned $5,4 billion in 1995/96 and employs upwards of 750 000 people. Free of inhibiting laws, Israel and India have emerged as established leaders in the “smalls” polishing industry with some Pacific-rim countries also developing diamond-cutting and polishing ventures of their own. These countries have a considerable lead over South Africa and it will be a challenge of magnitude for our industry in the short term to compete with these industries. The training of workers, the cost of new technology required and the acceptance by labour of a cost per carat wage structure, matching those of other countries, must be a long-term project, if it is indeed attainable at all. South Africa exports a large caratage of diamonds classified as “Smalls” now known in the trade as “Indian Goods”. These goods are not a viable proposition for South African cutters. In India, these diamonds are distributed to diamond workers who are organised as family groups or co-operatives, who perform the various phases of the cutting and polishing processes. The partly or fully finished diamonds are then returned to the merchant and payment made for their labour. The workers are highly skilled and earn low wages thus making it difficult to compete with this indigenous industry. The Indian diamond industry mainly uses gem quality “smalls” a category of diamonds which cannot be viably processed in South Africa. This category of diamonds is ideal for use in their natural state in jewellery and souvenirs here in our country.
The Master Diamond Cutters Association (submission 56) suggests that the South African diamond industry must be in line with international models like Israel. The Association suggests that rough imports should be banned or seized only if theft is involved.
The Rough Diamond Dealers Association (submission 68) suggests that international models are relevant to the improvement of the local industry. The Association suggests that a free and fast trading environment should be created to allow South Africa to compete at a level playing field with other countries. It is suggested further that exchange control should be done away with. The Association advises that all successful economies in the world today are successful because they have free and open trade. The Association suggests that South Africa’s processing and trading industry is constrained by laws designed to theoretically protect the interests of producers. It is added that neither Israel nor Belgium try to restrict the import of rough as South Africa does. The Association also observes that in the above 2 carat range, South Africa is the cheapest non-Eastern country to manufacture in, and in the sizes between 0,5 to 2,0 carats South Africa is on par with other non-Eastern producers. The Association adds that South Africa’s diamond processing industry is disadvantaged because of exchange control regulations, although Banks have assured the Association that the South African Reserve Bank would be able to facilitate internal dollar accounts for the purpose of diamond trading.
Trans Hex, in submission 75, points out that considering how blessed South Africa is with major local production, an existing diamond cutting infrastructure and excellent diamond expertise, the country could become another major world diamond centre, like New York, Antwerp, Tel Aviv and Hong Kong. Trans Hex says that commercial freedom is all that is needed. Like these major diamond marketing centres, South Africa should scrap all export and import duties and restrictions on diamonds and should scrap all special licenses and permits for the handling and dealing of diamonds. Trans Hex adds that the undisputed world centre for rough diamond trading is in Antwerp because it is unregulated there. In contrast the Antwerp diamond cutting industry, which as a result of overzealous trade-union insistence and government meddling and interference, has just been “regulated” out of existence.
Mr J G Gaddie, a diamond cutting factory owner (submission 41) is of the opinion that South Africa should have its own model and not rely on or follow other overseas industries. Instead of boosting the local industry, South Africa supports the Belgian and Indian industries - because these countries get all South Africa’s rough diamonds.
Mr R P Lappeman (submission 53) says that the Government should look at other successful models in order to improve the local industry and be more competitive.
7.2 RUSSIA
The Department of Minerals and Energy (submission 28a) observes that the diamond mining industries of South Africa and Russia have much in common. Most significantly, in both countries there exists a monopoly in diamond mining and the marketing of rough diamonds. De Beers produces about 94% of rough diamond production in South Africa while Almazy Rossii - Sakha produces about 98%, of rough diamond output in Russia. Both countries are also significant producers of gem quality diamonds which are used in the manufacture of diamond jewellery. Diamond cutting and polishing takes place in the major cutting centres , viz., Belgium, Israel and India. Thus, it is worth noting that both South Africa and Russia are relatively, small diamond manufacturing countries. The demand for diamond jewellery is highest in the more affluent countries such as the United States of America, Japan and some European and Asian countries. The fact that South Africa and Russia are located some distance away from the major markets is also a factor to be considered. It must be pointed out that the Governments of both countries are determined to see the expansion of diamond cutting in their respective countries. This, it. is believed, will create more jobs and increase revenue to the country - due to the added value. To achieve this objective, changes to both countries' existing diamond policies may be necessary. Recently, President Boris Yeltsin of Russia, signed a decree - the main objective of which was the "expansion and rejuvenation of the domestic diamond industry." The decree, in many respects attempts to liberalize the import and export of both rough and polished diamonds.
Ø The monopoly of Almazy Rossii-Sakha (ARS) as sole exporter of rough diamonds has been broken. Another state-controlled body, Almazjuwelirexport, will also have the right to market rough.
Ø Moscow also intends to have a greater say in how Russia’s output is sold on world markets, i.e., Moscow wants to be involved in setting the volume and pricing of CSO sales.
Ø High value-added tax and import duties have effectively prevented the imports of rough diamonds from other countries. Yeltsin has, thus decreed that import duties and value-added tax will be phased out. It is believed that this will enable the establishment of a more efficient rough market in Russia, as it will give domestic manufacturers an alternative source of rough diamonds.
Ø The decree, also specifically grants manufacturing units (domestic), including the joint ventures, the right of first refusal on the available gem-quality rough (exactly like existing South Africa diamond policy).
Ø The Russian Ministry of Foreign Economic Relations and Trade, in agreement with the Ministry of Finance, will now, authorise and issue export licenses for rough diamonds.
Ø Both import and export of rough and cut diamonds will be controlled though specific and specialized customs check points.
Ø The export of partially, processed rough will be prohibited.
In summary the decree attempts to reorganize the diamond industry. ARS commented, however, that it will probably take a while before Russian manufacturers could be in a sufficient financial situation to be able to import rough for domestic processing.
Almazy Rossii-Sakha (Alrosa) and De Beers Centenary AG signed a trade agreement on the export and sale of Russian rough diamonds to the CSO. The agreement also takes into account the needs of the developing Russian manufacturing industry. Depending on the satisfactory operation of the agreement, the 2 parties have formally expressed their intention to extend it for a further period. The agreement has the endorsement and support of both the President and the Government of the Russian Federation.
In terms of the agreement, De Beers has access to diamonds to a minimum value of $550 million from run-of-mine production and to further diamonds from the State stockpile which cannot be cut and polished economically in Russia. The $550 million of diamonds is considered to be about 50% of annual production. There is no commitment to sell more. On the other hand, the CSO is obligated to buy any amount up to a ceiling of $1,25 billion. The new agreement thus gives Russia a larger quota for the independent export of rough diamonds. According to the instructions by the Russian Federation President, Boris Yeltsin, the top priority in rough sales goes to the domestic cutting industry. The agreement was signed with Alrosa, but President Yeltsin has also authorised another government agency, Almazyjuvelirexport to sell rough, both overseas and domestically. So, the CSO is not the exclusive exporter of rough. The CSO had to accept these conditions.
7.3 OTHER COUNTRIES
No detailed submissions were received on other countries like Botswana, Namibia, Angola and the Democratic Republic of Congo.