MEASURES TO EXPLOIT AND DEVELOP SOUTH AFRICA'S DIAMOND RESOURCES IN THE BEST INTEREST OF THE LOCAL INDUSTRY.
9.A WRITTEN AND ORAL EVIDENCE RECEIVED BY THE COMMISSION
9.1 General
The Non-Sightholders Group states in submission 62 that since the discovery of the first diamond on South African soil, the country in general and the diamond industry in particular were destined for great things. The South African diamond industry has spawned some of the greatest scientific, engineering, technological and financial feats achieved by mankind.
The Group, however, argues that the great tragedy of this proud history of the South African diamond industry was that the majority of the population was excluded from actively participating in the industry.
However, with the political changes that have taken place since democracy was realised in 1994, the country can now look forward to the development and expansion of the South African diamond industry by a united, integrated, empowered and all inclusive nation. The Group submits that there is no reason why South Africa should not become the most powerful diamond nation in the world. The country has all the necessary knowledge, skills and infrastructure to lead the world.
9.2 MEASURES TO EXPLOIT SOUTH AFRICA’S DIAMOND RESOURCES
The South African mining and minerals industry is moving towards a transformation which many participants claim is long overdue. Diamond mining is a vital component of the economy, but while most of the medium and larger mining companies are still profitable, the same is not true for the small-scale miners, who lack access to mineral rights and viable mineral deposits, as well as financial and technical assistance. It is for this reason that new legislation is presently being framed to facilitate and regulate investment in the country’s mining industry, following the policy statements in the White Paper.
9.3 MINERAL BENEFICIATION
9.3.1 In submissions 2 and 10, both Messrs J A Absolom and A J Bond emphasise the importance of adding value to South Africa's rough diamonds, rather than exporting rough diamonds.
9.3.2 Mr R Lappeman (submission 53) recommends that if Government wants to expand the local diamond polishing industry, there should be incentives or discounts on the small rough diamonds. Mr J Gaddie (submission 41) concurs with most of the above but would further like to see the diamond industry regulated more in favour of the small local producers or manufacturers.
9.3.3 Dr V B Sibiya of the Diamond Board (submission 73) argues that manufacturers have an obligation and should cut diamonds in South Africa, a matter which should be addressed in Section 59 agreements. According to Dr Sibiya, Section 59 agreements can assist to increase manufacturing in the country and protect the local industry.
9.3.4 As referred to elsewhere, Mr E Blom (submission 9) states that Section 59 agreements are vital for the South African diamond industry and that the industry would be crippled without such agreements.
9.3.5 Mr M J Ball informs the Commission (submission 7) that the South African diamond industry has shrunk to a third of its former size, while diamond centres outside the country have expanded. No real benefit has accrued to the country, as most diamonds are exported, and an invaluable national resource is being depleted. Mr Ball suggests the use of natural diamonds in jewellery, which would in turn contribute to the expansion of the diamond industry, employment and revenue.
9.3.6 The greatest barrier to entry to the diamond processing industry, according to the Department of Minerals and Energy (submission 28), is its capital intensive nature. Diamond processing requires skilled, highly paid labour, expensive machinery and furthermore, most stones have a high intrinsic value. Another problem is that international traders prefer to buy rough stones because they generally obtain a higher return on these than on cut stones. Moreover, the cutting and facing of a rough stone may result in a loss of more than 50% of the stone.
South Africa is the world’s biggest gold and platinum-group metal producer and is one of the leading gem-diamond producers in the world, and yet it manufactures only 0,2 per cent of the world’s jewellery. The value of diamonds exported could be enhanced several times if more was processed into jewellery. Suggestions have been made that jewellery manufacturing in South Africa could be improved by establishing international manufacturing partnerships (joint ventures) or by importing expertise from a country such as Italy. In particular Italian designers could be used on a consulting basis in local manufacturing facilities to make world-class jewellery. To be internationally competitive, an experienced and full-time international partnership is a prerequisite.
Alexkor Ltd, the State-owned mining company, is in the process of being restructured by Government. The long term objective is to privatise the company and whether this will affect the whole or merely part of the organisation depends upon the result of the investigation currently being undertaken. The company has also been requested to set up its own diamond cutting factory, the feasibility of which will likewise depend on the outcome of the restructuring process.
Meanwhile, a Jewellery Cluster Study Group has been set up to fast-track issues concerning the jewellery industry. Perhaps most relevant is the appointment of a committee to undertake an investigation and to formulate a 10-year plan to develop South Africa into a major jewellery manufacturing country.
9.3.7 Trans Hex (submission 75) expresses a different view or philosophy about the concept of mineral beneficiation. Trans Hex argue that mineral beneficiation is a potential wasteful concept that mistakenly links old mercantilist notions of economic security with national prestige. Much more relevant to today’s global and increasingly unfettered economy is the concept of comparative advantage, whereby each nation concentrates on and specialises in those economic activities and processes in which it is most internationally competitive, as dictated by that country geopolitical circumstances, and desists from those activities where it is uncompetitive. The free market rather than the Government, should and will decide wherein a country’s economic comparative advantage lie, and any Government attempts to force added value onto a national resource will be at best, unnecessary, and, at worst, distortionary. This is not to say that mineral beneficiation by adding value is necessarily mistaken, only that it is much better for a free market rather than a Government to make the decision.
Trans Hex further argues that when one adds small size and high relative to their non-fungibility, diamonds become virtually uncontrollable by any governmental fiscal authority. No Government anywhere has yet been able to properly monitor, much less control, the diamond trade with anything approaching accuracy. All Governments have tried, some have saved themselves a lot of headaches and accepted and reality, while others continue deluding themselves. One thing, however, is certain: the more laws and regulations a Government imposes in an effort to monitor control and regulate the diamond trade, the more diamonds will be successfully used for tax evasion, capital flight, and money laundering.
The only value that can be added to a rough diamond, according to Trans Hex, is to cut it into a finished jewel. This process may result in some added employment, but this is more than outweighed, from the point of view of the country’s economic health, by the increased scope for financial mischief which is afforded an unscrupulous “diamontaire” by this value adding activity. For, if the monitoring (by physical controls and valuations) of rough diamonds by any government authority is difficult in the extreme, to attempt such monitoring in the value added phase is utterly hopeless.
Indeed, it would be more accurate to say that any diamond producing country which allows the cutting of those diamonds on its own territory is condoning more value deletion than encouraging value added. For the sake of the creation of a few largely low-paying jobs, the possibility for tax evasion, capital flight and money laundering is thereby greatly increased.
Hence, Trans Hex, as diamond producer, has its own commercial reasons for not indulging in mineral beneficiation of the resources they produce. The submission ends with an extract from a relevant and interesting article on Russia that reads as follows:
“Beneficiation is largely related to industrial-related processes which are usually different to mining operations. Mine owners should be penalised if their corporate strategy does not include the type of operations required for beneficiation. Mines should at all times be allowed to obtain “top dollars” for their products and beneficiation should be a separate concern subject to normal factory/industrial rules and regulations and viability considerations. Under no circumstances should mine owners be compelled to subsidise beneficiation operations.”
9.3.8 De Beers has responded to assertions (Mr G Penny, submission 18) that the diamond cutting industry offers opportunities for significant employment and that the industry has declined from its peak in 1989 to today’s levels because insufficient rough diamonds have been made available to the South African industry from the country’s mines.
Cognisance must be taken of the following:
Ø The manufacturing industry is highly competitive. Diamonds are “portable” so they can be easily moved for processing to the cutting centres where skills are highest or where labour costs are lowest.
Ø For those considering investing in the industry, proximity to markets, entrepreneurial flair and low cost or skilled and productive labour are important factors.
Ø Diamond manufacturing is capital intensive. The cost of a 50 worker factory manufacturing larger goods from 2 carats and over, could be $25 million or $500 000 per employee. The profit margin is tight.
Ø Johannesburg is not a cheap labour cost centre. In India employees are paid between $50 and $100 per month and these employees work in excess of 50 hours a week.
Ø Labour costs are higher in Israel, Belgium and New York. However, under pressure from centres where labour is cheaper, these centres have increased the size of the diamonds they cut, utilise improved technology thereby increasing productivity and ultimately competitiveness.
Ø South Africa has not yet developed a comprehensive range of skills to tackle more difficult rough, with cutters preferring the uncomplicated, straightforward-shaped stones.
Ø A profile of the 1996 South African diamond mining production shows that a small percentage by weight exits in larger sizes (7,2%), which are the diamonds most in demand by South African cutters. Approximately 19% of the country’s production by caratage is in excess of two thirds of a carat in the rough, but once the lower qualities have been excluded as being uneconomic by the industry, only some 3.5% remains in demand. This caratage, according to De Beers, could probably sustain a little over half the current workforce. This is why, additional “South African” category and “conditional” type goods are included in the various DTC selling mixtures made available to the South African cutting industry, bringing the total caratage sold by the DTC into the South African industry to about 6% of the country’s production by weight, but 48% by value.
Ø The real job-creation potential lies in the smaller and cheaper diamonds, where India dominates the world industry.
Numbers employed in the South African cutting industry reached a peak of over 4 000 in the late 1980s, following foreign investment (attracted by government subsidies and the promise of profit from foreign exchange dealings). However, with the abolition of the financial rand dispensation and the phasing out of subsidies, the workforce declined to its present level of about 1 500. This compares with over 9 100 jobs provided by De Beers in the South African diamond mining industry during 1997.
In order to stimulate business for even the smallest client, Diamdel has developed a policy of selling parcels as a small as a single stone. Diamdel clients who are not sightholders have a priority over sightholders when Diamdel has new diamonds for sale. The company offers technical assistance to small businesses and give advice in diamond manufacturing on optimising the yield of a rough diamond stone, so as to give the cutter maximum revenue. Despite all these efforts, given the lack of competitiveness, together with the capital demanding nature of the diamond manufacturing, the need for extensive international marketing network and the narrow profit margins currently available, not all smaller manufacturers have been able to make a profit.
9.3.9 The Free Market Foundation (submission 40) argues strongly against statutory intervention to give benefits to a particular industry. The Foundation says that to give statutory privileges to local industries that cannot compete is to protect inefficiency and obsolescence. Instead of protecting jobs, these steps ultimately destroy more of them, because it penalises efficient industries in other sectors in order to save the protection of an inefficient industry.
Protection, according to the Free Market Foundation, cannot be justified on the ground that it is a temporary assistance to an infant industry during its growing pains and until it becomes established and can complete on equal terms in the world market. They argue that those who are establishing a new industry should themselves bear and development costs, in the expectation of being able to recoup later.
9.4 Mineral marketing
9.4.1 Advocate N Cassim, in submission 12, indicates the importance of leading manufacturers abroad being encouraged to set up business in South Africa. He further submits that technology should be further advanced, and training and diamond cutting skills should be improved. According to Advocate Cassim, this will raise standards and bring new technology and skilled employees to the country, from which the local employees can learn.
As mentioned earlier in the report, he also states that unconditional rough have an insignificant industrial value in South Africa and via De Beers, these diamonds are absorbed and utilised in India, giving new life to marginal South African diamond mines.
9.4.2 The Non-Sightholders Group (submission 62) says that there is no reason why Johannesburg should not become “the Antwerp of Africa”, but, in order to achieve this, it is essential that the way be “smoothed” for African diamond producers and that they be actively encouraged to market their diamonds in, and via South Africa. South Africa has all the features and facilities of a first world country to enable the creation of a “Common Market of African Diamond Producing Countries”.
However, in order to achieve this, the Group proposes that South Africa should put in place laws and facilities that will encourage all diamond producers in Africa, whether they be Governments, private mines or individual diggers, to market their diamonds through South Africa to the rest of the world. By establishing suitable facilities and services to encourage Africa to bring it’s diamonds to South Africa for sale or manufacturing, we will readily be able to match and indeed in some cases surpass the markets in the United States of America, Belgium, Israel and the Far East.
The Non-Sightholders Group identifies a few obstacles that are seriously hampering the expansion of the South African diamond industry:-
Ø Illicit Diamond Buying (IDB) laws. Please see Chapter 4, paragraph 4.18.
Ø Export of rough diamonds
According to the Non-Sightholders Group vast quantities of South Africa’s non-De Beers diamonds are being exported annually. These stones are finding their way to diamond cutting factories in the USA, Belgium, Israel and the Far East. This takes place in spite of the fact that most South African cutting works are struggling to make ends meet. There is little or no incentive for rough dealers to sell their goods in South Africa. South Africa has the ludicrous situation of being a net importer of small polished diamonds while our cutting factories are closing or paying off workers. It is a tragedy that South Africa’s rough diamonds should be polished profitably outside of the country, while the country has queues of unemployed skilled diamond workers.
The opinion of the Group is that if the South African diamond industry can make some of the diamonds produced in the rest of Africa available to our market, a new supply will be available to the country’s polishing factories.
It is essential that South Africa should polish as much of it’s own and other nation’s diamonds as possible. The Japanese, Taiwanese and Koreans have clearly shown the massive benefits of taking the raw materials from other nations and ‘adding value” to them. They take pig iron and run it into motor vehicles, computers, domestic appliances, etc.
Hence, if the South African diamond industry was to export more polished diamonds, the income derived would far exceed the income from exporting rough diamonds.
The argument is also based on the fact that there are several of the local population groups who are highly skilled in beadwork. These same people can easily be trained to perform the detailed, repetitive work that is required for polishing small diamonds. After all they are already producing skilled, detailed, repetitive work in producing their beadwork. Much could be derived if they were polishing small diamonds.
The small polishing factories would be only too happy to get more work and employ more people, but, it is up to Government to provide the incentives needed to boost our polishing industry. One way would be for Government to make it easier for the rest of Africa to bring their diamonds to South Africa for sale and/or polishing.
Ø African Sight Day
The Non-Sightholders Group submits that the bulk of the goods available on the open-market is simply too expensive for the ordinary licence-holder to buy. One reason for this is that large foreign companies have local representatives buying up goods at inflated price and exporting them.
Since the rules requiring a certain amount of experience or monetary guarantees, have been lifted to allow previously disadvantaged person to obtain licences, a serious problem has begun to occur. There are simply too many dealers chasing too few goods. In terms of the classic laws of supply and demand, this is forcing up the price of rough on the open market to a point where only a very, very small profit can be made.
This is setting up the new “small” licence-holders for failure. They simply do not have the massive funds and resources that the foreign buyers have. Therefore, they are unable to compete realistically and fairly. The buyers with massive financial backing are able to make their profit on volume buying rather than on realistically priced goods. So, instead of aiding the previously disadvantaged, the issuing of ever more licences is in fact going to cause the “small man” to fail even more quickly, as there is no rough available for him to buy.
The only (vain) hope that the "small man" has, according to the Non-Sightholders Group, is to have offices in several different towns. All that this does is to add his already burdensome overheads.
If the South African diamond industry and Diamond Board can encourage African countries to market their goods here there will be a greater volume of diamonds available at realistic prices for the “small man”.
The Group recommends that one way to achieve this would be to set up a monthly “African Sight Day”. All African diamond producers must then be allowed to bring in (unrestricted) all diamonds they wish to sell.
Ø Dollar accounts Please see Chapter 10, paragraph 10.8.
9.4.3 According to the Department of Minerals and Energy, submission 28, the markets in the international diamond industry are:-
Ø the CSO
Ø the remaining free market
The crucial economic difference between the CSO and the “competitive fringe” is that the former acts as a price fixer while the latter is regarded as a price taker.
9.B Issues attended to
9.5 GOVERNMENT POLICY
The White Paper indicates the Government’s policy regarding South Africa’s diamond resources and measures to exploit mineral beneficiation and marketing in Chapter 1, paragraphs 1.1, 1.3, 1.4, 1.5 and 1.6.
9.5.1 Exploitation of South Africa’s diamond resources
There is an increasing awareness that the mineral resources on which the Republic’s economic development is based, are becoming depleted. The country’s diamond production during the past few years has, however, remained stable and a number of new diamond mining projects, including marine deposits, are being investigated. New mining legislation aimed at transforming the mining industry in line with the policy statements included in the White Paper, is presently being prepared and Government’s initiatives to promote the evaluation and exploration of mineral resources will provide opportunities for foreign and local mining groups, as well as for small-scale miners, to acquire mineral rights and to exploit available diamond resources.
9.5.2 Mineral beneficiation
The aim of the policy will be to develop South Africa’s mineral wealth to its full potential and to the maximum benefit of the entire population. Government, therefore, will promote the establishment of secondary and tertiary mineral-based industries aimed at adding maximum value to raw materials.
Government policy is summarised as follows:-
Ø A greater degree of co-operation and co-ordination will be established between the Departments of Minerals and Energy and Trade and Industry in respect of mineral beneficiation.
Ø In order to promote mineral beneficiation, efficient supply-side measures will be introduced, such as lower royalty rates for projects that include beneficiation. Qualification for such incentives will require a commitment to promote further local downstream beneficiation through, inter alia, export parity pricing of products.
Ø The State will continue to support research with a view to developing new or improved beneficiation techniques and to developing new applications for locally produced mineral products.
Ø Prices for minerals and processed mineral production will be determined by the market.
Ø Policies and regulations that constrain the downstream development, for example in the local jewellery manufacturing industry, will be reviewed by the Department of Minerals and Energy and other departments and institutions involved.
Ø Science Councils and Government departments will endeavour to establish joint-venture research and training programmes with universities and the private sector in order to produce the necessary skilled and productive manpower required for mineral beneficiation developments.
Ø Decisions regarding beneficiation projects will be based on sound economic and market principles, monitored by the Department of Minerals and Energy.
Ø The State will continue to support research with a view to developing new or improved beneficiation techniques and to developing new applications for locally produced mineral products.
9.5.3 Minerals marketing
Mineral marketing policy will be based on market principles. Government’s role will be supportive, and intervention will generally be limited to addressing market failures.
Government Policy is summarised as follows:-
Ø The marketing of South African minerals will be determined by market forces. State intervention will generally be limited to addressing market failures.
Ø Barriers, economic and otherwise, to mineral exports will be identified and appropriate strategies for their removal will be devised. All measures, which restrict the sale of South African minerals on foreign markets will be opposed.
Ø Transfer pricing will be dealt with by the application and enforcement of laws. To this end co-operation and co-ordination will be established between the Department of Finance and the Department of Minerals and Energy.
Ø Government will encourage and support market development by producers.
Hence, Government policy regarding beneficiation and mineral marketing is in place and covers most issues raised in the various submissions in this Chapter.
9.6 Section 59 agreements
The suggestion by Dr V B Sibiya (submission 73) that section 59 agreements should be used to increase manufacturing has been addressed. The renewed section 59 agreement with De Beers contains a clause aimed at increasing local manufacturing (see Chapter 2, section 2.12.2).
9.7 Alexkor Ltd
Mining activities at Alexkor Ltd are currently being restructured, and sensitive issues regarding the management contract, financing and the Alexkor Board are presently being dealt with. Reports regarding these issues are expected in the near future.
9.C OUTSTANDING ISSUES
The remaining proposals as recommended in the submissions by the Non-Sightholders Group, De Beers and various other parties will all be considered when Government policy is implemented and when the Diamonds Act is reviewed in its entirety in the longer term. The Act will be reviewed to bring the country’s diamond legislation in line with the Constitution and Government policy.