Diamond manufacturing reaches saturation
High labour costs in Botswana’s fledging diamond cutting and polishing companies is threatening the expansion of the industry, with government unlikely to issue more licences due to shortages of suitable supply.
Due to relatively higher labour costs in comparison with other cutting centres around the world, local firms can only viably cut larger stones, which are in limited supply in Botswana.
It is estimated that diamond cutting costs $12 to $25 per carat in India, $20 to $30 in China while in Botswana it costs between $60 and $65 per carat thereby forcing local manufacturers to cut only larger stones which have larger profitability margins.
In an interview with BusinessWeek, Diamond Hub coordinator of relocation and opportunities, Mmetla Masire said that due to shortage of larger stones that can sustain an expansion of the industry, the number of licenced diamond manufacturers is unlikely to increase.
“We have reached the optimal level of cutting and polishing companies given the available guaranteed supply. We currently have 31 cutting and polishing licences but only 21 are operational and these are the ones who are sightholders and have guaranteed supply.
“Botswana labour costs are higher than in some areas so it makes more economic sense to focus on larger stones. We can handle small stones just as well as we can handle big stones, it is just economics and profitability that determine the best stones to be processed in Botswana and which should be sent to other centers. If we have too many cutting and polishing companies without sufficient supply it will jeopardise the industry,” he said.
With production of an average of 22 million carats a year, Botswana is presently cutting and polishing less than two percent on its production locally, with some analysts querying why the allocation cannot be increased to grow the local cutting and polishing industry which presently employs about 3,500 people.
According to Statistics Botswana figures, in 2012 Botswana exported almost 21 million carats of rough diamonds and 257,000 carats of polished. This means Botswana processed roughly 1.2 percent of local production in the year.
“How is it that we are only processing 1-2 percent of our rough diamonds and yet you said we are reaching saturation,” questioned an observer within the industry.
However, Masire believes the figures on local beneficiation through cutting and polishing are much higher. According to Masire in 2013, De Beers diamond sales were about $5.8 Billion of which $ 812 million was supplied to the Botswana based cutting and polishing industry, which is about 13 percent of the total sales.
“This means about 13 percent of Diamonds sold by De Beers go to the Botswana cutting and polishing industry. Also, the point about currently having enough cutting and polishing is based on the fact that we have a 10-year agreement with De Beers and they have committed to supplying the local market a certain quantity. Until we negotiate more diamonds should we have additional supply from outside, it will not be easy to grow the cutting and polishing,” he said.
With cutting and polishing having reached saturation, Masire says that focus has turned to growing the jewellery industry, which can readily be supplied by the 21 cutting and polishing factories or be supplied by goods from outside the country. Only one company, Shrenuj has ventured into jewellery manufacturing in Botswana. “Whilst we are happy that beneficiation is moving in the right direction, we are disappointed that we have not been able to see the jewellery side grow as fast as we had expected. The returns of jewellery are higher and more profitable for the investor,” he said.
As part of a grand plan to transform Gaborone into a global diamond centre in the mould of Mumbai, Tel Aviv and Antwerp, government is pushing hard for Botswana to be involved in all diamond downstream activities.
The establishment of the Okavango diamond trading company is not only aimed at assessing the price development in the industry, but also building a platform for diamond trading in Gaborone outside of the De Beers channels.