Botswana�s experiment with diamond beneficiation � will it succeed?

Roman Grynberg | Friday March 7, 2014 17:16

 

In Zambia the World Bank together with UKaid have argued strenuously that copper beneficiation is not do-able. In Botswana and South Africa the World Bank dispatched Professor Hausman in 2011 to convince governments not to beneficiate. But the idea that Africa will just continue to (efficiently) dig holes in the ground and export unprocessed raw materials making China, India and Europe rich from the processing is absolute anathema in most African capitals. The argument is so instinctively repulsive to Africans that it makes aging middle class African officials, who were schooled in beneficiation in European universities,  remember their liberation struggle days and start using long forgotten rhetoric about ‘economic imperialism’.

 

The Backward Boys

There are two alternatives that are frequently offered to beneficiation. The alternative increasingly proposed by mainstream thinkers in the area is that rather than try to forge forward linkages with the mining sector through beneficiation of unprocessed copper, diamonds or platinum what African countries should do is to emulate the Australian, Canadian  and  south African model where mining intensive economies have developed strong backward linkages to the industries that supply the mining sector such as engineering,  services and skilled mining education. The model has one serious flaw. Most of the smaller African countries do not possess the resource base nor the scale economies to develop the sorts of backward linkages that are found in these three great mining titans. But if there is an absence of economies of scale for backward linkages often that also exists for forward linkages or beneficiation. 

 

Industrialisation.... don’t even bother!

A second implicit argument is that with small economies the resource base is small and that neither backward nor forward  linkages are  possible and so the right course for these relatively  resource rich countries should be to accept that globalisation has provided a terminal end to any possibility of mineral economies undergoing a traditional  transformation. These small economies  cannot compete with either the giants of mineral industry and rather than compete they should simply use globalisation to diversify their economies through sovereign wealth funds. In other words they should abandon any traditional model of transformation and stick to getting a high rate of return for their investment. So faced with these constraints where do most African countries go? Unfortunately it is neither backward nor forward nor outward but making ever deeper and larger holes in the ground with the resources being used more or less prudently depending on the internal political situation.

Botswana has over the space of the last several years embarked on a policy of diamond beneficiation whereby it has moved on two fronts to develop the economic benefits available to the country from its diamond resources. In its marketing agreement with De Beers the principle miner in the country it agreed to two aspects of beneficiation that had previously not existed. The first is the localisation of aggregation and sales whereby by the end of 2013 De Beers, of which Botswana in 15 percent owner, localised the aggregation and sale of diamonds from its offices in London to Botswana. This process is complete with two sights or sales have been undertaken with what is estimated to be the transfer of some 160 positions from London to Gaborone, 80 of which have been localised. The benefits of this are what economists call the horizontal linkages that having the sites every 4-5 weeks in Gaborone will create.

There will obviously be more sales of services to the site holders who are generally wealthy individuals along with the opportunities for localisation that the newly transferred positions within De Beers will eventually create.  The second part of the marketing agreement concerns the beneficiation of diamonds. Botswana has agreed with De Beers in the 2011 agreement that it will make available to sightholders some USD500 million per annum of diamonds for local cutting and polishing purposes.

This is expected to grow to some USD800 million by 2014. The sightholders will cut the diamonds in Botswana principally because that is one of the conditions for being a DTCB sightholderr. In other words if they do not process locally they do not get rough diamonds. In 2012 some 3,400 workers were employed in the cutting and polishing industry. They polished some 257,000 carats if the data from  Statistics Botswana is to be believed. This constitutes slightly more than 1 percent of Botswana’s estimated 2012 production of rough diamonds which was 23 million carats. However the value of the exports was 5.4  billion pula or some US$600 million. This makes diamond cutting by far the country’s largest industrial sector.

By any standard for a small country of 2 million people such a new and non-traditional export sector should be considered an unambiguous success which in many ways is precisely the case. The real issue is the sustainability of the sector. At the moment large parts of the cutting and polishing industry exist simply by virtue of the fact that the country has, by value, the world’s largest rough diamond export sector. The industry, using many of the more traditional labour intensive techniques that are found in India would not be viable but in large measure because the government of Botswana has permitted the import of high value rough and because of the use of new capital intensive cutting and processing techniques it appears possible  to cut and polish larger higher value diamonds in Botswana despite the relatively high cost of production that exists in the country.

Without the application of these relatively capital intensive means of processing the industry, most experts agree, would not be viable in the short term.

The question is then where the industry is viable in the medium term. In the longer term the industry is unlikely to ever compete with India which has over thirty years developed a comparative advantage in cutting that did not exist prior to the early 1970’s. Diamond  exports in India which in 2012 processed  80-90 percent of the world’s diamonds. India regularly boasts that 14 out of every 15 diamonds set as jewellery in the world were processed in India. For India diamonds are amongst its biggest export sectors responsible for exports US$ 43 billion (14 percent of total exports) in the financial year 2011-12. Diamond production is one of the leading growth sectors of India’s economy with an estimated  1 million jobs in Surat and Mumbai.

 

Learn from India!

The interesting economic question is why does India now have a comparative advantage in cutting diamonds? Until the early 1970’s most diamonds were cut in Amsterdam, Antwerp, New York and Tel Aviv. Indeed when India was the only source of diamonds in the 16th century most of its diamonds were cut in Europe because the cuts in Europe appealed to European tastes. Soon after independence in the 1950’s European cutters were sent to train Indians in modern cutting and polishing techniques which had not changed for a century.

India, much as Japan, Korea and China did with manufacturing, entered the diamond cutting market in the 1970’s developing a comparative advantage in the cutting of diamonds that could not be processed by high wage cutters in Europe and Israel. With its low wages India was able to develop a capacity in cutting diamonds that were traditionally considered to be detritus and were rejected because they were too costly to cut. It was not long before the comparative advantage gained by India from low wages soon extended to higher value diamond products and it has now reached the point where the country is now globally dominant.

The first lesson for Botswana is that, India had diamond mines and also successfully developed a cutting industry but this was at least 300 years ago. But the general failure in Africa where large mines have long existed is that the skills needed for cutting and polishing have been found elsewhere and the traditional entry point i.e. low cost products is not viable because the mines in Botswana have themselves contributed to the raising of production costs and wages and salaries to such a level that this entry point is commercially closed. However, the more important lesson, so often forgotten, is that comparative advantage can be learned acquired at a cost and it can also be lost.  The only way that Botswana will develop a comparative advantage will be if the government works closely with the private sector to raise productivity and lower costs.

Even then it is unlikely that Botswana or any of the other countries that aspire to beneficiate in Africa i.e. Namibia and South Africa will ever be able to take the low cost Indian path to beneficiation. There is a market niche but the sort of mouth watering employment levels experienced in India for diamond cutting are improbable in Africa. Africa is thus unlikely to follow an Asian model of cutting and polishing in the diamond sector and will have to find its own road.

 

Beneficiation... yes, but is it sustainable?

This would all suggest that, like the criticism of beneficiation offered by the World Bank, the OECD, the African Development Bank  and others that beneficiation is doomed to failure is simply wrong and often self seeking advice by those who benefit from Africa being a low cost of supplier raw materials needed for their on-going prosperity. What constitutes success in such cases is not necessarily the development of an industry that is likely to outlive the availability of rough diamonds in Botswana. Though if you listen to De Beers senior staff they will tell you that some, and by no means all, of the sight holders have world class operations in Botswana that are as efficient as anywhere in the world and that the industry is on the road to commercial viability. Of course whether these firms are sustainable without any supply of diamonds in Botswana is something only time will tell.  But if one defines sustainability to be the development of on-going and self-sustaining process which develops skilled labour, entrepreneurial capacity and value chain linkages then even when the industry goes into eventual decline those skills will be transferable to other sectors and possibly to other locations. 

If over the period where Botswana will experience both substantial diamond mining as well as develop its cutting and polishing i.e. into the 2030’s and 2040’s is used to develop those skills, entrepreneurial capacity and linkages along the value chain then a sustainable processes could evolve which will outlive rough diamond mining in the country.  However, without concrete policies to capitalise on the benefits the industry potentially creates for the country then beneficiation will fail. The outcome depends on the quality of the interventions of Botswana’s policy makers in the sector and not on inexorable forces.  Thus the answer to the question posed in the title of whether beneficiation will succeed in Botswana, the answer is a definitive yes at the moment  and an inconclusive,  maybe in the future! 

*These are the views of Professor Roman Grynberg and not necessarily those of the Botswana Institute for Development Policy Analysis where he is employed.