‘Special’ stones at De Beers’ Global Sightholder Sales in Gaborone © Peter Guest
The ‘special stones’ room in De Beers sales headquarters in Gaborone, Botswana’s capital city, has a laboratory feel. At computer terminals, experts spin 3D-models of huge diamonds on their screens, trying to fit cut shapes within the giants. By the window, several million dollars worth of uncut stones, none smaller than 10 carats, sit in the southern African sunshine.
One small group stands apart; 12 diamonds ranging from a glassy, near perfect stone of 12.5 carats to a 107-carat giant. Each is worth more than $250,000. None are quite to the scale of the 1,111-carat monster, found in Lucara Diamonds’ Karowe mine to the north in November, which provided a rare piece of positive news for the diamond industry after a gloomy 2015.
De Beers moved its sales operations to Botswana two years ago, uprooting its London facility and transplanting it into a high-tech, high-security building in Gaborone. The value of stones that pass through the facility is, like so much in the diamond industry, a closely-guarded secret, but it is undoubtedly the largest of its kind in the world. De Beers’ 80 ‘sightholders’ — clients who qualify for access to the company’s primary sales channel — visit the facility 10 times a year to buy boxes of rough diamonds.
Botswana is De Beers’ heartland. The country’s mines make up 70% of the company’s global production of rough diamonds, and De Beers is so deeply embedded in the southern African nation’s economy that the two’s fortunes are closely intertwined. It is a relationship that has borne fruit for both parties.
Botswana has grown from one of the poorest countries in the world on independence in 1966 to one of Africa’s wealthiest. The diamond trade makes up a quarter of the economy, and almost three-quarters of Botswana’s exports.
However, after a record-breaking 2014, in which diamond jewellery sales rose to an all-time high of $55 billion, the diamond business has reached a difficult moment, prompting a degree of introspection about the future of the world’s second largest diamond exporter, and by inference, the future of De Beers.
Asian retailers built up their inventories last year, before China’s growth shock hit the market. The mid-stream — cutting and polishing — is also congested with a glut of rough diamonds bought in anticipation of further growth. De Beers has trimmed back production to try to ease the supply glut, and is spending heavily on marketing ahead of the vital Christmas and Chinese New Year shopping seasons.
“It’s short-term,” Philippe Mellier, De Beers’ chief executive, says in an interview in Gaborone. “Some time in 2016 we should be in a more balanced situation in terms of demand and rough and polished stocks, and we will be into a new cycle.”
Foreign exchange fluctuations have also been challenging for retailers, who typically buy in dollars and sell in local currency.
“In Japan the business is going well in Yen, but translate that at the current exchange rate, and the increase can be a decrease,” Mellier says.
“As we measure the amount of jewellery sold in dollars, obviously you are also being penalised by the dollar. Some big jewellery chains are reporting their numbers, and you can see that in local currency they are doing alright, but translated into dollars, it’s not that great.”
For Botswana, the cut in production has serious implications. GDP growth will fall to 2.4% in 2015, according to the International Monetary Fund, down from 4.4% last year and 9.3% in 2013. The government plans to release some of its $8 billion in currency reserves to stimulate growth through infrastructure investments.
The downturn, no matter how short-term it proves to be, has been compounded by unprecedented shortages of power and water in Botswana, which is used to a stability of supply that was the envy of its neighbours.
The evident fragility of the economy to these external shocks has given new impetus to the debate, mirrored in other countries that are dependent on a single natural resource, about the value that the diamond industry brings, and what more it could do to increase employment and growth in Botswana.
The Prince of Mines
Do not lose sight of security, or let security lose sight of you. It tends to get difficult to get out if that happens.
Dust from the 3pm blasting at Jwaneng hangs over the horizon for nearly half an hour. In the maintenance hangar, the vast 300-ton Komatsu dumper trucks are disassembled and serviced, their components strewn around the yard like a giant’s Lego set. The pit itself measures 2km by 1.4, and from the ‘White House’ — the control room high on the rim, they look like toys as they kick up dust on the slopes below.
“Do not lose sight of security, or let security lose sight of you,” Boikhutsu Dube, the mine’s head of security deadpans. “It tends to get difficult to get out if that happens.”
More than a billion tonnes of waste rock and dust has been pulled from the mine and piled up beside it. Over the next decade the mound will double in size, as Debswana cuts deeper and wider in search of more diamonds.
The main pit at the Jwaneng diamond mine, Botswana. © Peter Guest
Discovered in 1972 and opened a decade later, Jwaneng—dubbed ‘the Prince of Mines’—is the richest diamond mine in the world, and an asset central to the growth of De Beers and Botswana.
As Jwaneng’s managing director, Albert Milton says: “This asset has been very pivotal to the development of our country.”
That development has been rapid and sustained. Botswana is one of a handful of upper middle income countries in Africa, and one of an exclusive club of economies that has escaped the ‘resource curse’ of bad governance, political turmoil and conflict. In a region where corruption and the mining sector have often been closely linked, Botswana has emerged as relatively transparent, fighting graft and directing resource revenues into public services.
It has been a story of “well-managed good luck,” according to Keith Jefferis, a former deputy director of the Bank of Botswana, who now runs an economic consultancy in Gaborone.
However, he warns, for all of its prosperity and stability, Botswana’s sustained diamond boom has not been translated into genuine competitiveness or employment. Public services are more advanced than in most of Sub-Saharan Africa, education is free, and yet unemployment has remained stable at around 18% for years; youth unemployment is considerably higher.
Mining is capital-intensive and highly automated, and its ability to create jobs rarely matches its contribution to exports or growth. De Beers directly employs around 8,000 people in Botswana, although many more are engaged in its supply chain and support businesses. Moving its sightholder sales operation to Gaborone has created jobs in supporting industries, including hospitality for buyers, security and logistics, but the impact is limited in scope.
The question of how to turn mineral wealth into diverse, competitive economies has haunted development experts for decades. There are few examples of resource-dependent nations that have successfully broken away from their primary export, particularly in Africa, where the end of the commodity super-cycle has poured cold water on a decade of optimism and runaway economic growth.
Many analysts hope that Botswana, with its reputation as the ‘best managed country in Africa’, might have a unique opportunity to lead the way. Beneficiation — the addition of value to the rough diamonds — could be the key.
In the short-term, the government’s aim is to capture just a small slice of a business that employs around 600,000 people in India — more than twice the entire of Botswana’s private sector employment. In the long term, the transfer of technology and skills could allow the country to break away from its dependence on diamonds altogether, by creating new industries and expanding under-developed ones, such as tourism, IT and telecoms.
“I think the single most important question is: what is it that Botswana hasn’t done, which if it did, would bring these jobs? Even just a fraction of them. That for me is the game-changer,” says Sheila Khama, the director of the African Natural Resources Center at the African Development Bank and a former managing director of De Beers in Botswana.
The Botswana government has been pushing beneficiation as part of its economic development strategy for the past eight years, using its position as a leading producer to force buyers to move some of their factories to Gaborone, creating higher-skilled jobs for the country’s young, highly-educated and under-employed population.
The ‘sight’ boxes sold at the De Beers sales in Gaborone are divided into local sights and international sights, the latter being aggregated from the company’s Namibian, South African and Canadian mines, the former exclusively from mines in Botswana. To qualify for a Botswana sight, buyers must set up a processing facility in the country.
The policy has been a qualified success. At its peak in 2014 there were 21 factories, employing around 3,700 people. Since then, two factories have closed and others have scaled back, cutting in total nearly 1,000 staff. It is a regional problem. In South Africa, the industry has all but collapsed, with more than 4,000 of a total 4,500 jobs lost. In Namibia, just three factories remain open.
As Jefferis says: “It was relatively easy for Botswana to get those factories to come in, but the question is, how do you keep them here?”
KGK Diamonds’ factory in Gaborone, Botswana. © Peter Guest
When this industry started, no one would talk to anyone about anything. Now, people are more relaxed. They’re talking to each other. They’re listening.
“I visited a single client in India that employed more people than the whole industry in Botswana,” Tshebetso Teekay Kgatlwane says as he steers his SUV around the road that circles Gaborone’s Diamond Technology Park, on the way to the first new factory to open since the downturn began. The DTP is a dusty industrial estate, ringed by high fences and security posts. A helipad on a tower juts out of the courier’s office in the center, and signs around the perimeter warn of the penalties for trespassers.
As a broker for I Henning & Co and a former director in the government’s planning and land agencies, Kgatlwane — known simply as ‘Teekay’ — is a Mr-Fix-It for the global diamond industry in Botswana, smoothing out the speed bumps for companies looking to secure licenses, premises or access to policymakers. He counts almost all of the De Beers sightholders in town as clients, and has watched the cutting and polishing industry evolve from a small, closed business to one that is far more comfortable with its place in Gaborone.
“When this industry started, no one would talk to anyone about anything,” he says. “Now, people are more relaxed. They’re talking to each other. They’re listening.”
Koi carp circle in an ornamental pond outside KGK Diamond’s factory on the edge of the Diamond Technology Park. The company, which opened its hangar-shaped Gaborone facility in September, is either an outlier or a sign of a turnaround in the industry. Inside, the atmosphere is hushed as banks of workers, a mix of locals and Indian expats, hunch under spotlights to work on stones, which arrive once a month from De Beers in orange Brinks courier bags, and are tracked through the system using a complex mix of annotated envelopes and software.
Employing around 85 people, 55 of whom are local Batswana, the company is perhaps an exemplar of beneficiation, attracted by the security of supply offered by the Botswana sights. Each highly skilled worker from India — who typically have more than 10 years’ experience in the industry — trains several locals. Batswana are involved at every stage, from the preliminary planning and ‘bruting’ of the stone, all the way up to the highly technical final stages. The company is now planning to expand its factory, taking the total employment up to 150 people, taking advantage of the 200-300 local diamond cutters who are out of work, according to Sandeep Kothari, the company’s managing director.
“The advantage of us going in at a difficult time is that quite a few other factories have closed down, and there is a lot of retrenchment over there. We do have our own training set up, but we were overwhelmed with applications by skilled workers who had been retrenched by the other factories,” Kothari says. “We were in an advantageous position.”
KGK’s investment was a long-term view on the recovery of the industry globally, and on Botswana as a hub for the polishing sector. The proximity and sustainability of supply from the Botswana sights, as well as supportive legislation, drove the decision to set up shop while others were scaling back.
“Botswana as a country holds huge potential for the diamond industry. Because raw material is a critical aspect of the mid-stream, to which we belong, it is important to stay in a position where the availability of raw material is uninterrupted,” Kothari says.
While KGK is optimistic about the future of the business, Kgatlwane is less convinced.
“In terms of cutting and polishing, I don’t see us going beyond the numbers we have here,” he says. “It would be nice if we can maintain it.”
Kgatlwane believes that a more realistic target is increasing the number of jobs in the supply chain and supporting industries — from security through to hospitality for the sightholders and other industry players who fly in on a constant cycle. While it is politically important to be seen to push for greater ownership of the industry, he says, the country is struggling to be competitive in labour costs and skill levels with India.
“Remember, Botswana is a new place,” he says. “In India, you can find guys on the street with all the qualifications. Here you are starting from scratch.”
A worker inspects rough diamonds at De Beers’ Global Sightholder Sales in Gaborone © Peter Guest
Diamonds Aren’t Forever
The country’s pitch for diversification and beneficiation have not been helped by the crippling water and power shortages, which have hit businesses at all levels of society, including those within the diamond industry and its supply chain.
As Binu Philip, the managing director at Laurelton Diamonds, Tiffany’s local subsidiary, says: “You can’t measure it, but if your employees are suffering, it will show up in productivity.”
Combined, the slowdown and the shortages have created a quiet but profound sense of disquiet among many in Botswana, who have become accustomed to sustained growth and progress for close to 50 years.
The country is not experiencing anything like the depth of turmoil of other countries in the region who have depended on commodities whose prices are now slumping, but in government and in industry, people are now motivated to ask how much more the diamond industry could contribute, and what happens when the supply of stones runs out?
This deliberation could lead to the government pushing for a new deal with its largest commercial partner.
“We have a commodity to sell. They have lots of technology and experience. They have created wealth out of nothing. We respect that. But also, we have created them,” says Onkokame Kitso Mokaila, Botswana’s minister for minerals, energy and water resources.
When the partnership began nearly 50 years ago, Botswana needed the skills and expertise of its investor, Mokaila says. Today, that balance of power has shifted.
“De Beers would not be where they are without us, and we would not be where we are without them. The partnership must mature.”
There is a lot of talk, a lot of plans to go beyond diamonds, but now we need to see some action. We can help as much as we can, but we’re only De Beers.
Botswana is not like South Africa, where the relationship between business, organized labor and the government has turned toxic; nor is it like Zambia, whose dependence on copper has left it bereft of options and shedding thousands of jobs. The unique structure of De Beers’ relationship with the government also creates a degree of stability that other companies and countries may not have.
The government of Botswana has a 15% equity stake in De Beers, and most of the diamond mining in the country is run through Debswana, a 50-50 joint venture between the two parties. Eighty thebe in every pula earned by Debswana goes into the government coffers — a far better deal than most countries get for their resource revenues.
“With the government here we have been through a few crises. It is a cyclical business, but there is always an expectation that the following year will be as good as the previous year, but it is not the case, you need to sit down and talk about that,” De Beers’ Mellier says.
“The government is quite mature about it, because we have been through some big crises together. It’s not good news. It’s not good news for De Beers also. But it’s quite important to understand that we have a common understanding of how we read the market and how we’re going to react.”
This relationship does not, however, absolve the company — and the industry at large — from building social pressures. As the biggest and most visible company in Botswana, De Beers is a lightning rod for the expectations of a young population.
“The youth, the next generation is asking: what’s going to happen? They are asking the question, and they require an answer,” Mellier says. “There is a lot of talk, a lot of plans to go beyond diamonds, but now we need to see some action. We can help as much as we can, but we’re only De Beers.”