Industry News by Nemesis

Namibia: After the Diamond Omungong - Now What?

December 4, 2015

OPINION By Roman Grynberg

 

LAST week the great and the good of the diamond industry convened in Windhoek to discuss the future of the diamond industry in Namibia.

 

The future is not promising, to say the least. From an industry that no so long ago employed 2 000 workers it has shrunk to having barely 700 jobs, and this according to the minister of mines and energy Obeth Kandjoze.

 

Why the industry is in such steep decline is a matter of much disagreement. De Beers explained the decline as a result of decline in demand from China.

 

But demand in China could not possibly explain the substantial widespread decline for De Beers products. The economy is improving in the most important diamond market, the USA, and the eurozone economy (the second market) remains stable, if anaemic.

 

The De Beers explanation overlooks the uncomfortable fact that long before the decline in growth in China, diamantaires were walking away from the De Beers sites (auctions) in Gaborone, Botswana, in ever larger numbers because of very high prices charged for rough diamonds.

 

The decline signals a squeeze in the middle of the diamond value chain where buyers are unwilling to continue to buy diamonds at high prices that De Beers demanded. De Beers had for some time been 'the jewel in the crown' of the fading Anglo-American bottom line.

 

De Beers and its high prices had been supporting Anglo profits since the beginning of the commodity price declines that commenced in early 2014. This is no longer the case and diamond are now following the other Anglo minerals into decline.

 

If what is being experienced in the diamond industry is just a short term cyclical blip as De Beers seems to suggest, then will "beneficiation" (value addition through diamond polishing) recover?

 

Namibia, like Botswana and South Africa, all want to "beneficiate" their diamonds as well as base metals. But the problem is that the middle of the value chain whether it is diamonds or copper, is controlled by India and China. In both diamonds and copper, these producers have squeezed the margins so hard there is no room for anything other than cost effective efficiency.

 

Many things can be said about factories in Namibia, but efficiency is not what jumps off the page.

Namibia either has to accept the current situation where it cannot compete on the world market and see "beneficiation" die or fight for Namibia to win or still possibly lose. To win, Namibia needs to do hard things that are truly politically unpopular.

 

The government needs to sit down with unions and say either we change our work practices to become competitive or you will all lose your jobs. It needs to tell employers that if there is an improvement in work practices they will need to sign productivity agreements that share some of the benefits with their workers.

 

But the hardest thing is for government to say to itself that its conduct of industrial policy in the diamond industry has been inadequate to the task. There are two commercial benefits to being a diamond cutting factory in Namibia. The first is the factories are exempt from paying tax and the second is that they get access to diamonds.

 

In an industry where transfer pricing is normal and most diamonds cross three or four borders before being cut with at least one country being a tax haven, then the tax free status is of almost no commercial benefit. They make their profits in Dubai or Switzerland.

 

The other nominal benefit, which is getting access to diamonds, is also of little commercial value in the current market because most sightholders are not buying what De Beers offers.

 

If Namibia wants to "beneficiate" then the Omungongo conference was an important first step. What is needed is to sit down on a regular basis, with what remains of the polishing employers and the unions to develop an industrial policy and a plan that will give firms a reason to stay.

 

One of the traditional benefits has been a form of cross-subsidisation through the provision to local cutters of an occasional high value 'special stone' which is of such value that it can make the stay in Namibia worthwhile. But far more importantly than these sorts of measures is a longer term plan that will make Namibia competitive.

 

That is much harder and will take money, political courage and sheer determination. If the government does not bring the parties together, set up an agreed plan with real targets, devote the money needed to help raise industry productivity with continual follow-up then there will be no third Omungongo in 2025.

 

- Roman Grynberg is professor of economics, University of Namibia. The views expressed are entirely his own.

 

Source: All Africa

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