So long, South African diamond mining industry … you served us well, but the toll of extraction by BEE-centred officialdom is leading to your demise.
South Africa’s diamond mining sector is teetering on the brink of extinction. It is down to two major and eleven small diamond miners. We could have survived the downgrade of the industry with small artificial stones, but South Africa’s arcane bureaucracy and regulatory restrictions have set a trend that, if it continues, will all but extinguish a 160- year-old industry.
The discovery of diamonds in 1867 signalled the start of intense mineral prospecting. It led to the development of our mining industry and the building of our industrial economy. South Africa owes a lot to diamonds.
Petra Diamonds recently announced it was putting the Finsch mine into business rescue. The mine is situated northwest of Kimberley and employs about 1,700 people. Petra will now focus resources on the Cullinan mine near Pretoria, which is its last remaining operation. This means that, along with De Beers’ Venetia, South Africa is down to just two underground diamond mines.
The situation in the alluvial diamond sector is even worse. Since the ANC’s signature mining legislation, the MPRDA in 2004, the number of people employed in alluvial operations has dropped from around 25,000 to fewer than a thousand. Over the same period, the number of alluvial diamond mining companies has been reduced from around two thousand to just eleven. The SA Diamond Producers Organisation (SADPO) says the small-scale sector which it represents is not in decline, but rather in the final phase of demise.
There are three main culprits responsible for this collapse:
Out of business
The first to hit were the ANC’s mine licencing and diamond sales policies. They drove half the small mining operations out of business in the first four years after the MPRDA. The need for BEE partners in the small-scale sector, which has risks akin to those in prospecting, meant it was difficult to conform to the rules. On top of this, the massive amounts of red tape required for any small-scale mine operation, let alone a diamond mine, meant money and time had to be spent on compliance rather than mining. The entire business, already risky, became unviable.
In addition to this, there are arcane and expensive compliance procedures in the marketing of diamonds which place South African stones at a relative disadvantage in world diamond markets.
The second and more recent hit was the emergence of lab-grown diamonds, which ruined the market for smaller stones. One industry insider put it to me that generally it is not worth the money and effort to mine any diamond that is smaller than one carat.
The third and most recent affliction is the rising cost of mining, owing to the rocketing cost and uncertain availability of electricity and, recently, the cost of diesel.
The first of these calamities we can fix, the second we can adapt to. The third we can hope is cyclical and will be ameliorated by improved geopolitical conditions and the ANC’s slow reforms of the electricity and fuel sectors.
The red tape in the marketing of South African diamonds is sometimes shrugged off as inevitable when a small, fungible, high value commodity is in play. The possibility of criminality is high and indeed pervasive in diamond markets.
But South Africa is burdened with additional layers of bureaucratic compliance requirements which have a material effect on the viability of diamond production.
Set by the state
The journey of a South African diamond to the cutting room in Antwerp is a tortuous one. Roughly every three weeks, small-scale producers need to declare every stone they have found to the state-owned marketing company, the State Diamond Trader (SDT). The SDT has the right, by law, to acquire up to 10% of production at a price set by the state. Objections can be made if producers don’t agree with the price but the dispute resolution process is convoluted, and most producers don’t bother to fight the state estimates unless they are particularly outrageous.
Diamond-trading houses then clean and sort the diamonds into packages prepared for tender. Buyers need to be licensed and, if foreign, they also require work permits. Winning tenders then get the diamonds, pay VAT and a 5% export tax, and only then can diamonds be exported to the cutting operations, most of which are in Antwerp, Dubai, Tel Aviv or India. VAT can then be reclaimed, as with all exports, but it takes several weeks and the buyers must carry the costs, which can be high.
The mostly foreign buyers are usually not prepared to come and see diamonds in South Africa because of the time and effort this entails. They rely on local buyers, and because they can’t see the stones themselves, they inevitably pay lower prices for them because of the risk.
SADPO reckons that the convoluted sales process results in the producers realising a sales value of 15-20% less than their foreign peers, for comparable parcels of stones.
The apparent logic behind the existence of the State Diamond Trader was to encourage the cutting of stones in South Africa, part of the much loved “beneficiation” strategy. This did not really work, as South Africa’s skills base was too low and labour costs too high to make the cutting of smaller stones competitive. The SDT now serves a relatively small group of cutting companies who appear to merely take many of their discounted stones and sell them overseas themselves. What percentage of the stones they buy from the SDT and cut, as opposed to merely export, is unclear.
The state is involved in the diamond-buying business in a way that constricts the mining industry for very little gain. There is also a principled objection to this: governments should not be in business. They should regulate rather than participate. The SDT should be abolished.
Can be reversed
The terminal path of the small diamond mining sector can be reversed. The Diamond Producers Organisation has set out sensible-sounding steps to achieve this. It is asking for the removal of the 5% export levy and the requirement for buyers of uncut diamonds to hold a licence, and for an exemption of rough diamonds from VAT.
This last proposal has been raised often in the Portfolio Committee and is always reportedly “in discussion” with Treasury. A source close to Treasury says it will not budge from charging VAT.
It appears the tax bureaucrats would prefer to sacrifice the diamond sector rather than budge on their tax regime: a classic case perhaps of rules suiting bureaucrats, rather than being to the benefit of economic growth.
The demise of diamond mining may not be inevitable, but a change of heart by the ANC is required for it to continue. Failing that, we may be forced to realise that while diamonds may be forever, the diamond-mining sector may not last much longer.
[Image: PRAHANT STUDIO on Unsplash]
The views of the writer are not necessarily the views of the Daily Friend or the IRR.
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