Even the news that the second-biggest diamond ever found was discovered beneath its soil cannot hide the decline of Botswana’s diamond industry.
A desert country with a small population and a valuable but finite natural resource – Botswana must move on to other sources of revenue.
Last month, the Canadian mining firm Lucara Diamonds said it had found a monster gem, second in size only to the Cullinan, found in South Africa in 1905 and which is now set in a crown belonging to the Queen of England.
William Lamb, the chief executive officer of Lucara Diamond says the 1,111-carat diamond was found at its Karowe Mine, in the northern part of the country. The company will hold out for the highest possible price for the stone, he says, “higher than the current estimates that people are putting out there, which are north of US$60 million”.
In spite of the magnificent find, Botswana’s diamond industry is in trouble and by some estimates its reserves may run out in as little as 15 years.
Gem exports account for about a third of the country’s income, which puts the country on a ticking clock to diversify.
“They have just had so much easy money for such a long time,” says Charles Wyndham, a former sales director at De Beers and the founder of WWW International Diamond Consultants. “They are perhaps a victim of having all their eggs in one basket.”
According to Reuters, the value of rough diamond exports from Botswana’s mines fell 15 per cent in the first six months of 2015 to $1.7 billion.
It may be a sign of the government’s desperation that this month it quietly issued a licence for gas exploration in the ecologically sensitive Kgalagadi trans-frontier park, according to Britain’s Guardian newspaper.
As with other maturing resource economies, Botswana is faced with opening up previously untouchable nature reserves, while its miners have to go deeper and take bigger financial risks.
In 2014, the UK-listed Gem Diamonds opened the country’s first underground mine, the Ghaghoo operation, smack in the middle of the Central Kalahari Game Reserve.
Apart from the sensitivity of its location, the mine also presented a unique technical challenge; the Khalahari desert has the consistency of beach sand, rather than the hard rock with which most operations must contend.
In building the mine two contractors were crushed to death when sand flooded into a support chamber in which the men were working. The deadly collapse delayed the mine’s launch by almost a year.
“Our mines are becoming bigger and deeper and costs are rising. Our greatest challenge is to remain competitive,” says Balisi Bonyongo, the managing director of Debswana Diamond, a joint mining venture between Botswana’s government and De Beers.
Debswana is currently the world’s largest diamond supplier by sale value and is responsible for most of Botswana’s exports. All in all, diamonds have been very good to the landlocked country of just over a million people.
“Botswana’s macroeconomic achievements are truly remarkable,” the World Bank says.
“From independence in 1966 to the late 1990s, Botswana was one of the world’s fastest-growing economies, comparable only to China, with average annual GDP growth above 10 per cent.” A stable democracy, it has avoided the “resource curse:” so many other nations have fallen victim to – dictatorship under a tiny, rapacious elite. Its gems are traded openly around the world, free of the stain of blood diamonds used to fund violence.
The country has tried hard to add value locally. It has encouraged cutting and polishing firms to set up and even talked De Beers into moving its entire “sightholder sales” facility — where the company’s 80 major customers come to inspect and buy boxes of diamonds 10 times a year – to Gaborone, Botswana’s sleepy capital.
Yet, major success in this regard has been elusive. This year the diamond cutters MotiGanz and Leo Schachter laid off 150 workers.
Another, the Teemane Manufacturing Company, owned by Diarough, shut down completely, with the loss of about 320 jobs in the village of Serowe, where it was the only employer of significance.
Ultimately, Botswana has failed to compete against other diamond trading centres such as Dubai and Singapore, which are better located being closer to their main markets.
Gaborone’s role in the diamond trade may even facilitate the growth of rivals such as Dubai, as it puts the UAE midway between Botswana, where De Beers now sorts and sells its diamonds, and India, where most of the world’s polishing is done.
Dubai also has a much better network of airline connections to the rest of the world; much of Botswana’s international links are still via South Africa, which is itself a long-haul destination to much of the world.
Furthermore, Dubai also has also become an international finance centre, which has embraced diamond trading and provided much needed capital to the industry.
Botswana does have a few things going for it, however. Recently, the country’s president Ian Khama said the country would use some of its reserves to pursue internal investment, much as the UAE has done with its oil wealth.
“We have realised our economy is going to stagnate,” Mr Khama said in a televised speech.
“The time has come for us to make bold decisions and implement these new projects that will boost our economy.”
The country has about $8.5bn in its coffers. It is also a world-class tourism destination drawing thousands of visitors each year to the Okavango Delta and other wilderness areas.
What it does not have, though, is time.
Unless the government can come up with a viable plan to redraw its economy in the relatively near future, and find a way to replace declining exports, it risks losing years of work building itself into what is arguably Africa’s most successful state.
De Beers no longer a player in Kimberley
Last week, the diamond firm De Beers quietly sold off its last mine in Kimberley, the dusty South African town that laid its foundations – and those of the gem industry – more than a century ago.
Kimberley was founded when a farmer stumbled across a “pretty rock” in the 1860s, and from it emerged De Beers, the company that would create the modern diamond industry.
Established in 1888 by the arch imperialist Cecil John Rhodes, for more than a century De Beers ran the industry as a one-company cartel, tightly controlling the price and volume of stones released on to the market.
It was De Beers’ marketing arm that came up with memorable slogans such as “diamonds are forever” and the arbitrary rule of thumb that a young man should spend a month’s salary on an engagement ring for his betrothed.
Today, it still controls a third of the global diamond trade, even if it is no longer the force it once was.
Following Rhodes’ death at the turn of the 20th century De Beers fell under control of the Oppenheimer dynasty.
The Oppenheimers exited the company in 2011, selling their majority stake to another of their creations – Anglo American.
Anglo was set up by the family doyen Ernest Oppenheimer in 1917 and eventually grew into a sprawling conglomerate from its base in Johannesburg with interests in sectors ranging from diamonds and gold to iron, paper and printing – anything it could get its hands on.
Anglo listed in London in 1999, and was big enough to power onto the FTSE100, the UK’s primary trade index.
Today, Anglo is in sorry shape.
The rout in commodities – particularly in its platinum division where the company produces 40 per cent of global supply – has seen its share price fall 72 per cent this year alone. As a result, it is cutting loose about half its 50 or so mines, shedding 85,000 jobs along the way.
“Quite frankly we didn’t expect the commodity price rout to be so dramatic and in all likelihood the next six months are going to be even tougher,” says Mark Cutifani, the company’s chief executive.
“We have pulled costs out of the business, but we need to do more because prices continue to deteriorate.”
Probably the only thing preventing Anglo from being snapped up by a rival is that potential suitors such as Glencore and Rio Tinto, two of the biggest commodity firms out there, are also struggling with bloated supply amid waning demand.
It has also been suggested that Anglo should sell De Beers, which could raise as much as US$10 billion, analysts say.
“De Beers would likely attract a premium valuation,” says HSBC. “A partial sale through IPO could be, under the right market conditions, a powerful price-discovery mechanism in addition to being significant cash boost.”
This would more than cover the $3bn Anglo is seeking in order to cover its losses.
However, the history between the two companies and diamonds collectively adds up to two centuries; even with the market for gems languishing, it is unlikely the pair will go their separate ways for now.