VERBAL SUBMISSION TO PARLIAMENT
DIAMONDS AMENDMENT BILL (B27-2005)
JAMES ALLAN [INDEPENDENT INDUSTRY CONSULTANT]
11 October 2005
James Allan's CV
- Mining Engineer and industry consultant
- Top rated Diamond Analyst (Financial Mail) 2000 and 2001
- Diamond Sector no longer rated from 2001 after de-listing of De Beers
- Represented minority shareholders in the De Beers privatisation in 2001
- Achieved an extra $2 per share for minorities.
- Currently advising the diamond and mining industry as an independent consultant
Outline
- Objectives of the Diamonds Amendment Bill
- Global diamond overview
Mining
cutting and polishing
Retail markets
Structure
Costs
Mine supply
- Implications and recommendations
Diamonds Amendment Bill Objectives
- Increase access to rough diamonds for manufacturing in South Africa
- Grow beneficiation industry in South Africa to create jobs
- Increase participation through the value chain
- Make South Africa a major international diamond benenciation centre
Diamond Pipeline 2004
PMG note: Graph not included, email [email protected] for this]
Mine Supply 1998-2004
PMG note: Table not included, email [email protected] for this]
Mine Supply 2005-2010
PMG note: Table not included, email [email protected] for this]
Global Diamond Production
($:+1.5% per annum; Carats -2.5% p.a.)
PMG note: Table not included, email [email protected] for this]
Retail Sales of Diamond Jewellery 2004 ($66bn)
PMG note: Graph not included, email [email protected] for this]
Supply and Demand Reflected in De Beers Stocks
PMG note: Graph not included, email [email protected] for this]
Global Overview
- Rough Diamond Prices up 35% since 2002
- Production decline of 2.5% (carats) per annum to 2010
- Argyle production to halve by 2010
- Growth in value of l.5% per annum to 2010
- Demand growth 5-6% per annum
- Upward pressure on rough prices
- Less carats to cut and polish!
Global Share of the Diamond Industry
PMG note: Graph not included, email [email protected] for this]
SA Cutting Industry
- 370 licensed Cutters
- Not all of them are active > 120-180 in any one year
- +-2 000 employees
- Output of around $500m
In contrast to South Africa, Israel and Belgium have seen falling job numbers since 1996
PMG note: Graph not included, email [email protected] for this]
Note: China has grown from a low base over the last six years - estimated 1000/0 increase in jobs over this period
SA Cutting Industry Export (+13% per annum)
PMG note: Table not included, email [email protected] for this]
Average Value of polished by Cutting Centres
PMG note: Table not included, email [email protected] for this]
SA Cutting Industry Compared
PMG note: Table not included, email [email protected] for this]
The South African Cutting Industry is significantly Higher Cost than in India and China
PMG note: Graph not included, email [email protected] for this]
De Beers' South African Production 2002
PMG note: Graph not included, email [email protected] for this]
De Beers South African Mines Production Split (2004)
PMG note: Graph not included, email [email protected] for this]
South African Production Cuttable Value Versus Cuttable Value Per Carat
PMG note: Graph not included, email [email protected] for this]
Production Split Prices are reduced 15%
PMG note: Graph not included, email [email protected] for this]
South African Production Continued
- De Beers produces less cuttable goods in South Africa ($400m) than are cut and polished locally ($500m)
- De Beers imports diamonds to be cut and polished locally
- Reducing the cost of rough by 15% increases SA cuttable production by 50% from $400m to $600m but
- This is only $l00m (25%) more than is currently cut and polished
- Cutting centre employment +500 jobs
SA Cutting Industry Compared
- The chances of competing with India are slim (SA labour costs ten times India)
- SA labour ($1300) is cheaper than Israel (>$1500)
- Quantity of cuttable goods is governed by costs of production
- Israel cuts smaller diamonds ($1000 polished vs $1600)
- Israel employs 50%a more people but polishes 6 times more
- SA should set a target of competing with Israel
Diamonds Amendment Bill 15% Export Tax
- Applies to all diamonds
- $135m on non-cuttable diamonds
- SA diamond prices will be 150/o less than international prices
- Arbitrage will lead to "round-tripping" (as in the finrand days)
- Kimberley process will be difficult to enforce
- Mine closures
- Investor unfriendly place for diamond miners
Diamonds Amendment Bill State Diamond Trader (SDT)
- Can buy a percentage of rough but..
- 10% by carats could equal 90% by value
- SDT can pick the eyes out of the production
- How will a fair value be achieved?
- No incentive for buyers to attend tenders
- How does a SDT provide "cheap" rough to the industry and not pay lower prices to the miners?
- Why would neighbouring countries sell rough to us at a cheaper price than they can achieve in Antwerp?
If Diamond Amendment Bill is Passed
PMG note: Table not included, email [email protected] for this]
Mines likely to close:
- SA to lose 30% of production
- >300/c of cunable production will be lost
- >500/a of large mining jobs may be lost
Approving the Bill Will Achieve the Following
- Reduce the prices for rough diamonds in South Africa leading to
- Increased employment in the cutting industry +500 jobs
- Closure of mines, decrease investment into the mining sector
- Lose >5 000 jobs in the mining sector
- Decrease the availability of rough by >30%
- create false jobs as unscrupulous dealers "round-trip"
- Increase statistics on polished exports and create a false sense of achievement
- Make South Africa a major international diamond smuggling centre
Conclusion
- The South African diamond industry competes in a global market for capital and job creation
- Growth in the cutting industry requires lower costs to make more rough cuttable
- But this should not happen at the expense of the mining industry
- Compete with Israel>Productivity> labour and technology
- Then SA can become a major diamond beneficiation centre
- If the Bill is passed it will lead to "unintended consequences and result in NET JOB LOSSES"