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Posted: Wed, 15 Dec 2004 [miningmx.com] -- THE South African government is to re-impose diamond export duties as part of proposed legislation that analysts say will heap further pressure on De Beers, and possibly damage its newly unveiled ‘supplier of choice’ programme. De Beers said earlier this month that five of its seven South African mines were losing money. This was owing to the strength of the rand against the dollar which had imperilled the majority of some 8,000 jobs employed by De Beers in South Africa. Imposing a new diamond export duty was part of the proposed Precious Metals and Diamond General Amendment Bill (Beneficiation Bill) which had been sanctioned by cabinet, the minerals and energy department (DME) said today. The legislation is aimed at building South Africa’s diamond polishing and cutting industry. “This [Beneficiation Bill] is intended at improving access to rough diamonds and precious metals with a view to promoting the culture of local value addition to these minerals,” the DME said. In its official response, De Beers said it looked forward to commenting on the bill in the new year. It can expect a fight because South African authorities appear to view De Beers as an emblem of historical social and economic evils. Phumzile Mlambo-Ngcuka, minerals and energy minister, identified De Beers’ supplier of choice programme, which selects a group of polishers and cutters to whom it will sell its goods, as one of the “... barriers to local cutting and polishing”. In an emotive press release, Mlambo-Ngcuka also criticised other alleged malpractices including the domination of the South African Diamond Board by industry representatives, and the bankrolling of local licensees by foreigners where purchases of unpolished diamonds were mainly for export. Mlambo-Ngcuka also alluded to “artificial inflation of prices of economically cuttable unpolished diamonds”. In terms of this practice, the DME believes diamond miners are pricing the South African polishing and cutting industry out of the market. This is an extraordinary inversion of another practice, called transfer pricing, that has been controversially imputed to De Beers in the past. Transfer pricing occurs when diamonds are not given their true value in South Africa but subsequently sold at a much higher value in London. De Beers has been accused of exploiting this mechanism – refuted by the company – in order to avoid paying taxation. Critics say its dominance of the SA Diamond Board has allowed it to carry on this practice for years. De Beers observed that diamond beneficiation in South Africa was well ahead of other natural resources. “The proportion of South African production sold locally, by value, is 69% against 13% for platinum and 1% for gold,” it said. The number of jobs generated by diamond polishing activities in the last 12 years had grown to over 2,000 whereas similar jobs in Israel and Belgium have fallen, De Beers said. But the DME remains unconvinced. Sandile Nogxina, director-general of the DME, said further negotiation of the bill would have to be with the parliamentarians: “This is government’s final decision on the matter. It [the bill] will now be taken to parliament where it will allow for public hearings,” he told miningmx. “We are trying to level the playing field. If that’s hard on any one individual company, then so be it,” he said. Financial PressureDe Beers has been exempted from paying an export duty in terms of Section 59 of the Diamond Act. This is because the company re-imports to South Africa up to 69% of its local unpolished goods, worth an estimated $500m, after adding a selection of diamonds mined from other countries. De Beers has argued in the past that this goods selection process, known as the ‘London mix’, actually helps the South African polishing and cutting industry. De Beers has argued that the local industry cannot economically beneficiate a large portion of South African goods alone because the stones are characteristically small and better polished by the Indian market. According to De Beers’ estimates, it costs the Indian polishing and cutting industry about $6/carat to cut and polish diamonds compared to $30/c for the South African industry. Des Kilalea, an analyst for Nedcor, a South African bank, said the imposition of the export duty would be a blow to De Beers, and other diamond mining companies, including Trans Hex. “The extent that De Beers is forced to offer much locally could impact the supplier of choice strategy; basically, it will shrink the range it offers to sightholders,” he said. “Another thing not clear is whether De Beers will still bring in a London sight to the local sightholders. If it doesn’t, what will the locals who take $500m or so of rough from De Beers do? Will they import themselves? And from where?,” Kilalea said.
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