State Diamond Trader on challenges in the diamond sector

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Mineral Resources and Energy

24 November 2020
Chairperson: Mr S Luzipo (ANC)
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Meeting Summary

In a virtual meeting, the State Diamond Trader briefed the Committee on challenges in the diamond sector in SA. The presentation spoke to legal/regulatory barriers to entry and ethical concerns. Challenges were in respect to dual licence for dealers and beneficiators, no grant funding/funding policies for the diamond industry, capital intensive industry driven mostly by foreign investment, no recognised qualification for diamond dealing and manufacturing, the 80/20 rule for beneficiation licences- beneficiators have to prove they have manufactured (80% by volume in order to qualify to export the 20%, cost of manufacturing in South Africa is high, but on par with USA, Belgium and Israel, but almost double that of India, where majority of the worlds volumes are manufactured and barriers of entry for new entrants (Start up capital, office space, access to technology and etc). Further challenges related to limited to no marketing of SA diamonds and the industry at large, limited online trading platforms, no manufacturing/diamond hub- access to technology and other services, limited to no research and development done in SA with regard to the development of manufacturing equipment and tools, decline in rough diamond production (No new diamond discoveries), entrance of the synthetic/lab grown diamonds, lack of co-ordinated strategy to deal with diamond beneficiation (Fragmented approach) and outdated legislation and regulations

 The SDR presented on opportunities for growth. The producing sector of the industry has intensive strategies aimed at keeping diamonds rare. It is both a marketing and a sustainability strategy as rarity means inaccessible and willingness to pay high price for the good while sustaining profits. The growth of the industry in SA or elsewhere is a significant threat to such strategies. SA is wrestling with local beneficiation from local producers while mine life spans may threaten this, the country should plan for a sustainable industry with or without local production, through imports of rough to be able to sustain jobs and economic activity

The Committee asked if it was possible to narrow it down to which top category South Africa was globally, and what percentage of diamonds in Africa it produces. Further questions probed beneficiation, specifically regarding the relationship between the current output and the licence agreements according to the 80/20 rule, efforts made to include the majority population in the industry, how the recent admission of diamonds from countries such as Zimbabwe and the Democratic Republic of Congo, into the continental market, presented advantages to the South African diamond industry and how many of the 15 000 plus employees in the diamond sector during 2019 were black women, disabled, and classified as youth.

Members said the Zama Zamas are a huge problem and the menacing effects are not limited to stealing diamonds from the country, but the proliferation of crime in various communities where Zama Zamas are found - it was not clear from the presentation how the SDT addressed this problem, and if this crisis is a priority within the SDT’s leadership.

Meeting report

Representatives of the State Diamond Trader (SDT) and the Department of Mineral Resources and Energy (DMRE) attended the meeting.

Apologies were read for a Committee Member and for the Minister of Mineral Resources and Energy.

Mr K Mileham (DA) apologised for the technical error he experienced in the previous week. He said he could hear the Chairperson but could not respond.

The Chairperson welcomed his apology and said Ms C Phillips (DA) made the Committee aware of his problem.

The Chairperson said it was beyond anyone’s control and he too once experienced a similar challenge.

Soon Portfolio Committees had to consider approaching Parliament for alternative ways Members could continue participating in meetings amidst such technical problems. Having addressed these issues, he said the focus of the meeting was the report from SDT. This would be followed by minutes from the previous meetings, and an overview of the Committee’s proposed programme for the remainder of the year and the first quarter of 2021.

Before calling upon the Director-General of the DMRE, the Chairperson said the Committee enclosed information from the De Beers Company on some of the challenges faced by the diamond industry. As a key player in the diamond industry, its findings were a viable source of information about the state of diamond mining affairs in the country.

SDT: Challenges in the Diamond Sector in SA

Adv Thabo Mokoena, Director-General, DMRE, thanked the Committee for awarding the DMRE and the SDT the opportunity to share what was happening in the diamond mining industry. He said the industry, like most industries, was negatively affected by the COVID-19 pandemic. In 2019 it was already facing challenges which could also be traced to the 2008 crisis. In 2020 it was undergoing a recovery phase but the coming of the pandemic compromised this progress and created numerous uncertainties. The challenges faced by the industry globally were mostly in mining, manufacturing, and retail.

Since 2013, available funding for mainstream players decreased by five billion United States dollars. The demand for global jewellery return sales were expected to decline by two percent, but this worsened because of the pandemic. This extends to polished and rough diamonds whose demand dropped by 25% in 2019.

Adv Mokoena said the adoption of lockdown measures by major consuming markets at the beginning of 2020 created uncertainties in the diamond industry. There was a slow recovery when lockdown regulations were relaxed. This was made even better by the Chinese market reopening. The meeting was going to look at the challenges which existed in the South African diamond industry and the specific interventions the DMRE proposed. He handed over to the Chief Executive Officer (CEO) of the SDT.

Ms Monica Ledingwane, Chairperson: SDT, said Adv Mokoena may not have noticed she was present. She said her part in the presentation was going to be minimal considering this was her first day serving as the chairperson of the entity.

She said she was an attorney by profession and she was not going to claim to be a guru in the diamond industry. However, she was not a stranger to the industry because she worked for the Ministry of Minerals and Energy in 2007 to 2017.

The Act, which split the Diamond Board, was drafted by her and the team she led. During this period of drafting the aforesaid legislation, her team had the opportunity to interact with key players in the industry, and visited important diamond producing countries such as India and Australia. She was also once a member of the South African Diamond and Precious Metals Regulator (SADPMR) and was familiar with the production of diamonds.

Ms Ledingwane provided a background of the South African diamond mining industry. Compared with South Africa’s top six most important minerals, she said diamonds were not at all significant. She referred to a bar graph in the presentation which outlined the timeline of the diamond industry between 2015 and 2019. It said both the production of diamonds and its value, was dropping. These drops were particularly significant in the year 2019. She attributed this to market conditions.

Regarding rough diamond exports, the industry was doing well since 2014. Significant fluctuations were only exhibited in rough diamond imports. The SADPMR said the impact of the legislation did not negatively impact the export of rough diamonds. The export of polished diamonds on the other hand was showing signs of a steady and gradual decline. The most dramatic drop was in the import of polished diamonds, particularly in the 2016/17 financial year.

Ms Ledingwane said the SDT promoted beneficiation licences to improve the beneficiation sector in the industry. Slide number ten of the presentation pointed out the industry was doing well in this regard, especially in the 2018/19 financial year. Although the total number of individuals applying for diamond dealers licences was greater than those seeking beneficiation licences, the latter, in the 2018/19 financial year exhibited a modest increase. She handed over the presentation to the SDT CEO.

Mr Stanley Mnguni, CEO: SDT, thanked Ms Ledingwane for her presentation. He said the information being presented to the Committee was gathered from various role players in the diamond industry, both public and private, and academic journals. Having said this, he provided summary statistics of the contribution and ranking of South African diamonds both locally and internationally. South Africa was ranked one of the top ten producers of diamonds in the world and was among the top ten producers in Africa. As shown in the document these statistics included the Gross Domestic Product (GDP) contribution of the industry, its value, and employment earnings.

When describing South Africa’s diamond production and sales from 2017 to 2019, Mr Mnguni said 2019 was generally not a good year. There was a gradual decline in the production of diamond carats between 2017 and 2018, and a dramatic drop in 2019. Such was case with local sales of diamond carats. The year 2018 experienced a temporary rise in local sales which was cut short by a sharp drop in 2019. The export sales of diamond carats also showed a massive drop between 2018 and 2019.

To provide an overview of the environment in which the diamond industry operated in, Mr Mnguni presented a schematic which highlighted some of the factors affecting the industry. Among these were political factors. The Department was working towards addressing the legacy of apartheid. This was done through amending laws such as the Diamond Act of 1986, the introduction of the Mining Charter in 2004, and various other institutions such as the SDT and the SADPMR.

Regarding economic factors, he said the South African diamond industry lacked funding, while in other countries banks provided funds to the industry. In South Africa government seemed uninterested in this. This gloomy state of affairs in the mining industry was worsened by the high levels of unemployment in the country.

Mr Mnguni said one of the biggest setbacks to the South African diamond industry was limited research and development. The local cost of technology made it grossly inaccessible. In the same vein, advanced countries during this period moved to online diamond trading, but South Africa was still lagging behind in such innovations. The country was doing well as far as green technology was concerned. There existed legislation monitoring mining activities before and after, to rehabilitate the environment.

There was a lot of red tape in issuing of licences, and this needs to be addressed. He called for more improvements in the turnaround for Value Added Tax (VAT), which took about 21 days. This especially had a negative impact on operational costs of Small, Medium, and Micro Enterprises (SMMEs). To wrap up his overview of the environment in which the industry operated in, he said the South African diamond industry was conflict free and the issue of illegal miners (Zama Zamas) needed to be addressed. The diamond industry in South Africa did not have a code of conduct. Although it existed in other entities, the industry in general did not have it.

Mr Mnguni outlined the five elements of the diamond value chain in South Africa. These were exploration, mining, manufacturing (cutting and processing), trading, and jewellery. There was room for the South African diamond industry to explore its competitive advantage in each of the elements listed on the value chain.

He went on to discuss the industry’s five porter’s model as shown in the presentation’s slide number 24. Currently there were no new producers in the industry and the number of sight holders declined. Previously there were over 20 in the country, but currently only six were recorded for the De Beers Company which is a major role player in the industry.

There were no new entrants in the industry, especially in the beneficiation sector and this was an outcome which needed to be addressed.

Lastly, he warned the Committee of the threat synthetic diamonds imposed on the diamond industry.

Despite these challenges, Mr Mnguni listed a few opportunities the South African diamond industry could explore. These included the creation of start-up funds for local diamond manufacturing businesses (especially for SMMEs), sourcing suitable rough diamonds for polishing outside South Africa, reviewing legislation to create an enabling environment for growth, establishing an enterprise hub, and a Southern African Development Community (SADC) diamond trading hub in South Africa.

Adv Mokoena thanked Mr Mnguni for the presentation and apologised for not acknowledging Ms Ledingwane as the chairperson of the SDT. He handed over the meeting to the Chairperson of the Committee.

After battling with network challenges, the Chairperson thanked the SDT for its presentation and welcomed Ms Ledingwane to the Committee. He praised her energy and said there was hope in the entity when there were people who hit the ground running, as she did. He said when everything seemed impossible, only women could make it possible, and she epitomised this spirit. He said he admired her rich knowledge on the industry, and opened the meeting for discussion.

Discussion

Ms C Phillips (DA) thanked the SDT for the presentation. In addition to the statistics presented on the ranking of South Africa as a diamond producer, she asked if it was possible to narrow it down to which top category South Africa was globally, and what percentage of diamonds in Africa it produces.

Mr V Zungula (ATM) asked for clarity on the matter concerning the Zama Zamas. He said it is a huge problem and the menacing effects are not limited to stealing diamonds from the country, but the proliferation of crime in various communities where Zama Zamas are found. He said it was not clear from the presentation how the SDT addressed this problem, and if this crisis is a priority within the SDTs leadership.

Mr Zungula asked about the issue of beneficiation, specifically regarding the relationship between the current output and the licence agreements according to the 80/20 rule.

He also asked the SDT to shed light on some of the efforts made to include the majority population in the industry.

Mr Mahlaule asked the SDT to explain how the recent admission of diamonds from countries such as Zimbabwe and the Democratic Republic of Congo, into the continental market, presented advantages to the South African diamond industry.

Mr S Kula (ANC) said the high price of processing diamonds in the country compromises its ability to compete on an even footing with diamond producers such as India. He asked which measures the SDT implement to rectify this unfavourable position. He supports the idea proposed by the SDT to create a Southern African Development Community (SADC) diamond hub, and asked how far this initiative was from completion.

Mr T Langa (EFF) asked how many of the 15 000 plus employees in the diamond sector during 2019 were black women, disabled, and classified as youth. He asked about transformation in management, and said the SDT referred to outdated legislation as a source of some of its challenges. He asked how this legislation affected the diamond trade.

Response

Mr Conrad Van der Ross, Operations Manager, SDT, said in the 12 years the legislation was in existence, the SDT identified a few shortcomings. Among these were, diamond dealers, particularly in the export trade, faced few restrictions compared to beneficiators. For instance, according to the South African Revenue Services (SARS) and the South African Diamond and Precious Metals Regulator (SADPMR), a beneficiator had to prove it manufactured 80% of its products to qualify in the five percent exemption on exports. This was a barrier to many beneficiators because 85% of South Africa’s diamond production was not financially viable to be manufactured. As a result, dealers dominated the industry because it was easier for dealers to export diamonds. This contradicted the objective of the legislation, which sought to promote beneficiation. He referred to the disparities between rough and polished diamond exports and said the dominance of the former confirmed dealing with diamonds was easier than beneficiation.

Mr Van der Ross said making South Africa a trading hub was a viable strategy to fully exploit the advantages of new diamond producers in the continental market. This is especially considering the country’s diamond reserves are slowly depleting. Trading in this manner gives South Africa continued access to rough diamonds. This arrangement also has indirect advantages to other sectors of the economy such as tourism. In response to the question about the percentage of diamonds produced in Africa and the globe, he said he was compiling the statistics.

Mr Mnguni also believes making South Africa a regional diamond trading hub will enable it to fully realise the advantages of having new producers in the continent. He said South Africa had adequate infrastructure giving it a competitive advantage in the region. The numerous companies in the country which specialise in the beneficiation of diamonds are bound to benefit from these new diamond producers because of continued access to rough diamonds. After beneficiation, these diamonds can be sold at a higher price for both the local and export markets. Despite the slow depletion of local diamond resources, this arrangement keeps the local industry busy, and most importantly, sustains and creates employment. Angola has a similar arrangement and seems to be reaping substantial profits from it.

In response to the question on transformation in the industry, Mr Mnguni promised to provide the Committee with a document compiled by the Mining Council with all the statistics of the employment trends in the industry. He said it is beyond the SDT to deal with the problem of Zama Zamas. It is a priority and the then Deputy Minister of the DMRE spearheaded a meeting on this topic alongside the SADPMR two years ago.

Ms Ledingwane replied to Mr Kula, saying the decline in the manufacturing diamonds was not entirely due to high prices of rough diamonds, but a myriad of factors which included tax incentives, employment laws, and wages. She also suggested making South Africa a regional diamond hub as a viable solution to all these problems.

Ms Ledingwane referred to the previously mentioned visit to India, and praised the advanced diamond processing techniques she witnessed there. While it was widely known Indian companies had the capacity to cut what the South African companies classified as uncuttable diamonds, it was important to emulate the dedicated support Indian companies received from the Indian government. India had diamond hubs which were actively promoted by the government through tax incentives and concessions with employment laws. The South African government and diamond industry must approach diamond cutting with the same speed and magnitude. In the creation of a diamond hub in South Africa, tax incentives are very important. Identifying shortcomings in the legislation years after its promulgation is natural. Through implementation and unintended consequences, loopholes are bound to be exposed. The time has arrived for the SDT to review and improve the legislation.

Adv Mokoena said the DMRE was in the process of drafting an artisanal and small-scale mining policy. The objective is to facilitate licensing small-scale operations and to ensure it is incorporated into the mainstream economy.

Regarding reported illegal activities, he said the DMRE arranged to interact with the Minister of Police. This decision was made after considering there were certain elements about these activities which could only be addressed by the law enforcers. This was a matter the PPC was aware of and was very clear on what needs to be done to address it.

The Chairperson thanked the SDT and the DMRE for its responses. The Committee is expecting another meeting with the Department to discuss the financial sustainability of its entities. He asked the DMRE to invite Minister Mantashe to the Committee’s remaining meetings. The Minister was missing for a very long time and his presence will be greatly appreciated in the upcoming meetings.

The Committee went on to deal with the minutes.

Committee Minutes

The minutes of 17 November 2020 were adopted with an outstanding matter.

The minutes of 18 November 2020 were adopted with no amendments and objections.

Committee Programme for the remainder of the year and the first quarter

The Chairperson used the remaining minutes of the meeting to update the Committee on changes in the parliamentary programme for 2020. While everyone was aware the Committee was scheduled to rest its operations on 4 December 2020 but there was a condition - if it submitted its report from PetroSA, it was possible to do so on 29 November 2020 when the House was set to rise.

Recently it was announced the House was set to rise on 4 December 2020.

Prior to these changes, the Committee took the PetroSA report and the update by the Department on the issue of strategic stock out of the programme. Given the recent update on the programme, the Portfolio Committee reinstated these two items since it was already approved in the initial programme.

On the issue of strategic stock, the Department had to brief the Committee on the outcomes and implications of the Western Cape judgement which reversed the sale of strategic stock. This was why the Minister had to be present in the meeting, to discuss this matter. The Chairperson shared a document outlining the Committee’s activities for the 2021 first quarter. The issue which was tabled by

Mr K Mileham (DA) was going to be addressed in the first quarter of 2021.

The Chairperson asked Committee Members to share thoughts on the proposed programme for the first quarter.

Mr Mileham said he was happy with the proposed programme and suggested the issues over tariff determinations between the National Energy Regulator of South Africa (NERSA) and ESKOM be prioritised by the Committee. He called for NERSA to provide a briefing in the first quarter about how it sought to solve this issue. This included how it would avoid future court action with ESKOM, how it intended to improve the determination of tariffs, and finally how it intended to keep the costs of electricity low for consumers and businesses in South Africa.

The Chairperson welcomed Mr Mileham’s suggestion but reminded him, in the previous meetings it was already resolved the DMRE had to brief the Committee on both the minerals and energy licensing regimes.  Matters which are usually of priority in the first and second quarter of the year are annual performance plan, the budgets, and the annual targets of the departments. Matters concerning the impasse between NERSA and ESKOM were not extremely important.  He promised to get back to Mr Mileham once the programme was finalised.

Finally, he reminded the Committee the proposed programme was subject to change because the House Chairperson was the one who determined its focus areas.

Mr Mahlaule asked for the document setting out the proposed Committee programme be shared among Members.

The Chairperson apologised because the document was not sent and said the document was going to be distributed to the Committee.

Closing remarks

The Chairperson thanked the SDT, the DMRE, and the Committee for its attendance. He said three relatives in the Eastern Cape succumbed to COVID-19, and pleaded with everyone to follow the national regulations on the virus, and encouraged people not to be shy to reprimand relatives if relatives do not do so. Public representatives have the duty to conscientise people, and to make people aware of the damage the virus was causing. It is sad to see the older generation who hardly navigates the public space, is severely affected because of contact with the younger generation. He said everyone must play their part.

The meeting was adjourned.

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