Diamonds Amendment Bill: hearings

Meeting report

MINERALS AND ENERGY PORTFOLIO COMMITTEE
11 October 2005
DIAMONDS AMENDMENT BILL [B27-2005]: HEARINGS

Chairperson: Mr E Mthethwa (ANC)

Documents handed out:
United Diamond Association of South Africa presentation
United Diamond Association of South Africa submission
ABT Diamond Cutting Works and Steinmetz presentation
Diamond Marketing Reform in South Africa presentation
Diamond Contractors Chamber of Business presentation
James Allen (Diamond Analyst) submission

SUMMARY
The United Diamonds Association of South Africa, the ABT Diamond Cutting Works and the Diamond Contractors Chamber of Business presented submissions to the Committee on the envisaged implications of the Diamonds Amendment Bill. Issues such as greater accessibility to rough diamonds and enhanced skills levels were discussed. Presenters focused on the relevance of the proposed State Diamond Trader and suitable concession requirements to foster industry expansion. Local beneficiation initiatives should be vigorously pursued to facilitate job creation. Submissions highlighted concerns that hindered the industry such as export duties, exchange rate fluctuations and value-added tax. A consistent supply of rough diamonds to cutters was needed to maintain economic viability. Equitable access to rough diamonds had to be promoted.

Members asked various questions including the composition of the attendant organisations' executive committees and staff complements, the envisaged impact of the Bill on small scale operations, the marketing of South Africa as the place of origin of rough and cut diamonds, Black Economic Empowerment initiatives within the industry, the proposed role of the State Diamond Trader, training programmes and the promotion of local beneficiation activities.

The Committee heard briefings by members of the Blinklip Study Group (representing 69 small scale miners), Khadima Mining, an Independent Industry Consultant and Diamond Analyst, James Allen, and the Free Market Foundation. The presenters applauded the objectives of the Bill stating that it would have far-reaching consequences for the diamonds and precious metals sectors in terms of the more direct role in the downstream beneficiation of those materials, but some noted concern over the fifteen percent export tax which the Bill proposed; stating that it could possibly have adverse effects on the export of diamonds and precious metals from South Africa.

Members welcomed the enlightening comments made by the presenters and noted the recommendations as well as criticism of the Bill, stating however that presenters’ criticisms should take into account the key objective of the Bill being that of ‘transformation’ in a country where economic marginalization was the order of the day.

MINUTES
United Diamonds Association of South Africa presentation
Mr E Malakoane (Chairperson) provided background on the origins and rationale of the organisation. The Association was targeted at previously disadvantaged communities to assist in transformation activities. Various issues to be addressed were submitted to the Committee such as the need for greater representivity and enhanced skills levels. A State Diamond Trader should be formed to distribute diamonds to smaller players in the industry. One license should be issued for cutting and dealing and cutters should not require a permit. Section 58 of the original Act should be re-instated in the interests of industry effectiveness. A certain percentage of local diamonds should be made available to local beneficiation initiatives. The skilled labour force had to be increased by the Departments of Minerals and Energy and Labour to promote industry output.

Discussion
The Chairperson sought clarity on the nature of the Association and the composition of the executive Board and staff complement.

Mr Malakoane replied that the organisation consisted of 175 paid members with specific focus on the previously disadvantaged in order to improve access to the diamond cutting industry. Members wanted increased access to rough diamonds. He appealed to the Committee to assist in the transformation of the industry.

Adv H Schmidt (DA) asked when the Association was formed and whether an executive committee was in place. He asked what envisaged impact the legislation would have on small-scale operators within the industry and their access to diamonds.

Mr Malakoane responded that small-scale miners and cutters would be put out of business thereby adversely affecting the Association. Significant financial resources were needed to acquire permits that limited accessibility. The Association was formed in 1997 and amalgamated with a white-dominated organisation in 1998. The Association intended to promote beneficiation of diamonds. The Board consisted of 15 members including a Chairperson, Vice-Chairperson and Treasurer.

Ms N Mathibela (ANC) asked for detail on the racial breakdown of the Board.

Mr Malakoane responded that the Board consisted of two women and 13 men comprising 2 whites, 4 coloureds, 2 Indians and 7 Blacks.

Adv Schmidt reiterated that the Association's executive committee had to be properly constituted in order to ensure adequate representation of the industry.

ABT Diamond Cutting Works Presentation
Ms F Buthelezi (Director) stated that the company operated in seven countries with 14 offices. Detail was provided on the marketing component of the group. ABT was a subsidiary of the Steinmetz Group and specialised in the "fancy cuts" of diamonds. A breakdown of the international diamond industry was provided including reference to Israel and Belgium as South Africa’s main competitors. Concerns within the South African sector were elucidated. The group proposed that Export Duty be waived on beneficiated diamonds. Many diamonds were exported into South Africa for beneficiation. The strong rand, value-added tax and the restriction of free trade activities were cited as major concerns. The Regulator should judge each deferment of payment of export duty case on its merits. Beneficiators should be allowed to sell or export rough diamonds known as fragments. The new regulator should control the issuance of permits to sell or export rough diamonds. More detail was needed on the State Diamond Trader regarding proposed regulations. The government should fund the State Diamond Trader. The industry needed a consistent supply of rough diamonds to maintain adequate growth.

Discussion
Mr Morkel (DA) noted the extensive marketing component of the group but asked whether South Africa was promoted to an adequate extent within the campaigns. He asked for detail on Black Economic Empowerment investment within South Africa and how the group facilitated broad-based economic empowerment. Clarity was sought on steps to promote transformation of the industry.

Mr C Molefe (ANC) asked whether the training process would be accelerated as part of the proposed legislation’s intention to restructure the industry. The role of beneficiators in selling rough diamonds had to be clarified.

Adv Schmidt sought detail on the financial consequences of the Bill for the industry as a whole. More information was needed on the State Diamond Trader. The percentage of the diamonds to be traded had to be clarified and the proposed impact on the industry had to be explained.

Ms N Mathibela (ANC) asked for detail on the BEE partnership component within the group. The use of cheap labour in China could be construed as the exportation of employment opportunities. Proposed export duties should compensate for the lack of jobs.

Mr Temkin (Director) replied that rough stones were not manufactured in the East but in the Southern African region. ABT contained a 40% empowerment component. The manufacturing of "fancy cuts" in South Africa had been set up to supply top international jewellers. The industry did not consume much local products and was therefore isolated from national policy to some extent. Diamonds were also sourced from overseas markets. ABT existed as a client of De Beers since 2000. Each deferment case for exemption from export duty should be judged by the new regulator on its particular merits. Laser technology could assist in the local beneficiation industry. Beneficiators should be allowed to dispose of rough diamonds at their discretion. The disposal of fragments should be controlled by the regulator in accordance with clearly stipulated rules.

Ms Buthelezi stated that the group was 40% women-owned and was part of the Steinmetz Group.

Mr Molefe sought clarity on current training and skills development programmes.

Mr Morkel asked for figures on the extent of BEE shareholding within the group and the level of ownership by staff. He asked whether South Africa was marketed within the Group's PR activities.

Ms Buthelezi declared that the Group currently had diamonds displayed in the Natural History Museum in London with clear reference to their South African origins. South African cutters had been involved in the placing of diamonds on F1 racing helmets. Approximately 2300 cutters were currently employed by master cutters in South Africa. Various schools were in place to train cutters and in-house training programmes were vigorously applied. An expert was utilised within the training programmes to achieve high standards of excellence.

Mr Temkin asserted that the training programmes were ongoing concerns and bonus systems were in place to motivate employees and contribute towards welfare of workers.

Ms Buthelezi added that the F1 helmets would be returned to South Africa on completion of the current racing season. An auction would be held for the benefit of children's charities.

Mr Molefe asked whether job creation targets were in place in accordance with specific timeframes. The Bill would facilitate an increase in the number of trainees.

Ms Buthelezi stated that the introduction of laser technology into the cutting industry negatively affected job creation. The industry required high levels of precision with a low rate of error. The labour costs of skilled workers had to be considered.

Mr Temkin stated that the cutting industry could grow in South Africa but Members should remember that the industry was not labour intensive. Further automation processes would be used for smaller diamonds. In general, the Bill would help the industry to grow. Beneficiators relied on a constant supply of rough diamonds to maintain economic viability. Any change in the percentage of supply would adversely impact on business stability.

Diamond Contractors Chamber of Business Presentation
Mr L Phillips (Chairperson) declared that the principal aim of the Diamonds Amendment Bill was to promote equitable access within the diamond value chain and in particular within the small marine mining industry. Two dominant players controlled access to the small marine mining industry, namely Alexkor and the Trans Hex Group. Small miners were expected to be profitable on 48% of the income with rising production costs. Shallow water concessionaires did not have the expertise or the means to mine for shallow water diamonds. The Chamber supported the Government’s efforts to promote equitable access to rough diamonds. The local cutting industry could not compete internationally in terms of price, scale and quality. Many small miners had been forced out of business. Adjacent communities should benefit to a large extent from the diamond resource. The shallow marine mining industry had to be promoted within Port Nolloth and Alexander Bay.

Discussion
Mr Molefe noted that the Bill sought to improve access to diamonds for the previously disadvantaged. The government should investigate any claims of manipulation by large industry players. He asked whether the Chamber promoted small and medium enterprises within the industry.

The Chairperson asked whether the Chamber felt that the Bill would marginalise Port Nolloth and Alexander Bay as the smaller operations would require a certain percentage of rough diamonds to remain economically viable.

Mr Phillips asserted that the Chamber was committed to the expansion of equitable access to rough diamonds. Small companies were at a disadvantage in terms of profit generation and further export duty requirements would add to this problem. The Bill should promote wider benefits for adjacent communities of diamond resources by facilitating beneficiation processes.

Ms Mathibela asked for clarity on the gender breakdown within the industry and noted that the Minerals and Petroleum Resources Development Act would be amended to provide greater assistance to smaller operations.

Adv Schmidt asked for clarity on the position of the Chamber regarding the nature of the problems experienced by small cutting and mining operations. He asked whether the difficulty lay with access to diamonds or the inability to obtain significant profit margins.

Mr Morkel asked which towns the Chamber represented and which regions were a priority. He asked whether the Chamber wanted to assuage the presence of a large cartel within the industry.

Mr Phillips replied that the involvement of women within the industry was a recent development and the training of additional female workers would continue at the same rate. The significant investment needed by contractors such as the acquisition of concessions restricted the accessibility of smaller players into the industry. The Chamber represented 72 small marine miners currently contracted by Alexkor. The Chamber operated in the West Coast region.


Blinklip Study Group Briefing
Ms Michelle Pirie of the Blinklip Study Group presented the group’s comments on the Diamonds Amendment Bill. The aim of the presentation was to point out that the Bill did not take into account the nature of small-scale mining. Secondly, it aimed to illustrate the potential impact of the Bill on small-scale mining operations, surrounding communities and local government.

The presenter described the groups’ general characteristics as that of sole proprietors/family owned and managed enterprises in which mining occurred at the subsistence level or an ad hoc basis. The average size of the farms utilized for mining purposes was between 20 ha and 1000 ha. They utilized basic tools (without mine shafts) which they estimated employed between 2 and 50 persons. Also, the group was subject to Mining and Agricultural statutes.

The group noted factors which negatively affected small-scale miners as the MPRDA, the strength of the Rand and the possible unintended impact of the Diamonds Amendment Bill.

Ms Pirie explained that the impact of the proposed amendment Bill would:
Result in a scaling down of operations,
Job losses
Increased poverty since the main breadwinners of families in communities would suffer unemployment as a result,
The adding of further pressure on an already compromised local community.

The group recommended that the government review the process of beneficiation so as to ensure that it would contribute to competitiveness in world markets without compromising price and therefore small-scale operations. Further, that the government commission an in-depth study regarding the World Polished Diamond Market and alternative methods to increase competitiveness by means of competitive manufacturing costs and not trying to become competitive by providing diamonds at a lower purchase price.

Discussion
Adv H. Schmidt (DA) asked what the financial implications of the Bill would be for the average small-scale miner. Mr Pieter Marx (Director: Blinklip Study Group) responded that the Bill would have negative financial implications for the cashflow cycle of the small-scale miner. He elucidated that the average weekly production of diamonds often might not cover all costs for that week, hence the small scale miner might have to rely on the diamond production of the following week to cover these costs. However the Act would not allow the small scale miner to use this additional production of diamonds to pay those costs.

Mr S. Louw (ANC) asked why Ventersdorp used different production methods as opposed to other mines. Secondly, he criticized the lack of developments in the areas of Wolmaranstad, Ottosdal and asked with regards to the Environmental Management Plan, why they were failing to rehabilitate these areas. Mr Marx responded that the gravel in Ventersdorp was much more compressed, hence the different production methods. He explained that each town used different types of production methods because of the different types of gravel. Secondly, he said that the unrehabilitated areas were caused by previous Acts under the old regime. However, they were not proud of the lack of rehabilitation in the area, and admitted that there was in fact much work to be done in the area.

Mr C Olifant (ANC) sought clarity on how the 15% export duty would impact on job losses for small scale miners. Mr Marx replied that as small scale miners, due to operational costs, they simply could not bear additional unnecessary costs, since they could not afford to subsidise the additional 15% on their own. Hence it might result in job losses.

The Chairperson enquired what new innovations were proposed in terms of the establishment of a commission for polished diamonds. Ms Pirie said that more research was required for establishing what impact the Bill would have on small scale miners as well as proposing that more research was necessary to investigate the different methods of advancing beneficiation.

Ms Ngaleke (ANC) sought clarity on whether the Blinklip Study Group was in fact a big/small scale miner. Mr Olifant reiterated his question and asked to whom the Blinklip Study Group preferred to sell their diamond production to. Ms Pirie replied that Blinklip Study Group was not a company, instead it was a group of 69 small scale entities. She added that some diggers were indeed very small and further that she was prepared to forward to the Committee a breakdown of their group. Mr Marx responded to Mr Olifant’s second question in saying that they sold diamonds to the highest bidder since they were interested in the beneficiation process and that they further supported the localized manufacturing of diamonds in South Africa.

Mr Morkel enquired in what ways the study group felt the 15% export tax should be applied for specific purposes other than that which it was intended for. He asked whether the group felt that it should be spent towards the rehabilitation of mined areas. Mr Marx responded that they agreed that that was a good suggestion, and that they would like to see rehabilitation going back to the communities. However currently their major concern was survival.

Khadima Mining Briefing
Ms Khapamesi Maleke and Mr Dan Kempel (Directors: Khadima Mining) presented their briefing on Diamond Marketing Reform in SA to the Committee where they described their company as a black company owned jointly by emerging local entrepreneurs and the Leviev Group. Their objectives included beneficiation of SA mineral resources, especially diamonds, promotion of employment, skills transfer, and development of urban and peri-urban communities. The Leviev Group was the largest diamond manufacturer (by value) in the world with an annual turnover of US$2.5 billion.

Ms Maleke attributed the SA diamond market imbalance to local manufacturing being dominated by sight holders who were monitored by a dominant player and was guided by its interests which were to maintain control over the diamond pipelines. She expressed support for the Bill as it would contribute to an increase in the local manufacturing industry, thereby turning SA into a major player in all phases of diamond production, generating economic growth, investments in training and skills transfer. The Bill would also assist emerging diamond polishers and jewellery manufacturers through Black Economic Empowerment (BEE). She added that the Bill would grant equitable access to rough diamonds and SA would be able to utilize local branding in addition to increasing the country’s revenues from concessions, exports and corporate tax.

Khadima Mining proposed the establishment of diamond cutting and jewellery manufacturing factories in both economically deprived rural areas and urban centers with total new jobs estimated at just under 2000 specifically targeted at youth and women. This project would yield an estimated US$ 43 million per annum, with direct foreign investment estimated at US$ 16 million. They highlighted the critical success factors as being that of the establishment of an independent professional state trading authority, with immediate control over rough diamonds and the development of the local market. They proposed the speedy implementation of the Bill to guarantee sustainable supply for local manufacturing.

Discussion
Mr C. Kekana (ANC) commended the presenters on the briefing and their objectives of giving back to the local community.

Adv. Schmidt sought clarity on why the costs of diamond production in India were less than that of South Africa. Mr Dan Kempel (Director: Khadima Mining) responded that polished stones in India costs less than that of South Africa since India’s stones were cheaper than they were in South Africa. He elucidated that the cost to polish a stone in India was $10 per carat to polish, whilst in SA, it cost $14 per carat.

Ms Ngaleka sought clarity on whether Khadiman Mining had training capacity to ensure skills transfer and secondly what impact the export tax would have on the local industry. Ms Khapamisa replied that they had the training capacity to ensure adequate skills transfer. Mr Kempel responded that the export tax would protect the local industry.

James Allen (Diamond Analyst) Briefing
Mr James Allen (currently advisor to the diamond mining industry as an Independent Consultant) applauded the objectives of the Bill which aimed to increase access to rough diamonds for manufacturing in South Africa as well as grow the beneficiation industry in SA and create jobs, thus making SA a major international diamond beneficiation center. He provided a global overview of the mining, cutting and polishing retail markets stating that in terms of rough diamonds, prices had increased by 35% since 2002, whilst production had showed a decline of 2.5% (carats) per annum.

Ina comparison with other diamond producing countries, Mr Allen stated that the chances of competing with India were slim since SA labour cost 10 times that of India. But, SA labour was cheaper than that of Israel (SA =$ 1300) and (Israel= $ 1500). He added that whilst Israel employed 50% more people, it polished six times the quantity that SA did. He proposed that SA set a target of competing with Israel.

With regards to the Bill and its 15% export tax, Mr Allen commented that the implication was that SA diamond prices would be 15% higher than international prices. Further, arbitrage would lead to ‘round tripping’, there would be mine closures as a result of mines not being able to cope with the added costs and finally it would result in an investor ‘unfriendly’ place for diamond miners.

He further named the three mines most likely to close as a result of the Amendment Bill being passed, being Cullinan, Namaqualand and the Koffiefontein whereby SA would lose 30% of production, 30% of cuttable production and 50% of large mining jobs.

He concluded that approving the Bill would achieve a reduction in the prices of rough diamonds in SA leading to increased employment in the cutting industry (+500 jobs). However, the closure of mines would lead to decreased investment and the loss of more than 5000 jobs in the mining sector.

Mr Allen proposed that the SA diamond industry should compete in the global market for capital and job creation and should compete with Israel through increased productivity in labour and technology. He added that growth in the cutting industry required lower costs to make more rough diamonds cuttable; however this should not happen at the expense of the mining industry.

Discussion
Adv Schmidt sought clarity on the reference to the concept of ‘round tripping’ in the presentation. Secondly, he inquired whether the presenter had factored into the equation the 30% increase in rough diamonds. Mr Allen explained that the imposition of a 15% tax would ultimately devalue a diamond by 15% from the price achievable on the international market. He explained the term ‘round tripping’ by providing a hypothetical scenario in which SA would sell diamonds less 15% their value on the international market and syndicates would purchase at this cheaper rate, then smuggle diamonds back into SA and sell them locally for a higher price.

Mr Morkel asked the presenter to provide the Committee with solutions to the identified challenges as highlighted in his briefing. Mr Allen provided the following solutions:
-SA should zero-rate export diamonds
-Diamonds should become a dollar commodity in SA
-The government should allow the local industry to turn their accounts into dollar accounts, and keep their money in dollars.
-SA should have an import processing zone.

Mr Kekana repeated Mr Morkel’s question adding that Mr Allen should provide specific solutions to his criticism of the 15% export tax. Mr Allen responded that the imposition of any export tax (irrespective of whether it was 15% or 14% or any lesser figure) would have negative consequences in that it would lead to the decrease in the value of the local miners’ production.

Mr C Molefe expressed concern over the insinuation that the Bill would lead to massive job losses. Mr Allen assured Mr Molefe that he supported transformation and the objectives of the Bill, but that it was necessary to highlight the potential negative consequences of the Bill.

Free Market Foundation Briefing
Mr T Nolutshunga (Director of the Free Market Foundation) presented on the economic aspects of the Bill by proposing that it be subjected to a RIA and CBA.(Can someone please check these acronyms?) He added that through the RIA, the implications of the Bill for the local industry would be based on sound economics. He appealed that SA should attempt to enhance its economy through decreased regulation, taxes and tariffs. He commented that the implementation of the Bill in its current form would impact negatively on potential foreign investors.

Mr Nolutshunga called for a repeal of the Diamonds Act of 1986 and added that the government should not impose ‘harsh current measures’ such as the forced sale of diamonds to cutters, polishers and taxes on exports. He explained that this would result in the ‘proper functioning’ of the diamond industry.

Discussion

The Chairperson stated that the objects of the Bill were to ensure that those who were previously marginalized received equal opportunities.

Mr Louw sought clarity on Mr Nolutshungu’s statement about addressing the injustices of the past.

Mr Nolutshungu explained that they wanted disadvantaged people to benefit from economic growth.

The meeting was adjourned.