G7 sanctions may insulate Botswana from a slowdown in global diamond demand – Moody’s
De Beers supports G7 objectives, calls for engagements with producing countries
“Technology can support a framework, but it cannot be the framework”
ODC says pressure will be on traceability
2024 looks likely to be an uncertain – Econsult
The outlook for the global diamond industry has softened due to multiple factors adding to the downside risks of diamond-producing countries. However, Moody’s believes Botswana may be somewhat insulated from the fiscal and economic implications of a slowdown in demand and softening of prices.
In its assessment, the rating agency factors in the proposed implementation of sanctions from G7 countries on Russian diamonds in 2024 and the realisation of higher diamond revenues via the implementation of the new sales and mining agreement between the government of Botswana and De Beers.
But a local economic think tank has cautioned that the rest of 2023 and early 2024 looks likely to be an uncertain and somewhat challenging time for the economy of Botswana due to adverse global conditions that have been experienced in the diamond market.
Nevertheless, Econsult in its Q3 2023 report indicated “This has not yet fed through to diamond mining which, perhaps surprisingly, was up 7.1% in the 12 months to June 2023”.
Keith Jefferis and Sethunya Kegakgametse the economists of the firm warned: “This may just be the calm before the storm”.
Econsult report showed that Botswana’s annual GDP growth was down to 5.0% in Q2 2023, with a projected further decline to 3.8% for the year as a whole.
Proposed Sanctions
Last month, Reuters reported that proposals submitted by Belgium, India, France and the World Diamond Council would form the basis of the G7 discussions to ban Russian diamonds from entering the bloc. The report described the Belgian plan as “the strictest of the four with the compulsory use of third party blockchain technology to receive a “G7 certificate” on the relevant diamond sizes”.
In the same vein, India proposed that “diamond firms, including laboratories, must register with the government (India) and receive a “GEMPACT certificate” in order to export diamonds to G7 countries and be compliant with the ban”. The GEMPACT regulations would be limited to polished and raw diamonds weighing one carat or more. India cuts and polishes 90% of the world’s diamonds.
Reuters’ report has also indicated that France’s national jewellery and gemstones union UFBJOP “wants all polished Russian diamonds that are round, white and larger than 1 carat to be banned from G7 markets in the first year of the ban with the aim of encompassing 0.5 carats and larger later”.
“Sellers would have to declare the country of origin regardless of origin and shipments would not be able to be of mixed origins with exception of De Beers’ gems sorted in Botswana.”
The World Diamond Council (WDC), which includes the world’s largest rough diamond producer by value, De Beers, has proposed a version of the ban that is largely self-regulating, according to Reuters.
“The WDC suggests banning all diamonds that are Russian and at least 1 carat in size.”
De Beers supports the objective of G7
As the world’s leading producer of diamonds, De Beers fully and unequivocally supported the objectives of the G7 countries to prohibit diamonds of Russian origin from entering their borders. De Beers Group CEO, Al Cook penned an open letter to G7 urging them to engage with governments and industry in key producer countries such as Botswana, Namibia, South Africa and Angola and in key cutting centres such as India.
“Any framework must be workable and must avoid damaging diamond exports from producing countries outside Russia.”
In particular, Cook believes any import framework must protect the jobs, businesses and livelihoods that sustain the economies of diamond-producing African countries.
Further, he reckons the industry must be realistic about the current capabilities of technology-based solutions. De Beers developed the world’s leading diamond blockchain, Tracr as provenance became a topical issue amidst Russia’s invasion of Ukraine. But even they recognise that no single technology-based platform is capable today of meeting the G7 requirements. In the near term, Cook is of the view that technology can support a framework, but it cannot be the framework.
“If an effective framework is one that identifies and traces all diamonds, then it must be as accessible to the artisanal sector in Africa, small enterprises in India, and independent jewellers in America as it is to De Beers and our partners.”
Cook called for multiple government diamond offices, in trusted countries, for the certification of rough diamonds to avoid debilitating and restrictive bottlenecks.
“Any solution that leaves parts of our industry behind threatens the integrity of that framework.”
ODC wary of sanctions
Okavango Diamond Company (ODC), which now sells 30% of Debswana Diamond Company diamonds said the war did not affect its distribution but its customers. With the G7 imposing stricter rules, Managing Director (MD) Mmetla Masire cautioned that “it is going to possibly affect us in terms of putting more pressure on us to do traceability of diamonds”.
“So, we’re still trying to fully understand the full implications of the new G7 requirements,” he said in an interview.
ODC has the Gemological Institution of America already embedding origin on its diamonds. As they leave the country, they leave with a Kimberley Process Certificate, a major step in trying to verify where they come from.
ODC recently signed a contract with the Botswana Institute for Technology Research and Innovation (BITRI) and is in the process of finalising one with the University of Botswana (UB).
“We have been working with a consultant in the UK and so we want to utilise those institutions to help us with some of the technical issues and innovation that we require,” Masire said.
There are many systems that he believes one can use but because G7 has not yet made it clear in terms of requirements, “we are waiting for them to finalise”.
Soft diamond market
The proposed sanctions come at a time when the market is oversupplied with diamonds. The global market for rough diamonds continues to experience a tough 2023, with weaker demand for diamonds combined with low prices and increased competition from synthetics. The government’s budget strategy paper has warned that adverse effects on diamond sales in 2023 could have implications for export earnings and Government revenues as well as foreign reserves. Diamonds account for 90% of exports.
Ministry of Finance has projected that collections for the 2023/24 fiscal year will be lower due to the softened diamond market. GDP growth has been revised down to 3.8%.
Sales
In the 12 months ending 31 March 2023, ODC sold 5.85 million carats an improvement from the previous year. Masire said it has subsequently experienced pressures as the market softened, only able to optimise sellable goods.
Econsult showed that diamond sales through De Beers Global Sightholder Sales (DBGSS) are down 31% over the first eight sales cycles of 2023 compared to the same period last year. De Beers receives 70% allocation from Debswana.
Adverse factors affecting the market
Econsult economists Jefferis and Kegakgametse observed that the global diamond market has been buffeted by multiple adverse factors during the year.
“Restrained consumer demand in the US, notwithstanding some resilience in the US economy, has been one factor, compounded by weak post-COVID recovery in China,” the two said adding that recent demand may have been impacted by a sharp increase in diamond prices in 2022, when demand was strong, but the industry is now paying the price.
“Synthetic diamonds are taking increasing market share, at much lower prices than natural diamonds.”
With slowing demand, the two noted that downstream participants in the diamond value chain (cutters and polishers, traders, jewellery manufacturers and retailers) have all cut back on purchases as their stocks have risen, impacting rough diamond demand. Reuters reported that India has asked “global miners to stop selling it rough gems for two months to manage accumulated stocks”, meaning stocks at diamond miners will grow.
De Beers has announced that sightholders would be permitted to defer up to 100% of their contracted purchases for the remainder of 2023 while ODC cancelled its planned November auction.
Debswana production down
De Beers’ Q3 2023 rough diamond production decreased by 23% to 7.4 million carats, primarily due to the planned reduction in South Africa as Venetia transitions to underground operations and begins the ramp-up of production, as well as planned maintenance in Botswana, Anglo-American, the mother company revealed. In Botswana, production decreased by 12% to 5.8 million carats, driven by lower throughput at Orapa due to planned maintenance.
“It will not be possible to continue expanding mining with sales contracting, as the required stockpiling becomes increasingly expensive,” Jefferis and Kegakgametse said.
“The main concern is the depressed state of the global diamond market, and the potential impact on economic growth, exports and government revenues – although it is important to note that no negative impact on these important economic indicators has yet been realised.”
Growth to moderate
Moody’s projects growth in 2023 will moderate to 3.8% due to the softening in the global diamond industry, offset by increased fiscal spending for infrastructure projects and social initiatives, with growth returning to the pre-pandemic average of around 4% in 2024.
“Potential shocks include pressure to address social risks, such as very high-income inequality and persistently high unemployment,” the rating agency said.
GIA, FX reserves
Fortunately, Econsult indicated that Botswana’s critical financial buffers – in the form of the Government Investment Account (GIA) at the BoB and the foreign exchange reserves – have been rising, assisting the ability of the economy to withstand possible shocks, at least in the short term.
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