(Vol.3 Edition 7, June 2007) Antwerp Focus writes:
Observers note that, ironically, the first shot in what was supposed to be a revolutuion in the South African minerals sector was heard not at home, but in Belgium, at Antwerp Diamond Conference in November 2004. It was fired by President Thabo Mbeki, who was the guest of honor and keynote speaker at the conference’s gala dinner.
‘There is a widely shared view that all humanity should seek to make an impact on the globalization process so that it does not result in the marginalization and impoverishment of large numbers of people globally,’ Mbeki said. ‘With regard to our own continent, it is our firm view that this cannot be done on the basis of the pertuation of the old relationnship according to which we as colonies produced and exported raw materials and imported high vaue added manufactured goods from the colonizing countries.’
Thus was unveiled a policy that came to be known as ‘beneficiation’. It referred to a deliberate practice of preferential treatment for South African industry, with the goal being that a greater percentage of the country’s mineral output would be processed at home, thereby providing the domestic economy with an increased share of the added value that comes from further down the distribution pipeline.
‘From a jewelry perspective, it is common knowledge that South Africa is one of the richest countries in the world in mineral reserves, producing approximately 25% of all raw materials for worldwide jewelry production,’ explained Elizabeth Thabethe, South Africa’s Deputy Minister of Trade and Industry, in an address she delivered on March 12 to the 2007 CIBJO Congress in Cape Town. ‘But although South Africa is an exporter of jewelry, we contribute less than half a percent to the world’s fabricated jewelry market. There is growing recognition that South Africa must develop the means to transform its compartive advantage as a leading producer of precious metals and stones to become a globally competitive producer and marketer of jewelry.’
Initially, the international reaction to the South African government’s beneficiation policy was lukewarm at best. But a growing recognition among the leadership of the gemstone and jewelry sector that the industry needs to play a more proactive role in promoting sustainable economic social development in the producing countries has led to a general acceptance that the ‘Africa First’ approach has merit.
For the South African government, there is a link between economic development and longterm political stability. ‘We have more than 10 million young, unskilled people with 12 years and less of schooling to focus on in the short term,’ explained South Africa’s deputy president, Phumzile Mlambo-Ngcuka, in her address to the CIBJO Congress. ‘If our democracy is to work, it is with them, in the first place, with whom the growth must be shared.’
The government is vesting a great deal in beneficiation. It hopes that the policy will contribute to its achieving a level of GDP growth of 6 percent per annum by 2010. It it falls short, the post-apartheid honeymoon, which still has not completely ended, would definitely be over.
But members of the South African jewelry industry, while supportive of the beneficiation strategy, are nonethelss skeptical about its chances of success. ‘Don’t get me wrong, I would love for it to work out,’ said a jewelry manufacturer in Johannesburg. ‘But, as it is designed right now, I am not sure that it addresses our most basic concerns, and the world certainly is not waiting for us to catch up.’
Beneficiation is not simply a goal; it is being ensconced into law. The country’s new Minerals and Petroleum Resources Development Act, as well as recent amendments to the Diamond Act and chapter 16 of the Minerals Rights Act were, in the words of the South African Minerals and Energy Minister, Buyelwa Sonjica, ‘carrierd out to encourage wider participation, across race and gender, in both mining and beneficiation.’
A key element of the amended Diamond Act invovles the establishment of the State Diamond Trader, whose role it will be to acquire and distribute rough diamonds to local cutters and polishers. While the minister of Minerals and Energy is still scheduled to provide a detailed explanation of the functions and modus operandi of the State Diamond Trader, reportedly the new government agency will purchase 10 percent of South African rough output specifically for local beneficiation. Furthermore, the output of the government-owned Alexkor mine will be supplied to the State Diamond Trader, and De Beers transferring to the new government agency its local Diamdel infrastructure and personnel.
The amended Diamond Act also includesa tax on rough diamond exports, which at one stage was pegged 15 percent, but since has been reduced to a more moderate 5 percent. But, warned South African analyst James Allan, when he addressed a mainly local audience at the Diamonds Africa 2007 conference in Johannesburg on April 23, the export tax may have ‘unintended consequences’. While it certainly has the potential of creating between 400 and 500 additional jobs in the local cutting industry, as result of more rough remaining in the country, it may also have the effect of cutting rough diamond supplies by up to 30 percent and, ultimately, could lead to the loss of about 5000 mining jobs, Allan said. In his opinion, the pressures created by the addition of the 5 percent export tax could accelerate due to De Beer’s decision to close or sell the more marginal Cullinan, Namaqualand and Koffiefontein diamond mines.
Allan said that the local cutting industry can only be grown by reducing costs and improved productivity. He said that South African cutters find it very difficult to compete with India and China, when their cutting costs vary between $45 per carat and $100 per carat, whereas in India the costs are between $1 per carat and $8 per carat, and in China between $6 per carat and $12 per carat. For South Africa to become a major diamond beneficiation center, it would have to cut its production costs to no more than $20 per carat, he stated.
Despite the difficulties facing it, South Africa’s diamond cutting sector is still in better shape to impact the international marketplace than is the country’s jewelry manufacturing sector. The South African jewelry industry comprises 350 manufacturing companies, employing about 3000 people, although there may be up to 2500 manufacturers in the informal sector. Most of the jewelry sector’s output is geared to the local market, with only a handful of companies actively targeting overseas customers. In 2000, AngloGold—now AngloGold Ashanti—one of the world’s largest gold producers, acquired a 25 percent stake in OroAfrica, and began to cooperate with the company on a number of strategic marketing initiatives, including the establishment of a new product design center. The company exports a significant part of its output to the United States and Europe.
But, said Gary Nathan, OroAfrica’s managing director, while his company has shown that is possible for South Africans to penetrate and compete in foreign market, ‘we face a range of obstacles that severely hinder the development of an export oriented jewelry sector. If, for example, I was manufacturing in Italy and I needed findings, I could walk down the street to my supplier and buy exactly the amount that I require. Here, my options are to make them myself, or to order them from abroad. Right from the outset I am working at a disadvantage.’
In October 2000, AngloGold Ashanti and Rand Refinery initiated a ‘clustering’ project designed to assist jewelry manufacturers to export. Called the Gold Zone, it involved the establishment of a manufacturing enclosure on a 3.3 hectare plot provided by Rand Refinery, whose own facility is adjacent. Firms in the zone could not only benefit from low rental and maintenance costs, but also from the direct and secure supplies of gold from the refinery, and access to secure export facilities at OR Tambo International Airport in Johannesburg. To date, only one manufacturer—albeit one the country’s largest, Alan Mair Manufacturing Jewellers—was prepared to invest in building a factory in the Gold Zone.
Unlike other jewelry manufacturing centers, South Africa never developed an active bullion lending business, which would have enabled manufacturing jewelers to benefit from gold lending rates based on the gold lease rate, which is typically lower than monetary interest rates. Local jewelers had to rely on ordinary bank loan agreements for financing working gold inventory, and South Africa is a high interest rate country. Local jewelry manufacturers typically pay prime interest rates plus a 2-3 percent risk premium. Local manufacturers say that this makes their gold at least 6 percent more expensive than their competitors abroad.
The government has been looking for a solution. At the end of 2005, it initiated the launch of a 1000 kilogram gold advance scheme through a consortium that included European defense contractors Saab and BAE Systems, and gold mining companies AngloGold Ashanti and Gold Fields Limited, which collectively extended guarantees of $10.5 million to Standard Bank, which would underwrite the scheme.
For a variety of reasons the gold loan has to date been ineffectual, but it and other complementary programs continue to enjoy the strong support of government. ‘The jewelry industry, as a down stream industry, is ideally placed to contribute to job creation and economic growth,’ Deputy President Mlambo-Ngcuka, told the CIBJO Congress in March. ‘The industry is in large parts labor intensive and could be a contributor to social and economic development. We recognize direct jobs are not in millions but we welcome the thousands and the indirect jobs.’
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