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Angola's diamond sector: expectations of a miracle and growth pains

29 october 2018

The change of political leadership in Angola has generated justified hopes that the closed club of diamond beneficiaries of this country is transforming into a rough sales system more “accessible” for the market.

The eagerness not to miss this lucky break made many diamantaires buy tickets to Luanda and heated up their commercial interest towards the Angolan diamond industry. No one escaped the overall fuss involving dealers, world diamond hubs, mining giants, banks and brokers. Actually, this is justified. Angola produces about 9 million carats of diamonds per year worth more than $ 1 billion. The largest contribution to this cake, about 7 million carats per year, comes from diamond mining giant Catoca. This company’s produce is known to everyone, as the diamond sorting pattern does not change for years and customers are willing to buy these goods blindly. The local price tag has always been more attractive compared with those offered by diamond producers from other countries. The rest of this country’s diamond goods are of alluvial origin and boast of top quality at the lowest cost of production. Prices for these goods do not even depend on a sober assessment, but on one’s ability to bargain.

On average, the fair price of rough diamonds produced by Catoca in the current market, taking into account the growing content of fluorescent goods, can be said to be between $94 and $ 100 per carat. It should be borne in mind that the buyer is obliged to pay a commission, which previously was 6.5% and now it is over 10.5%. In this case, the seller, be it Catoca or some other company, is also obliged to pay a commission for this transaction, although it is incommensurably lower, reaching only 2.5%.

Forget the "blessed" times of the past, when the price was $80 per carat and less, when in fact only one person made decisions to whom diamonds would be sold and to whom not. The system is gone along with the era of Eduardo dos Santos. What was born instead?

Today, national diamond mining corporation Endiama and state diamond trader Sodiam have become independent companies.

Endiama's goal is to double diamond production and attract investment to this sector of the economy. Sodiam is assigned the function of "commercializing" diamond products, that is to form a client base for the sale of diamonds. Sodiam organizes direct sales of rough to its customers from the country’s diamond producer, for which it charges a commission, and at the same time Sodiam purchases rough on its own account for subsequent sales on the market. In this case, prices for consumers are higher, but there is no need to pay a commission.

There is nothing wrong with the division of competences for diamond production and sales. As a matter of fact, De Beers’ DTC also buys diamonds for further sales. Problems start to arise from mixing the immiscible functions. This year, Angola’s diamond producers have been granted the right to sell up to 60% of their goods independently. Objectively, diamond miners are always more interested in maximizing prices than in the stability of their client base. There are many examples of this, and one of them is the case of De Beers headed by Philippe Mellier, when it gave in under the pressure from its new giant shareholder, Anglo American and squeezed out all the juice from its non-conflict-prone sightholders, who were used to that this former monopoly left some margins to its customers anyway. Today, Russia’s ALROSA keeps exorbitant prices, eating all the cream "off the top" for the sake of maintaining revenue performance. This is always bad, because later it is followed not by a price correction, but by a “nervous decline” in prices, stimulating jewelry brands to search for substitutes to avoid expensive diamonds, which further increases the psychological pressure on the market prone to excessive emotions even without it.

Catoca decided to go the same way, having inflated prices for its goods by more than 15% since the end of last year.

However, diamond goods are bought not only by the market, but also by state-owned Sodiam guided by the logic of a diamond trader. Having failed to withstand a sharp increase in prices, Sodiam practically doubled the commission for buyers, effectively halting sales. The final price of goods from the country’s producer has exceeded $ 127 per carat. Of course, it is possible to buy diamonds above the market, then spend three months for manufacturing polished goods, spend another eight months to sell them, pay bank interest and sell the rough goods not used by manufacturers at a loss. It is possible, but who will do it?

In fact, we are witnessing a war between the right and left pockets of the same jacket, whose owner is the State of Angola. In the absence of an arbitrator, this has resulted in a dead end: no one sells, no one earns, everyone looks at each other and shrugs.

In the absence of sales, Catoca may not pay dividends to shareholders and try to sell goods at the maximum price to the largest of them – Russia’s ALROSA.

Not being a diamond trader, ALROSA has habitually been expressing its readiness to buy goods from Catoca for a long time, offering rather high prices. If Endiama will decide that this is its last chance in the conflict with Sodiam, then the company may force ALROSA to act in the spirit of the latter’s statements. It is impossible to rebuke ALROSA that it is not familiar with the realities of the market, but to buy Catoca’s goods in excess of $ 125 per carat means to put them in stock with a prospect of selling at a loss. Of course, one can follow the example of a well-known literary hero and make a fuss saying, “I don’t know about any commission,” but the outcome will be appropriate.

In my opinion, the problem of difficult relationship between Sodiam and Endiama does not have to be resolved by the rule that “only one of them must stay” and there is no need to return to a single vertical pattern of management. In contrast to such countries of Southern Africa as Botswana, South Africa and Namibia, a fairly large amount of diamonds in the Angolan diamond sector is mined by the so-called garimpeiros or artisanal miners. And Sodiam today is the only company capable of technologically ensuring the entire process of preparing and selling such goods, including sorting, evaluation, security, transactions and transportation. Moreover, in theory, Sodiam is able to handle not only the rough diamonds mined by garimpeiros in Angola itself, but also in the neighboring countries, such as the DRC.

It is exactly Sodiam that is able to civilize the unbridled trade in rough diamonds and provide the control required by the Kimberley Process.

Of course, Endiama should and will be interested in raising its prices for rough goods in order to secure investments in the mining sector. But in the case of Angola, there is no direct relationship between the high price per carat and investment attractiveness. It is quite the contrary. Unlike Canada and Russia, the cost of production in Angola is lower and Angola does not face the problem of maintaining the level of diamond output by mining poor diamond deposits, whose economic viability is possible only if diamond prices are high. Angola needs predictable rules, not high prices - only in this case, the goal set by Endiama to double diamond production looks realistic.

The interest to invest in the diamond sector of Angola on the part of professional market stakeholders is high precisely because of its main competitive advantage - the economic opportunity to conduct flexible pricing. The issue is not the price, but the margin. The quality characteristics of rough, the relatively low cost of production, the very good prospects for new commercially significant geological discoveries, the growth of the country’s regional political influence - all this gives Angola high chances to become one of the world’s leaders in diamond mining.

The market will eventually force the two Angola’s companies to move to realistic pricing. It is obvious that the level of commission and other additional payments from transactions involving rough diamonds should not change several times a year. Sodiam, acting as a state trader and currently having a priority in purchasing diamonds, may act as a guarantor for the preservation of production in the event of a sectoral crisis, as Russia’s Gokhran did this for ALROSA in 2008. In turn, there is no economic need for Endiama to boost prices sky high and try to sell goods at such prices to Sodiam in order to secure mining investments.

The current “dizziness with success” in the diamond mining sector of Angola requires obvious administrative intervention of the Angolan government. There is no doubt that it will follow in the near future. No matter what kind of decision will follow, in my opinion, it should without prejudice rely on two main points. The first is that the economics of Angola’s diamond mining sector is able to provide price advantages in comparison with other producers, while maintaining a high margin at a lower cost of goods. Secondly, this allows Angola to guarantee the attraction of investors, being professional market stakeholders, to its diamond mining sector retaining full control over the diamond industry.

Segey Goryainov, Rough&Polished