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Sodiam, a time bomb

07 september 2020

Until September 2017, the end of the ‘never-ending’ presidency of José Eduardo dos Santos, Angola’s diamond industry was quite an obvious system common for such forms of government control. All decisions were taken by the family of the head of the state in the person of its most pro-active member - Isabel dos Santos, the president’s eldest daughter. By coincidence, she was also Africa's first female U.S. dollar billionaire. Formally, the diamond industry was controlled by the state corporation Endiama and its permanent leader Carlos Sumbula. Endiama owned shares in almost all diamond mining companies in the country, issued geological exploration licences, and sold all finished products - rough diamonds. To sell rough Endiama established Sodiam as its internal trading arm, whose employees carried out diamond sorting operations, conducted diamond viewings for its customers, and handled transactions.

According to various estimates, Angola’s rough diamond exports totals just over US$ 1 billion. Some market players said that up to 25 percent of an export contract value was a figure, which could please the organizers of these export activities. Simple calculations suggest that this kind of ‘pleasure’ from Angola's second most important export item was estimated at about US$ 250 million.

However, history shows that even a super controlled transfer of power from one leader to his successor does nothing good for the ‘leaders’ of national business, especially if they are members of the outgoing president’s family. And when there is a threat, action is needed.

The solution was simple - to impose a structural problem on the new leadership that would make the system confusing and conflicting, which in turn would make it possible to say that “we had at least some semblance of order and ‘stability’”... Add to this the practice of "fishing in troubled waters," an opportunity never thrown away.

Just on the eve of announcing the election results and the accession of João Lourenço to power, the country’s outgoing president signed a decree on the withdrawal of Sodiam from the Endiama organizational structure and, thus, on the creation of an independent state-owned diamond trading company. In principle, there was nothing wrong with that. It seemed that the scheme gave its organizers the hope that they - having established connections in the market - would be able to maintain a certain control over the distribution of financial revenues from rough diamond exports, or at least, have some influence on this, through Sodiam. This could have been the case if Sodiam had acquired the exclusive right to market rough diamonds leaving the role of technical operators to diamond miners, including Endiama.

As one of the popular literary heroes said, a conspiracy, the true meaning of which is known to more than one person, is doomed to failure. The country needs investments, as Angola does not have own means to independently develop its mining industry, while the country’s geological potential and cost of diamond production make it possible to take a leading position in the world.

Finally, it turned out as it was expected. With no market justification for that, Catoca, Angola's key diamond producer, increased the average price per one carat of rough diamonds by nearly 25 percent within a month. After gaining the right to sell up to 60 percent of their rough, the country’s diamond producers and Endiama displayed an obvious desire to sell their goods at a higher price. But the question arises, what has Sodiam to do with this, as it should also sell in the same market and in fact to the same companies? So, either the diamond miners have to sell their rough diamonds to Sodiam a little cheaper than to their customers to allow the state trader to earn money, or the state can increase the commission for purchasing goods directly from diamond producers, rather than from their intermediary. Both sound like sheer nonsense.

Formally, Sodiam has a priority right to buy from any diamond producer. What does this mean in practice? Suppose I am ‘Company X’ mining diamonds in Angola and I want to sell my monthly diamond production for $100 per carat to ‘Company Y’. We made a deal. I am satisfied with the price and my counterparty is satisfied as well. Sodiam is aware of all these negotiations, since in principle I cannot conduct any transaction bypassing the state trader as one of the participants in determining the so-called ‘base price’ of almost any diamond lot. Sodiam comes to my potential customer - Company Y - and says “you will buy diamonds produced by Company X from me at a price of $102 per carat, since I buy them from the diamond producer on the priority right basis for $101; if you refuse, there will be no deal at all”. Reluctantly, Company Y will probably find extra two dollars and buy the goods in order to have normal business relations in Angola, although in the current conditions, it may refuse.

This spectacular example of a handy-dandy trick, I think, has little to do with the tasks of developing the investment attractiveness of the country’s diamond mining sector. As a rule, large companies develop relationships with rough buyers based on long-term contracts, which imply certain obligations for customers to purchase goods even in ‘cold years’ - periods of declining demand. Besides, they usually talk about goods coming from more than one country, and therefore, this requires a verified pricing policy that ensures profitability for the global mining business. As for the second-tier companies, they usually prefer to sell the diamonds they produce on their own auction platforms. They do not need a ‘pleasant’ surprise in the form of a state trader’s feudal right to buy rough first. Is it possible to invest in the diamond mining sector of Angola under these conditions, even if it is the most promising country in this region? The question is rhetorical, and the last three years have not added any confidence in getting an affirmative answer.

So, what about Sodiam? Has it become an effective trader? It does not seem so, as Angola’s rough diamonds are now pro-actively traded at auctions - but by a foreign diamond dealer, not by Sodiam. In principle, there is nothing wrong with that either, moreover, it is correct if a diamond dealer takes on the market risks buying rough diamonds from a miner. But once again - What has Sodiam to do with this and why is it needed in its current capacity?

Rough diamonds are the country’s second most important source of income. Angola is the most promising diamond bearing area in the world and has every chance of taking a leading position in the global market. But in the current situation, it will most likely fail to establish itself as a leader due to the ‘blast from the past’ - a political time bomb. The elections will come, and you can always say, “You had a chance, but you just messed everything up.”

Antônio P. Fernándes for Rough&Polished