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Following steep decline, is Botswana’s recovery underway?

19 august 2009

Has Botswana – the world's largest diamond producer by value – turned the corner as far as the slump in diamond sales is concerned? Mounting evidence of rising demand and prices for rough diamonds in global markets is no doubt being received with sighs of relief in government circles in Botswana, Antwerp Facets writes. Botswana went through a technical recession between October 2008 and March this year with a sharp drop in diamond sales.

But the worst of the global financial crisis is thought to have passed, and the country could now start benefiting again from rising demand for diamonds. Exports were better in the first four months of this year, with sales higher in March and April than in the first two months of the year.

With the global economy showing initial signs of recovery, rough diamond sales are rising. "We think cautiously that the worst is behind us now," said Sheila Khama, head of De Beers Botswana, in comments to the Sunday Standard. "We think that the actions that we took as De Beers, Debswana and DTC were right. Otherwise Debswana could have been faced with huge costs."

Botswana saw diamond sales slump alarmingly in the last quarter of 2008 and the first quarter of this year. Indeed, Botswana's Central Statistics Office (CSO) reported that diamond exports fell by close to 90 percent between August and November 2008. That was followed by a 67 percent plunge in the first quarter, an overall drop in exports of 18.2 percent, and a huge economic contraction of 20.3 percent. In a forecast published in April, the International Monetary Fund said the Botswana economy was likely to shrink by 10.4 percent in 2009 as a whole.

So severe was the downturn in diamond demand at the start of this year that Debswana, the mining company owned by De Beers and the Botswana government, temporarily halted production and only resumed operations at most of its operations on April 15, with the exception of Damtshaa and Orapa No. 2 plants. In a further sign of the impact of the slump in demand, Debswana said it had secured a loan facility of around $110 million from financial groups in the country to aid it through cash flow problems.

"This is not a normal loan agreement as per se," said Debswana Managing Director Blackie Marole. "But we have made arrangements with different banks to lend us money whenever our requirements for cash rise and at the moment, we have not started utilising the facility."

Marole said that although it was the first time the company had sought bank loans, the company was faring better than reports had suggested in recent months. "Although there were virtually no sales in November and December last year, demand has begun to improve in the past few months," Marole said. "It is just that we are not generating enough cash to maintain our normal operations, and at the same time have something else for the shareholders. But there is optimism that  the recovery  of the market has begun  and there are indications that prices could be firming as well and hopefully we will get back to our normal average sales of around $300 million a month," Marole said.

The Botswana Diamond Trading Company says that sales have now recovered, and the weakness that started in the fourth quarter of 2008 has clearly been halted. In the fifth sight of the year, held in June, diamond sales were approximately 30 percent lower than for the corresponding sight in 2008. However, for the first half of this year, sales were down 80 percent.

Nonetheless, with demand rising, Debswana might resume operations at its Orapa No. 2 mine earlier than scheduled. Debswana said in February it planned to keep Orapa No. 2 and its Damtshaa mine closed for the rest of 2009 because of falling demand. Debswana resumed operations at its Jwaneng, Orapa No. 1 and Letlhakane mines on April 15 after closing them in December.

“As demand for rough diamonds from clients has picked up, we are looking at ways to meet that demand,” said De Beers spokeswoman Lynette Gould. She said that a possible option for meeting demand could be to soon restart operations at Orapa No. 2. “We’ll be able to comment in more detail once these plans are solidified,” she added.

For Botswana, the falls in production and sales are even more important due to the huge role diamonds play in its national economy. Indeed, Minister of Finance and Development Planning Baledzi Gaolathe told the National Assembly in February during the annual budget speech that the fall in diamond sales are the main risk to the Botswana economy.

“The diamond market performed exceptionally well during the first three quarters of 2008 which saw prices increasing by about 20 percent," he told delegates of the National Assembly. "However, the ensuing global financial crisis led to a sharp decline in commodity prices during the last quarter of 2008." The financial benefits to the Botswana economy of diamonds derive from mineral taxes, royalty payments and dividends.

In 2009, Gaolathe expects diamond prices to plummet by 15 percent and production to contract by 35 percent, leading to a 50 percent decline in diamond revenues. Debswana only employs around 6,500 people, accounting for just 2 percent of Botswana's workforce. However, the diamond industry has created many secondary industries and a fall in diamond production would inevitably have an impact on those, as well as on government revenues and therefore its ability to pay the salaries of the large public sector workforce, as well as bringing investment in infrastructure to a halt.

Botswana has used its mineral wealth to enhance its development, unlike some of the continent's other resource-rich countries, where minerals have often become a source of conflict and a means of financing wars. Per capita income has grown from $80 to about $7,000 since Botswana gained independence from Britain in 1966.

For Botswana, as with other diamond mining countries in the region, the global slump came at an inopportune time. With the country pushing its beneficiation efforts in recent years, Botswana’s nascent cutting and polishing industry had been hoping to create thousands of jobs. Those plans have now inevitably been pushed back.

Less than two years ago, Debswana opened an $83 million sorting plant in the capital, Gaborone, for the processing of the country's rough diamonds and the sale of around 15 percent of the country's diamonds to manufacturers who have set up cutting and polishing factories in the southern African country. The new Diamond Trading Company of Botswana was expected to sell $375 million in rough diamonds in 2008 and $550 million by 2010 to 16 manufacturers.