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Diamond crisis temporary-Debswana

SHARE   |   Monday, 25 January 2016   |   By Ditiro Motlhabane
Debswana Managing Director, Balisi Bonyongo Debswana Managing Director, Balisi Bonyongo

Debswana maintains that the current decline in rough diamond prices is temporary, despite several analysts, including Moody’s, warning this week that diamond miners would likely have to cut prices further this year in order to lift demand. In an agreement entered into on January 5, 2016 between the miner and Botswana Mine Workers Union (BMWU) the parties are of the view that "the long term prospects for the diamond industry and for Debswana in particular, are good and that the current situation is temporary". Notwithstanding the optimism, the company – the largest producer of rough diamonds by value – concedes that "it is not clear when the market will recover". Hence, measures taken to mitigate the situation including the suspension of operations at Damtshaa and reduction of production at Orapa mine took into cognizance the temporary nature.

Around 242 Damtshaa employees are currently being redeployed to other sectors of the business after management committed to take all practical and reasonable steps to avoid job losses, conserve cash and ensure upturn readiness. Before the agreement was concluded negotiations were suspended for 10 days to allow for cooling off period after the union registered a dispute when management indicated that some workers may lose their jobs in the 2017/18 financial year, should the crisis persist. The union felt that if management was uncertain about retention of jobs in the duration of the closure, the parties should rather discuss a retrenchment agreement where workers will have different options to accept or reject what Debswana offers, or even opt for a voluntary exit package. Management backed down on the position. 

In terms of the current plan, production at Damtshaa will be suspended until December 2018 as the mine goes into care and maintenance. Orapa and Letlhakane mines will produce a reduced target of 8 million carats, while Jwaneng mine will increase carats production to 12 million per year for the same duration. "Due to uncertainty of the diamond market and fluidity of the situation, the parties shall continue to monitor the status and engage each other on a regular basis or return to full operation should there be an upturn," reads part of the agreement seen by The Patriot on Sunday. Under the special redeployment all affected employees at Damtshaa will be placed on like to like positions. Conditional allowances will only be earned by redeployees who work in areas where such allowances are payable.

However, employees who are currently in positions which earn conditional allowances and are placed where there are no conditional allowances payable, shall be paid the allowances for a period of three months from the date of redeployment. Jack Tlhagale - president of BMWU - said on Thursday that they are currently monitoring the re-deployment process through their Orapa branch committee to ensure that Debswana complies with the signed agreement. "We have not had any problems so far. But we will not hesitate to revive the dispute should some workers not find posts to be redeployed to," he said. Although Debswana has vowed not to retrench workers, the collateral effect of the decision to close down Damtshaa and scale down production at Orapa make it inevitable that short-term contractors will be cut off, together with a scale down on long-term ones. Already the agreement shows that "fixed term contracts employees shall conclude their specific contracts' period after which review shall follow the normal process". Consequently, job losses will occur downstream outside Debswana and inside.


2016: Dark year for diamonds?

• Diamond sales week
It has been difficult to gauge the reaction from diamantaires expected in the country this week ahead of an online auction at the state -owned Okavango Diamond Company (ODC), next Thursday. But following on to last year, performance is expected to be subdued. Last year sales by ODC fell 45 percent to US$303 million due to challenging market conditions. ODC was established following the renewal of the Debswana Sales Agreement between the government and De Beers which provided for the government to purchase and sell 12 per cent of Debswana’s production in 2013, rising to 15 per cent by 2016. 

In 2015 the company was entitled to purchase 14 percent of Debswana’s production and independently auction it. Efforts to get a comment from ODC Managing Director Toby Frears on Friday were unsuccessful as he said he was locked up in meetings and could only respond to questions after three days. But Kutlo Thathana - Stakeholder Relations Executive at ODC - said “We note an improvement in sentiment amongst our buyers and hope that this will translate into a positive sale when we host our auction sale on the 28th January”.

ODC Diamond auction dates:

January 2016 Sale —Viewings: 17th to 27th January
Auction: Thursday 28th January, 12pm (CAT)
March 2016 Sale —Viewings: 21st February to 2nd March
Auction: Thursday 3rd March, 12pm (CAT)

Kim Lanny, General Manager at Shrenuj Botswana - a DTC sightholder and jewellery manufacturer -declined to comment on the developments in the diamond market and how it has affected their business when contacted on Friday.

De Beers’ prices

Meanwhile there are reports that De Beers has reduced the price of its diamonds in its first sale of the year, in a fresh attempt to counter weakening demand. Bloomberg reports that De Beers cut gem prices by as much as 7% at the January 18 sale. The company, the largest supplier of rough diamonds by value, has poured millions of dollars into advertising in the US and China, trying to boost jewellery sales as part of a strategy to unclog the manufacturing pipeline and lift demand and prices for rough diamonds. In December, De Beers said it had pushed down rough prices by 15% during 2015 and cut output by about 12% to try to support prices. The miner also closed two operations in 2015 — Snap Lake in Canada’s Northwest Territories and Damtshaa in Botswana.

De Beers has remained cautiously optimistic as new year begins but could not rule out market volatility, after what it dubbed a “difficult 2015”. Group chief executive Philippe Mellier told a Sightholder reception on Wednesday during the first De Beers Sight of 2016 in Gaborone that “we may be starting to recover some of the lost momentum”.  “But of course, these initial positive signs must not be viewed as grounds for complacency. In fact, this is possibly the most crucial point as we now stand at a crossroads,” he said in a speech emailed to Rough & Polished. “The midstream trading environment remains delicate, the recovery remains a work in progress and our actions in the near future remain crucially important. Just as we have needed to take great care with our actions in response to the recent challenges, we must be equally watchful as things begin to improve.  

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“And while we may have seen a few encouraging signs, if there’s one thing we can be sure of in the year ahead, it’s that we will experience volatility.” Mellier said uncertainty regarding the macroeconomic outlook was still continuing, while currency pressures had the potential to weigh on downstream demand in a number of locations. The De Beers boss said the group would put in place a “comprehensive plan” to support and accelerate the improvements they were “starting to see” in the diamond sector. “In this uncertain world we need to focus on both supply and demand in order to get things fully back on track. Our 2016 strategy therefore comprises important points on how we intend to supply you, as well as how we intend to improve pull-through from the consumer end of the value chain,” he said. 


“The starting point for our 2016 plan is that we recognise that strengthening our relationships with you [sightholders] will be crucial in the year ahead. We are all vital, interconnected parts of this industry and we can only help you to play your part fully if we have a very deep understanding of your businesses and the environments you operate in.” Mellier said De Beers would make some changes to how the group organise its Global Sightholder Sales business. “We will continue on the journey we have started with the current supply contract but, given the expected volatility of the world in which we will operate, we will restructure Global Sightholder Sales so we can sharpen our focus on customer relationships and on product and service delivery,” he said.

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“This will improve our responsiveness and provide all our businesses with the best insulation against those challenges that remain outside of our control.” Mellier said one of De Beers’ plans for the year would be a continued investment in non-proprietary marketing. He said they would need to find the most effective method of pooling the group’s resources, and the most effective vehicles for delivering the programmes. “But we saw the power of diamond marketing (and specifically De Beers’ expertise) at the end of last year and we will ensure that consumers – young and old, eastern and western – continue to celebrate their own facet of forever with the magic of diamonds,” he said.


Mellier said 2015 was a “year in which it felt as though the fates conspired against us”. He said the industry experienced “several persistent headwinds” and many “unforeseen challenges”. “Each time it looked as though there might be the opportunity for an improvement, another unexpected problem raised its head,” he mourned. “Altogether, we saw a number of difficulties relating to midstream inventory levels, downstream inventory levels, profitability, liquidity, currency movements and macroeconomic changes, among others.” [Additional reporting by Rough&Polished]