When Minister Ponatshego Kedikilwe Talks – Diamond People Listen
April 02, 09Something odd is going on in
The very articulate minister was quoted as saying “withdraw;” he didn’t use the terms “postpone” or “delay.” The initial reaction among some people close to the contract was that the minister may wish to review some of the time-honored practices connected to the GDV contract. Change is in the air.
This reminds me of an event that took place in a court room in
Except that the Central Selling Organisation is now called Diamond Trading Company, that statement is as true today as it was then. The
Historically, De Beers is the price setter of its productions – which clearly was the case in the cartel period, when De Beers was selling some 80 percent of world production or more. Has the time come to change that practice? That is hard to say, there are sound arguments in both directions. On balance, I would certainly suggest that a revision is in order.
In the current contractual arrangements between De Beers and the government the time-honored practices remain unchanged. The DTC Botswana has committed itself to sort and value the mine output in accordance with the DTC International Price Book, also called London Price Book. In fact, the sorters use a “sample parcel,” which is a reflection of
Thus, the task of the Government Diamond Valuator is to certify that the parcels are sorted accurately in terms of the price list. But the price (the value) of that parcel is determined by the London Price List (the SSV), over which the GDV has no say whatsoever (except for the large specials, where the GDV negotiates the price with the DTC.)
So what happens if the rough market prices changes? Nothing changes until De Beers changes its Standard Selling Values. And what happens if De Beers changes the composition of its Sight boxes? It is agreed that in such instances a new Sample Parcel that reflects the modified Standard Selling Assortment will be prepared, which will then be valued through a modified Price List. Thus, essentially, it is exactly as ex-De Beers Director Bertie Lincoln testified 12 years ago: A Government Diamond Valuator does not value diamonds – at least not if the diamonds were produced by a De Beers mine.
There is an
A Joint Government and De Beers Decision
What the GDV in
I haven’t seen the actual tender documents yet and I hope that they will provide full disclosure and transparency. In all fairness, the documents should point out that the
In practice, any person who according to the DTC may have conflicting other business interests, or may in any way shape or form clash with the interests of Botswana, of the DTC in London or with De Beers, may be disqualified as being unsuit
What are the reasons behind these limitations on the GDV? Rough diamond pricing is extremely difficult. The rationale underpinning rough diamond pricing evolved over time, and certain elements have become permanent features.
Rough diamonds have always been sold by producers in standard parcels (series). The basic valuation of the rough was historically determined through a price formula and related to the average carat values for varieties of stones in the series supplied by the mines to the DTC, its predecessor, or to the open market.
In any pooling arrangements of producers with dissimilar productions, inevit
The Minister’s Dilemma
I haven’t the foggiest notion
Changing the system would prob
Sir Ernest Oppenheimer, the architect of the modern rough pricing and distribution system, once remarked that he would challenge anyone claiming they could determine the exact value of a single rough stone. At best, one can value within a 5 percent margin. Therefore, he said, trade must take place through larger parcels as the individual valuation errors would then balance out to correct averages. Indeed, a number of peculiarities of diamonds and the diamond industry itself have coalesced to evolve into the present rough distribution and pricing system.
In one of my books, I have reflected that “part of the attraction of diamonds is the illusion that diamonds are items of lasting love, value and prestige. These illusions would be damaged if the price of diamonds was seen by the consumer to fluctuate sharply. Such fluctuations would also attract the attention of speculators who, by buying and selling for investment purposes, would add supply-side volatility to the market. Rough diamonds are produced in a volume and a mix of categories that does not always match the demands of the market. However, it is not possible to selectively mine just the categories in demand. The production of all categories must continue, and somewhere in the distribution chain there is a requirement to stockpile any surplus.”
That’s what I wrote some yeas ago. I am the first to realize that times have changed. Though the mines are, in fact, again stockpiling some of their current output, as a general policy they sell what they produce. De Beers' role in marketing has fallen from 80 percent to 40 percent. And the traditional reluctance to outside speculators and outside investors participating in the trade has fallen away. In fact, it is De Beers itself that is now actively seeking outside investors – as we reported a few weeks ago on De Beers Managing Director’s
Maybe changing the time-honored valuation system might well be an essential prerequisite to attracting outside investors to our industry.
The new GDV contract will run for five years. The minister may have some new thoughts
Have a nice weekend.