Market NewsCommentWhat Buildings Show

What Buildings Show

When in Gaborone I am never sure if the enormous size of some of the new buildings is to fit the signs or titles of the buildings, or the other way around.

One splendid new building in the ever-expanding CBD area is home to the Ministry of Youth Empowerment, Sport and Culture Development.

Be that as it may, there has been a great deal of building since my last visit to Gaborone, in fact there always is on any visit.

Pretty much whatever happens in Botswana is on the back of diamond revenues.

In 2016 diamonds contributed over 80% to the countries Forex earnings and nigh on 20% of GDP.

Diamond revenues and the partnership with De Beers through Debswana is always sold as one of the great economic success stories of Africa, and in some ways it is, or was.

However, diamond mines are finite, and come the next decade diamond revenues are going to decline sharply, indeed the glory days could be said to be already over. 

Therefore, it is critical for Botswana to maximise its key resource both in terms of hard cash but also as a spring board to sound long term diversification.

Whatever the current state of the diamond industry on a day to day basis, the fact is that it is slowly (or not so slowly) shrinking.

I have in the past rabbited on about the appalling comparative performance of diamonds to either precious metals or in comparison to the Forbes Luxury index.

Taking the latter, since the early 1970’s polished diamonds have underperformed the Forbes index by over 330%. 

Since 2003, rough diamonds have underperformed gold by 84% and polished diamonds by 234%.

If ever there was proof of a broken model these cold numbers must be pretty conclusive evidence.

However on top of that, reading headlines such as, ‘Youngsters embracing lab-grown diamonds, says Morgan Stanley report’ and ‘ 70% millenials will consider a lab-grown diamond engagement ring’, hardly make for encouraging reading for the future.

The long term steady shrinkage of the industry maybe foreshortened by asphyxiation through lack of credit.

The latest fraud to engulf the industry, namely the Modi / Gitanjali bust for $1.8 billion follows on from the Winsome  $1 billion bust, which follows on from the likes of the Fabrikant belly up, etc etc.

The only diamond dedicated bank ADB has closed its doors, ABN AMRO has taken further provisions in its latest accounts and is any way shrinking out of the business.  Standard Chartered that came rushing in as ABN rushed out, is well known to be staring at a massive loss on its book. The industry is awash with what I would politely call the walking dead.  Indian banks, who provide some 80% of the total credit to the industry, must be having a serious re examination of their bountifulness.

The reason for my trip to Gaborone this time was to do a ‘dog and pony’ roadshow to extol the possible virtues of a properly regulated diamond ETF.

In collaboration with the Botswana Stock Exchange and a large South African bank a whole raft of fund managers and pension fund managers were regaled with our blubbering presentation.

‘Our’ , because fortunately mine was not the only voice, but there was also Geoffrey Wyatt there to talk about some of the technicalities.

Geoffrey was the product developer at ABN AMRO when in 2006 he approached polishedprices to create a diamond product, and now U2 Diamonds, owner of polishedprices’ CEO.

Unfortunately, Geoffrey’s product was scuppered at launch through pressure from De Beers and some of its sightholders, in particular those in New York, remembering that at the time ABN AMRO was the largest lender to the diamond industry.

Well, I can only say that our burbles or more particularly those of Geoffrey fell on fertile ground, and for those who are even more bored about the Royal Wedding than myself you can get an equal or maybe a shorter dose of amnesia by looking at some of the slides we used for the presentations attached to this article.

The diamond industry has proven itself totally incapable of real change from within.

A successful diamond ETF will break the mould, bring in a brand new cash customer and provide an opportunity for Botswana to grab the initiative over its key commodity.

The fusty, dilapidated and self serving De Beers model is not fit for purpose to grow the industry which, ironically, of course De Beers themselves would be a major beneficiary of any increase in demand for polished and thereby rough, though maybe not so dominant, it’s a classic case of growing the cake for the benefit of everyone, than just your own slice.

The huge DTC Botswana building just outside the Gaborone airport, which I christened sometime ago as ‘Helmut’ because of its cracked heli pad, is more redolent of a fractured future, as the full horrors of De Beers failed Supplier of Choice strategy, consequences of its privatisation, and then absorption into Anglo as a sub division have worked through the system.

Let’s hope that the diamond industry can make the most of the opportunity to embrace financial products which will be good for Botswana and do the Ministry of Youth Empowerment’s job for it.

Download the presentation here.

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