It appears that South Africa’s entrepreneurial diamond cutters, “the small guys,” have won a mini battle in their fight to procure rough diamonds. The South African Diamond and Precious Metals Regulator (SADPMR) has procured 6,000 carats of run-of-mine rough from Petra Diamonds to sell to these companies by tender.

The sale, which will be hosted by Petra next week, is significant in that it bypasses the State Diamond Trader (SDT), which is mandated to purchase up to 10 percent of locally produced rough for distribution to local cutters.

According to the small-scale diamond cutters, the SDT has proved ineffective in helping sustain their businesses since its establishment in 2007. They stress the lack of gem-quality diamonds being provided and competition with larger cutters to win the goods - some whom they claim, represent even larger international companies. Furthermore, these small-scale cutters challenge that SDT prices are driven by volatile international tender prices, while they would prefer a more consistent supply and pricing policy, which could possibly be achieved through long-term supply contracts.

The small cutters brought their complaints to Deputy Minister of Mineral Resources, Godfrey Oliphant, who met with their representatives in early April. At that meeting, they resolved to set up an advisory panel to work with Oliphant to ensure that the factories gain access to rough by June.

Having met that deadline, the 6,000 carats is an encouraging start, even if many of the same challenges for the factories appear to remain. While representatives from Petra could not be reached by press time, the goods are reportedly being sold by the less-preferred tender method and only a small portion of the total is expected to be gem quality and “polishable.”

Still, the small cutters need to participate in the tender to ensure that this process will continue, with the hope they have the funds to do so.

Their successful participation will send a positive message that diamond beneficiation in South Africa is in fact not a hopeless cause, as many, including in this column, have bemoaned (see editorial ‘Diamonds & Jobs in South Africa’ published on April 28, 2011).

It’s worth repeating that South Africa’s legislation governing the sector, the Diamond Act, 1986, as amended in 2005, and the Precious Metals Act of 2005, were formulated to grow the beneficiation industry and facilitate job creation in South Africa, mainly through the development of small cutting and polishing businesses. To help expedite this, mining companies gain varying exemptions on export duties by selling a certain percentage of their goods locally. De Beers, the largest producer, gets full exemption from a 5 percent export levy by making 40 percent of its production by value available to the SDT and the 16 local sightholders, while lower volume producers receive the exemption by selling 10 percent of their output spread between the SDT and at their local tenders. Clients of the SDT are required to polish 80 percent of the goods in the country.

According to a survey conducted following the April meeting, the relevant small factories, of which there are about an estimated 50, require 30,000 carats of rough per month to operate at full capacity. This amount would certainly give beneficiation, and job creation, the boost they need. It also appears that the supply could be attainable, with enough left over for sightholders and others. When you consider that South Africa’s 2010 production rose 40 percent year on year to 8.86 million carats, 10 percent would amount to a monthly supply of approximately 72,000 carats of, admittedly, run-of-mine goods.

The question therefore falls on the model used by the SDT even if it was forced to adopt a different strategy due to the recession. Should the SDT have prioritized the small beneficiators who, in truth, account for a small portion of the local workforce? Of approximately 1,200 people employed in cutting and polishing in South Africa, an estimated 70 percent are employed by the larger De Beers Diamond Trading Company (DTC) sightholders.

While the SDT was able to turn a profit in 2010, this was achieved through an interim sales strategy which enabled mainly larger clients to pre-finance their purchases. According to the SADPMR, of the 100 companies registered to buy from the SDT, only 15 were active in 2010. The regulator also recently told Rapaport News that the value of goods polished by local cutters increased 25 percent to $354 million during the year.

While the growth and profit may be impressive, complaints remain about the SDT’s effectiveness in fulfilling its mandate. Recent allegations that its chairperson Linda Makatini imported a parcel of diamonds worth $1 million from the controversial Marange fields in Zimbabwe do not help its cause. Neither do the conflict of interest claims, revealed by the Mail & Guardian, that she is a director in diamond mining company Matodzi Resources and that she owns a cutting business called Tumelo Diamond Cutting Works. Representatives from the SDT could not be reached for comment at press time.

Makatini aside, it now appears that the government is aware of the challenges facing the small beneficiators and is acting on them. How this will impact the make-up of the local industry remains to be seen. It may simply be a test whether the small guys are just crying foul in a tough economic environment. Perhaps next week’s tender will tell. Hopefully, it will mark the beginning of the rejuvenation of beneficiation in South Africa.