World Diamond Industry: Namibia

Namibia is a Southern African nation with rich diamond reserves. Their production comes mostly from marine sources: diamonds that have been deposited on the ocean floor as a result of river movements and ancient tidal basin flows. There are also a few small, land-based mining operations. Marine mining is a difficult, costly, and highly mechanized process. De Beers is the main producer of diamonds in Namibia, having invested heavily in marine mining equipment and exploration vessels over the years. The limited artisanal mining in the country means the government has strong controls over production levels.

Namdeb, a 50:50 joint venture between De Beers and the government of Namibia, is responsible for diamond mining activities in the country. The company employs approximately 1,600 people, and has contributed more to the national Gross Domestic Product (GDP) than all other mining activities combined. According to Kimberley Process statistics, Namibia produced $914 million worth of rough diamonds last year. Diamond production accounts for approximately 10% of GDP, 40% of export revenue, and 7% of annual government revenue.

In mid-2016, De Beers and the government of Namibia announced a landmark 10-year agreement on diamond beneficiation, the longest agreement since the partnership was formed in 1994. Under the new deal, Namdeb will make 15% of its run-of-mine production available to a government-owned, independent sales company called Namib Desert Diamonds Pty Ltd. Namib will offer its diamonds to 11 local manufacturers polishing in the country. Each company is allocated up to $15 million worth of rough diamonds annually. Because of their alluvial source, Namibian diamonds have amongst the highest average value anywhere in the world. This means that local cutters have an advantage over manufacturers in other countries, such as South Africa, where only large, high-value diamonds can be cut profitably due to the country's relatively higher wages.

However, the touted benefits of these efforts have yet to materialize. In some cases, local cutters are choosing to forgo their local supply, or buy and sell to the secondary market, which means that many Namibian diamonds are not being cut locally. Despite warnings by the government to curb the practice, and cut off supply such companies, it remains common. Estimates suggest that as few as three to five companies still polish diamonds in Namibia.

Another major part of the deal imposed tough terms on De Beers. Local cutters successfully lobbied to get access to large 'special' diamonds, rough diamonds weighing 10.80 carats or more. These diamonds are the most valuable in any rough production, but in the case of the high-value Namibian goods, are amongst the most valuable rough diamonds in the world. The government complied, and now obligates De Beers to supply all of its locally-mined +10.80 carat diamonds for local polishing – and beneficiation.

The mechanism used to establish the purchase price of these diamonds means that De Beers sets the price based on their expectation of the polished outcome of the rough stone. Since they have vastly more experience in pricing these special diamonds than the local cutters, the prices are set so high that profit can only be achieved by maximizing all possible yields in the finished diamonds. Under normal circumstances, these special stones would be cut by some of the most skilled diamond cutters in the world, typically located in the traditional diamond centers of New York, Israel, and Belgium. In these centers, there are master cutters who have decades of cutting experience, and access to the best technology in the industry. The cutters in Namibia simply lack the expertise and technology to cut these stones profitably. So despite the best efforts of the …