Zimbabwe Rough Diamond Exports: Is Government Selling Out?

Zimbabwe Rough Diamond Exports: Is Government Selling Out?

Farai Maguwu, Director of the Centre for Natural Resource Governance.

In February 2014, Zimbabwe held a second auction of its diamonds in Belgium. The Zimbabwean government has hailed the opening of the Antwerp market as a great economic opportunity and revealed long term plans to do business with Antwerp. At the same time, the Antwerp Diamond World Centre (AWDC) seems to be pinning its long term survival on Zimbabwe, as a key emerging producer in the world. The AWDC, which currently ranks as the largest diamond trading hub in the world, is facing increasing competition from other players such as Dubai, Mumbai (India) and Tel Aviv (Israel). AWDC said in its 2013 report that its future would be secured through cementing relations with countries such as Zimbabwe: "This long term strategy is also designed to bear fruit over the next coming years, for example through further intensifying of the trade relationship with Zimbabwe, which will, according to experts, account for at least a quarter of world diamond production over the next decade".

The Centre for Natural Resource Governance argues that by exporting all its diamonds in the rough the government of Zimbabwe is undermining its own economic blueprint, the Zimbabwe Agenda for Sustainable Socio-Economic Transformation (ZIM ASSET), which pins economic growth on value addition and beneficiation. We also argue that trade in rough diamonds involves serious illicit financial flows through practices such as transfer mispricing and undervaluation, even if gems are accompanied with genuine Kimberley Process (KP) certificates.

Zimbabwe urgently needs to guard against under-invoicing of its diamonds in Antwerp.

The First Diamond Auction in Numbers

Zimbabwe’s first diamond auction was held in Antwerp in December 2013 which realized USD 10.7 million from the sale of 300,0002 carats at an average of USD 35.67 per carat. In the run-up to the auction, government and industry experts estimated that the diamonds would fetch between USD 50 and USD 100 per carat for a total sale of around USD 37 million. The permanent secretary in the Ministry of Mines, Professor Francis Gudyanga, advocated for the auction by stating “we used to sale our diamonds at cheaper prices due to sanctions that were imposed on our firms”.

In 2012, when Zimbabwe Mining Development Corporation was under EU sanctions, Zimbabwe sold most of its diamonds to Dubai and China (markets that generally buy diamonds on the cheap) at an average selling price of USD 49.54 per carat. In the same year diamonds were being sold to Dubai at an average of USD 76.40 and to Belgium at an average of USD 134.52 per carat, 76 percent more than in Dubai. It was precisely the expectation that Zimbabwe’s diamonds would increase value by 76 percent that justified the decision to auction diamonds in Antwerp. However, Zimbabwe ended up selling diamonds at 28 percent less than the prices offered by the lowest paying markets such as China, Dubai and India! There are four possible explanations for this:

1. Zimbabwe was swindled on the Antwerp auction floor, which is highly unlikely. Given Zimbabwe’s five years of experience in exporting rough diamonds, there is no doubt the country has developed a pool of experts in rough diamond exports. Further, the presence and involvement of company officials in the auctions means the Zimbabwean delegation was not lacking in terms of technical competence.

2. Diamond mining companies sabotaged the whole process by sending low quality stones to Antwerp because they prefer the murkier waters of Dubai and Chinese markets. This is also quite unlikely given their desperate need for higher returns and search for better markets.

3. The diamonds being mined now are of much lower value than those mined in 2012. There is credence to this explanation in that Anjin is now mining diamonds embedded in red conglomerate rock as it has run out of alluvial diamonds. These diamonds may be of different quality compared to alluvial ones.

4. Trade mis-invoicing: undervaluation of diamonds is one of the most common practices of fraud and illicit financial flows in the diamond sector. This practice has been perpetrated using KP certificates. In this case, it could involve government and local diamond mining companies’ officials colluding with Antwerp buyers to sell the gems at an unreasonably low cost so that they can receive huge financial kickbacks for prejudicing the government of Zimbabwe. In that case Zimbabwe would have received invoices which do not reflect the real value of diamonds sold.

Beneficiation

Although unemployment is extremely high due to poor performance of the Zimbabwean economy since 2000, the government continues to export jobs annually through the export of rough diamonds, frustrating the fledgling local cutting and polishing industry. One of the stated reasons why diamonds were sold cheaply at the first auction was that they had not been cleaned. After five years in the diamonds business Zimbabwe must have made strides to ensure its diamonds appreciate in value before leaving the country. If just the cleaning of diamonds will increase their value by up to 200 percent, how much more will the country benefit by cutting and polishing them?

In May 2013, the Ministry of Mines released a draft minerals policy whose vision statement is: “Equitable and optimal exploitation of Zimbabwe’s mineral resources to underpin broad-based sustainable growth and socio-economic development”. The first aim of the policy is to achieve a knowledge-driven mining sector that catalyses and contributes to the broad-based growth and development of, and is fully integrated into, an African market through down-stream linkages into mineral beneficiation and manufacturing.

The ministry has correctly identified beneficiation as a key activity to maximize the benefits derived from the country’s mineral resources. The mines minister, Walter Chidhakwa has indicated value addition is central to his plans of increasing the contribution of mining to the economy: “I see value addition of our minerals as the new area of industrialisation. For example, by polishing diamonds, you open the jewellery sector, that is industrialisation” said the minister.

This is underscored by President Mugabe's speeches on several forums where he decries the exportation of minerals without value addition. The government’s economic blueprint, ZIM ASSET calls for the cutting and polishing of 1.2 million carats of diamonds locally between 2013 and 2018 i.e. 240,000 carats a year, yet local diamond polishing companies continue to be shunned by diamond mining companies. They continue to receive fewer and poor quality diamonds than their capacity requires. With Zimbabwe expected to produce between 50 and 75 million carats of diamonds over the next five years the 1.2 million carats represent less than 2 percent of the expected output. The president called for local beneficiation of at least 10 percent of the country’s diamonds. This shows government, as represented by the president, the responsible minister and a cross section of government departments and ministries that crafted ZIM ASSET know what needs to be done to maximise revenue from Zimbabwe’s mining sector.

Why Value Addition Will Not Happen Any Time Soon

There is no indication that government will start investing in value addition anytime soon, despite proclaiming value addition as a key pillar of economic recovery under ZIM ASSET. There is lack of political will to develop and capacitate the local cutting and polishing industry.

President Mugabe has been the most vocal African leader calling for value addition of African minerals in order to boost African economies and employment creation. However, these calls have not been followed by action as evidenced by the failure by the Zimbabwean government to develop a vibrant local cutting and polishing industry to harness the abundant rough diamonds in the country. On the contrary the Zimbabwe government has continued to export its rough diamonds at unreasonably low cost whilst creating enormous profits and jobs for other countries. The major question is why government is keen to continue doing what is unprofitable when opportunities for value addition and maximisation of profits exist.

Illicit Financial Flows

Exporting rough diamonds, if not managed properly, can create opportunities for illicit financial flows by corrupt company executives and government representatives. There are genuine fears Zimbabwe’s diamonds are being undervalued on international markets, thereby prejudicing treasury of the much needed revenue. The concept of conducting the auctions in Belgium is also highly questionable when considering the challenges of transparency that have characterised Zimbabwe’s diamond sector since inception of official diamond mining activities in 2009. As long as certain individuals are benefiting from the Antwerp auctions, they won’t find any incentive in local beneficiation.

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