De Beers and Botswana: A Hint at the Future of Resource-Rich Countries in Africa?
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De Beers and Botswana: A Hint at the Future of Resource-Rich Countries in Africa?
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By Izabela Silva, Researcher at Botho
August 28, 2023
As the second largest producer of diamonds in the world, Botswana holds considerable influence when it comes to the movement of the precious stones in the market. For over 54 years, it has had a deal with De Beers, owned by the British mining company Anglo American, outlining how the stones are mined, the percentage share kept by Botswana, and details on the payment of taxes and royalties. However, after over half a century, Botswana’s relationship with De Beers is set to change dramatically. The question is - for better or for worse?
This past June, Botswana’s agreement with the mining firm was significantly revised for the first time in 10 years, with Botswana successfully negotiating to retain a higher share of the diamonds. While earlier, the country used to keep 25% of output, it is now keeping 30%, with the share projected to rise to 40% in 5 years and 50% by the end of the 10-year agreement.
At first glance, this sounds like Botswana is taking more ownership of its resources and building a path towards a future where it has more agency. However, owning more of its own diamonds does not automatically translate into more revenue and prosperity for the country. As most of the profits for Botswana come from royalties, taxes, and dividends paid by De Beers, less diamonds for the company means less sales, which means less royalties, taxes, and dividends for Botswana. Not to mention, the country supplies 70% of all diamonds sold by De Beers.
Furthermore, De Beers has been struggling with its reach and advertising, given the rise of synthetic diamonds, and growing competition from Russian mining company, Alrosa, which has risen to become a giant in the market, leading production worldwide - producing 32.4 million carats in 2021, while De Beers produced 32. So, was this a good deal for Botswana after all?
KEY MARKET OPPORTUNITY
The answer to the above question would depend on how Botswana decides to handle this newfound ownership. It could backfire, but it could also present itself as a great opportunity for the country to reimagine its diamond marketing and selling strategies. In the sales deal established in 2011, the one prior to the current agreement, Botswana founded Okavango Diamond Company to sell its own share of the diamonds. However, more than a decade in, the company is still struggling to sell large volumes and scale its business. Their current model is largely dependent on auction sales, which can be quite unpredictable.
Okavango will have to revisit its business model and make alterations that not only take into consideration the increased volume of diamonds they will now have in their possession, but also the recent decrease in diamond prices and the acknowledgement that the current market is not suited for an auction-only model. This is Botswana’s chance to implement alternative selling mechanisms, such as “sights,” a classic in the diamond industry where boxes of unpolished gems are offered to key clients, and direct sales.
Furthermore, just like De Beers revolutionized the diamond industry in the 1950s with their slogan “A Diamond is Forever,” so must Okavango invest in developing a memorable marketing strategy, giving consumers a reason to buy diamonds directly from the company.
Since a higher proportion of diamonds will stay in Botswana’s posession, this also presents an opportunity to increase the value capture for the country - they will be able to be part of the many processes along the value chain (such as crushing and treatment) instead of solely present for the extraction step. That will create more jobs and increase ownership across intervention phases.
Once they have more ownership over their resources, Botswana must also have more autonomy over its business decisions. That will be soon reflected in its ability to face this challenge and increase sales.
sHOULD OTHER AFRICAN COUNTRIES FOLLOW IN BOTSWANA’S FOOTSTEPS?
Botswana is not the only resource-rich nation in Africa that has faced their fair share of hurdles over the balance between ownership and profitability when it comes to partnering with foreign companies.
Countries like Nigeria with its oil reserves, Ghana with gold supply, and Angola with ample diamond mines, have forged deals with many foreign companies. Although none of them have been as long, extensive, and exclusive as the relationship between Botswana and De Beers, they pave a way to gauge the tide in ownership conversations around the continent. And the same applies for value capture along the value chain - Nigeria owning more of its own oil could lead to increased refinery capacity and added revenue.
The Ghanaian government, for example, has ordered miners to sell 20% of the gold to the Central Bank, so that goal can replace US dollar reserves to buy oil products. This is a great step towards ensuring that the country is utilizing its own resources to address its problems - with dwindling foreign currency reserves, Ghana played the cards that it was dealt and exercised agency in this matter.
In Nigeria, Africa’s largest oil producer, even though oil revenues only account for 9% of GDP, it accounts for 90% of export revenues and one-third of the government’s budget revenue. The question of who owns the oil is posed by many, but not much initiative is taken to address it. The country even imports oil from countries like India and the UAE due to a lack of refinery capacity. Even though a 20 billion-dollar refinery is set to be built by the Dangote Group, Nigeria could follow in Botswana's footsteps in diversifying its strategy and aiming to own more and sell more of its own oil.
Angola, the world’s sixth largest producer of diamonds, owns shares of 41% of its main mine of Catoca, while Alrosa owns another 41% of the shares. However, as it seeks to open new mines and engage in new negotiations with companies like De Beers and Rio Tinto, Angola has the opportunity to secure higher ownership and agency over its diamond industry, as Botswana has recently done with its new deal.
THE FUTURE OF RESOURCE-RICH COUNTRIES IN AFRICA
As natural resources become more and more scarce, African countries need to better leverage their agency in managing them. But it is not enough to just reclaim resources, they also have to step up their strategy around selling, marketing, and utilizing those reserves. For e.g. only when Botswana invests in its marketing and sale strategy for diamonds, can it serve as an example and boost the confidence of other African countries to better negotiate an increased ownership of their own resources.
Izabela Silva is a Researcher at Botho Emerging Markets Group.