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Digging in the dumps - diamond mining & market


#1

Today’s online “Economist” gives an interesting glimpse into Sierra
Leone diamond digging and market conditions worldwide.

Cheers all,
Hans Durstling

THE people of Sierra Leone’s Kono district, in the east of the
country, know all too well about diamondsfor better and for
worse. In the 1990s, the drugged-up rebels of the Revolutionary
United Front controlled Kono’s mines by means of rape, murder
and mutilation. When that bloody civil war ended in 2002, mining
companies replaced the rebels but brought their own problems.
The largest firm, South Africa-based Koidu Holdings, was pitted
against locals over blasting schedules and environmental issues.
Small-time local miners, little more than licensed freelancers
prospecting by hand, were disappointed to find that most of the
mines near the surface had been exhausted. The jobs, the volume
of production and Kono’s cut of tax revenue from exports
disappointed almost everyone. “Progress in Kono has not been
commensurate with expectations,” admits Ibrahim Kamara, who runs
a kimberlite project for Koidu Holdings.

Such are the growing pains of a nascent industry in a dirt-poor
African country. Yet Sierra Leone’s diamond mining has shown
promise. Exports ballooned from a mere $26m in 2001 to $141m in
2007. Taxes on diamond exports helped finance the country’s
post-war reconstruction; a quarter of the 3% tax on sales paid
by artisanal miners, as the local small-timers are known, is
returned to the people who live around the mines. Bigger
companies, such as Koidu Holdings, have negotiated
profit-sharing schemes that will benefit the locals once the
mines start making money.

But now that virtuous circle may be broken by the collapse in
the past ten months of world diamond prices, which have
plummeted by nearly one-third. The country will be lucky to
export $50m-worth this year. From Australia to Botswana and
Canada, the industry is in the doldrums. Over the past few
months De Beers, until recently the world’s biggest diamond
producer, has seen the value of its "sights"carefully calibrated
sales of rough diamonds to a handpicked club of buyers called
"sightholders"fall from an average of $650m to a recent low of
around $150m. In response to collapsing demand, mining companies
have been temporarily closing mines or reducing production. This
does not hurt countries such as Australia and Russia all that
much. But it squeezes poorer ones, particularly in Africa, very
hard.

Earlier this year, for instance, De Beers temporarily shut mines
in Botswana and Namibia that it owns in partnership with those
states. At least three-quarters of the companies in Namibia’s
young cutting and polishing industry have closed. “We are
suffering quite severely because of job losses,” says Bernhard
Esau, Namibia’s deputy minister for mines. In India, home to the
largest diamond cutting and polishing industry in the world, at
least 100,000 diamond polishers are out of work. America, where
half of all polished diamonds are eventually sold, is importing
less than half the volume of polished diamonds compared with a
year ago. “Diamonds are not necessary to live or to survive.
It’s a luxury product,” said Philip Claes of the Antwerp World
Diamond Centre, the industry’s leading promotional organisation.
“So it’s the first thing probably that consumers skip on their
lists.”

But Sierra Leone relies on those consumers to help prevent it
from slipping back into chaos. When Koidu Holdings temporarily
halted operations and laid off 540 people, leaving only 60 in
work, it was especially nerve-racking. For Kono has the highest
concentration of former rebel fighters in Sierra Leone. Despite
political stability and fairly harmonious elections since the
war ended, the conditions that led to it still prevail. Back in
1991, the rebels gained early if short-lived support by arguing
that a country as mineral-rich as Sierra Leone should give all
its people a decent living. Yet it was at the bottom of the UN’s
human-development index when the war startedand is still at the
bottom. There is “a time bomb of frustrated, disenfranchised
youth”, says Joan Baxter of Partnership Africa Canada, a
charity.

The diamond slump may have reached its bottom. The De Beers
latest sight, last month, was worth around $250m, up on previous
months. Some mines in Botswana have cautiously resumed
operations. In Sierra Leone, Koidu Holdings says it will rehire
a few hundred workers as the market improves. None of this is a
guarantee against unrest. But a return to the diamond-fuelled
warfare of the 1990s seems unlikely soon. For one thing, even
rebels would have trouble finding a market for ill-gotten
gemstones at present.

Besides, the diamonds’ recent lack of lustre may bring unexpected
benefits. Many artisanal miners are going back to farming. In a
country where food prices have doubled in a year, this is
welcome. And companies are looking for other minerals that Sierra
Leone has in abundance, such as gold, bauxite and rutile, a
mineral that is usedamong other thingsto brighten the whiteness
in paint, plastic and paper. In the longer run, a bit of
diversity may be healthy.