Embed Size (px)
Citation preview
Beneficiation and Job Creationin the South African Diamond Industry
A Mining Industry Perspectiveon the Diamonds Amendment Bill 2005
1
Submission to the Parliamentary Portfolio Committee on Minerals and Energy by the Chamber of Mines of South Africa
12 October 2005
Confidential
2
IntroductionRole of the Chamber and Who is Being Represented
Since its establishment in 1887, the Chamber of Mines has established itself as the pre-eminent voice of South Africa’s private sector mining Industry.By 2004 the Chamber represented both large and small, local and international mining companies, and its members accounted for 90% of the country’s mineral production by value.The Chamber’s 4 diamond members account for nearly 100% of South African diamond mining production.A Chamber task team on diamonds was established to produce a Chamber response to the Diamond Amendment Bill.
Confidential
3
Overview of presentation
General principles of beneficiation
Assessment of the economic impact of the Diamonds Amendment Bill
Conclusion
Confidential
4
THERE IS BROAD SUPPORT FROM BUSINESS ON THE OBJECTIVE OF ADDING VALUE (BENEFICIATION) TO SOUTH AFRICA’S MINERALS
The mining sector and business in general is of the view that adding value to South Africa’s minerals is a meritorious objective.
Of course the key questions include:
– How to define beneficiation?
– Who are the lead agents to drive beneficiation?
– How to encourage/facilitate beneficiation?
Confidential
5
BENEFICIATION IS AN OFTEN MISUNDERSTOOD CONCEPT -
The term beneficiation elicits mixed reactions, but much is based on the view that South Africa is exporting all its minerals in “raw form” and that employment and extra revenues are forfeited to the advanced and developing countries that do all the processing.
Much of the attention is on why the South African mining sector allows this to happen? This happens without sufficient investigation of what type of beneficiation is being talked about and who the key actors should be?
Yet significant beneficiation does take place in South Africa – where the commercial opportunities exist and depending on how beneficiation is defined.
Confidential
6
A WORKABLE DEFINITION FOR MINERALS BENEFICIATION
“The term beneficiation, used broadly to describe the successive processes of adding value to raw materials from their extraction through
to the sale of finished products to consumers, covers a wide range of very different activities. These include large-scale and capital-intensive operations like smelting and technologically sophisticated refining as
well as labour-intensive activities such as craft jewellery”.
Minerals Policy White Paper, Oct 1998
Confidential
7
THE FOUR STAGE BENEFICIATION PROCESS
Stage Mineral beneficiation process category
Process flow-chart Labour intensity
Capital intensity
1
2
3
4
The action of mining andproducing an ore or
concentrate (primaryproduct)
The action of converting aconcentrate into a bulktonnage intermediate
product (such as a metalor alloy)
The action of converting theintermediate goods into a
refined product suitable forpurchase by both small &
sophisticated industries (semis)
The action ofmanufacturing a final
product for sale
Run-of-mineores
Washed &sized
concentrates
Mattes/slags/bulk
chemicals
Ferro alloys /pure metals
Steel/ alloysWorkedshapes &
forms
Workedshapes &
forms
Workedshapes &
forms
High High
Low High
Low High
Medium tohigh
Medium tohigh
IndustryCluster
Mining
Mining
Refining /Manufacturing
Manufacturing
Mining
Manu-facturing
Confidential
8
DEFINING BENEFICIATION
MINING BENEFICIATIONMining has competency/skill in the mining and in certain
parts of the concentrating/refining areas.
MANUFACTURING BENEFICIATIONManufacturing companies have core skills and competency
in this arena (understanding customer needs, product development, design, skills, markets, distribution chains,
technology).
Confidential
9
THE SEPARATION OF MANUFACTURING BENEFICIATION FROM MINING BENEFICIATION IS VERY IMPORTANT
This is a crucially important issue because much of the focus in the beneficiation debate has been on why the mining sector has not done enough to drive the manufacturing/fabrication beneficiationarea - despite acceptance by the DME and government that the beneficiation being focused on is at the manufacturing level.
Given the globally accepted and driven Anglo Saxon model of specialisation, it is very unusual to see a mining company operating at all levels of the value chain.
Confidential
10
DOES THE AVAILABILITY OF MINERALS CONSTITUTE AN ADVANTAGE FOR THE MANUFACTURING BENEFICIATION SECTORS?
For precious metals and diamonds the products are generally available in any of the world’s markets at internationally determined prices.
The vast majority of manufacturing beneficiation (jewellery fabrication and diamond cutting) takes place in countries that produce little or no mine production of precious metals and diamonds.
So the answer is that the availability of mined precious metals and diamonds at world determined prices is not an advantage.
Confidential
11
Global share of diamond mine production by value versus global share of diamonds cut and polished
by value, 2004
0102030405060
Botswan
a
Russia
Canada
South
Africa
Angola
DRCNam
ibia
Austra
liaBelg
ium
USA
Thailand
, Chin
a & othe
rs
Israe
l
India%
of w
orld
tota
l
Mine production by value Cut diamonds by value
Confidential
12
Gold, share of world mine production by volume versus share of jewellery fabrication by volume
2004
0
5
10
15
20
25
South
Africa
CISUSA
Austra
liaChin
aPeru
Canad
aInd
ones
iaBraz
ilUAE
Pakist
anMala
ysia
Egypt
Saudi
Arabia
Turkey Italy
India
% o
f wor
ld
Share of mine production volume Share of jewellery production
Confidential
13
MANUFACTURING BENEFICIATION IS DRIVEN BY COMPETITIVE ADVANTAGE ISSUES & NOT BY THE AVAILABILITY OF RAW MATERIALS
COMPARATIVE ADVANTAGE issues such as natural resources are no longer considered to be a key driver of
manufacturing beneficiation investment.
COMPETITIVE ADVANTAGE issues such as cost competitive production, skills and craftsmanship, etc., are now the key drivers of manufacturing beneficiation
investment.
Confidential
14
WHAT ARE THE KEY DRIVERS OF THE MANUFACTURING BENEFICIATION INDUSTRY (E.G. JEWELLERY FABRICATION)?
Competitive production, high productivity, low costs vs competitors.Craftsmanship and specific skills.Access to markets (domestic and foreign). Most successful jewelleryproducers have started with a large domestic market.Good market intelligence (what customers want, the latest designs?)Low costs of doing business (red tape, labour laws).Low materials funding costs (i.e. low interest rates).Duty free, VAT free and low tax rate areas for manufacturing.Quality assurance (Hallmarking) for final markets.Research & development & innovation incentives and capabilities.Appropriate and competitively priced infrastructure.
Confidential
15
A comparison of corporate tax rates, KPMG Survey 2003 and 2004
05
1015202530354045
Japa
n
USA
Ger
man
y
Sout
h Af
rica
Can
ada
Indi
a
Arge
ntin
a
Fran
ce
Braz
il
Chi
na
Mex
ico
New
Zea
land
Turk
ey
Aust
ralia
Indo
nesi
a
Peru
Thai
land UK
Kore
a
Cze
ch R
ep
Mal
aysi
a
Portu
gal
Boliv
ia
Taiw
an
Ukr
aine
Rus
sia
Pola
nd
Slov
akia
Hon
g Ko
ng
Chi
le
Hun
gary
Irela
nd
% ta
x ra
te
Confidential
16
Relative labour productivity as measured by value added per US$1 labour purchased, 1999/2000 (source UNIDO)
5.4 5.35.0 4.8 4.7
3.73.3
2.5 2.42.0
1.7
0
1
2
3
4
5
6
Irelan
dS-K
orea
Turke
y
Brazil
China
India
Malays
ia
USA
Poland
South
Africa
New Ze
aland
US$
val
ue a
dded
Confidential
17
Overview of presentation
General principles of beneficiation
Assessment of the economic impact of the Diamonds Amendment Bill
Conclusion
Confidential
18
Key Questions
Positive Impact of Bill Negative Impact of Bill
Access to diamondsAccess to diamonds
Competitiveness of manufacturers
Competitiveness of manufacturers
Jobs in beneficiationJobs in beneficiation Jobs in mining production
Jobs in mining Jobs in mining productionproduction
Competitiveness of mining producers
Competitiveness of Competitiveness of mining producersmining producers
Other issuesOther issuesOther issues
What is the balance?
Note: We have answered these questioned in our written submission to the PPC. In this presentation we high-light the core arguments. Data differences between the two submissions are due to more information having become available since the written submission.
Confidential
19
Access to diamonds, in principle, will be increased
19 SA sight-holders
113 mid- / long-term customers
[no pre-selection]
SDT selected customers
Low volume, high quality / value
TranshexTranshex othersothers
Diamdel
Diamdel
DTCDTC
SDTSDTDEECDEEC
>90% of volume
De BeersDe Beers
Weak data
on how SDT will select customers
Weak data
on likely DEEC price levels
Weak data
on potential effects of ‘cherry
picking’
Current Anticipated*
19 SA sight-holders
113 mid- / long-term customers
[no pre-selection]
Privately selected
customers
Tender housesTender houses
Diamond Bourse
Diamond Bourse
>90% of volume Low volume, high quality / value
De BeersDe Beers TranshexTranshex othersothers
Diamdel
Diamdel
DTCDTC
production
trading
buyers
* Considering introduction of amendment bill
Confidential
20
SA based manufacturing of SA diamonds gains a cost advantage illustrative
SA rough,cut & polished in SA
SA rough,cut & polished int’l
Non-SA rough,cut & polished int’l
200
30
10
240230210
$/ct $/ct
15%*
10
200
10
$/ct
0%*
200 210200 200
3030 ?30
Price of rough
Export duty
Cost of rough to manu-
facturer
Manu-facturing
cost
Cost ofpolished
Price of rough
Export duty
Cost of rough to manu-
facturer
faManu-cturingcost
polishedCost of Price of
roughExport duty
* The amendment bill introduces a 15% export duty on all SA rough exports.
Cost of rough to manu-
facturer
faManu-cturingcost
polishedCost of
Introduction of export duty
Will market tolerate higher
price point?
Cost advantage for manufacturer
Confidential
21
Given the cost differential between South Africa and India…Cutting & polishing costs
0
20
40
60
80
100
120
USA Israel SouthAfrica
Belgium Thailand China India
$/ct
47 99
FRIDGE estimates
De Beers estimates
0
20
40
60
80
100
120
USA Israel SouthAfrica
Belgium Thailand China India
$/ct
40 74No
data
73 $/ct
Medium price differential
57 $/ct
Medium price differential
Medium estimated price differential between SA and India: 65 $/ct
Weak data
Large variances of data points
Confidential
22
…manufacturers will have to make a trade-off…
0
20
40
60
80
100
120
140
160
0
100
200
300
400
500
600
700
800
900
1000 Value of rough [$/ct]
Export costs,posing additional cost for manufacturing internationally*
Price differential at 65$/ct,posing additional cost for manufacturing in SA**
433More economic to export
and cut and polish internationally
More economic to cut and polish in South Africa
export costs > price differential
export costs < price differential
$
* Modelled on the assumption of a 15% export duty** In our written submission we assumed a price differential of only $30. This had to be revised given the data cited above.
Predictedcut-off point
Confidential
23
Manufacturers cannot afford to cut diamonds at a loss
Estimate of the distribution of South Africa's diamond production by volume per value category
81.26
10.74
3.36
1.11
0.82
1.38
1.26
0 10 20 30 40 50 60 70 80 90
<$100/carat
$100 to $200
$200 to $300
$300 to $400
$400 to $500
$500 to $1000
>$1000
% of production (volume)
break even point for cutter ~$433 per carat
Confidential
24
…and it appears that up to 1,650 additional jobs could be created
200 400 600 800 1,000 1,200 1,400 1,600 1,800 $/ct
20
40
60
80
100
%
Predicted cut-offpoint: 433
Current cut-off point: 750
108,
350,
000
SA Production of Diamonds (volume)**
Employees in Beneficiation Associated
with SA Production
20001,650
Weak data
On actual distribution of
types of diamonds
Weak data
What is the current
appropriate cut-off point?
Weak data
On potential job creation
Weak data
Unclear how many jobs are
being created in total globally
112,000
SA current practice
SA pot
ex
ential with 15% port duty* g
Other geo-
raphies*
96.7% =14.5bnct
1.5% = 220mct
1.8% =270mct
* Estimates assume same carat/employee relationship as practiced currently in SA.** Graph reflects DBCM production only. DBCM production constitutes the vast majority of SA production.
Confidential
25
However, the amount of potential new jobs needs to be adjusted for other consequences: Possibly, only less than 1,000 new positions are realistic!
1650
320
399
279
652
0
200
400
600
800
1000
1200
1400
1600
1800
Potential newjobs
lower importsfrom De Beers(15%, by value)
lower productionfrom De Beers(30% of current
production)
lower ct/job ratio(20%)
net new jobs
?
Weak data
How will De Beers react? Weak data
Will mines have to close and production decreased?
Weak data
What is the appropriate ct/job
ratio?
Note: De Beers mines assumed under threat include Namaqualand, Cullinan, Kimberly (surface). Other marginal mines may also be closing but not necessarily due to 15% revenue reduction created by impact of export duty to be introduced.
Confidential
26
Still, the bill does provide a positive impact.
Positive Impact of Bill Negative Impact of Bill
Jobs in mining production
Jobs in mining Jobs in mining productionproduction
Competitiveness of mining producers
Competitiveness of Competitiveness of mining producersmining producers
dMore equitable acce
mondsd
ss to
iaMore equitable access to
iamonds
Cost advantage for
manufacturerCost advantage for
manufacturer
1,000 jobs in
beneficiation1,000 jobs in
be
Other issuesOther issuesOther issues
neficiation
However, how do the negative unintended consequences compare?
Confidential
27
SA based manufacturing of SA diamonds gains a cost advantage – on behalf of the SA diamond mining producers!Rough worth 200 $/ct on the international market will be traded at 15% less in South Africa: The producer will only receive 174 $/ct for rough worth 200 $/ct.
illustrative
SA rough,cut & polished in SA
SA rough,cut & polished int’l
Non-SA rough,cut & polished int’l
174
26
10
210200210 15%*
10
200
10
0%*
200 210
174 174
2626
!
$/ct $/ct $/ct
Transfer of margin
26
Price of rough
Export duty
Cost of rough to manu-
facturer
Manu-facturing
cost
Cost ofpolished
Price of rough
Export duty
Introduction of export duty
Same price point!+
Cost of rough to manu-
facturer
faManu-cturingcost
polishedCost of Price of
roughExport duty
* The amendment bill introduces a 15% export duty on all SA rough exports.
Cost of rough to manu-
facturer
faManu-cturingcost
polishedCost of
Cost advantage for manufacturer
Revenue reduction for
producer
Confidential
28
These reduction in revenues probably will have severe job implications in mining
4,000
6,000
2,000
12,000
0
2000
4000
6000
8000
10000
12000
14000
16000
De Beers SADPO Transhex total secondary joblosses?
Estimated number of Jobs Threatened in Mining Industry
Weak data
What are the secondary
effects of job losses?
Weak data
Will 15% export duty result in
lower revenues and job losses?
Note: De Beers mines assumed under threat include Namaqualand, Cullinan, Kimberly (surface). Other marginal mines may also be closing but not necessarily due to 15% revenue reduction created by impact of export duty to be introduced.
Confidential
29
In addition: other issues pose concerns
Concerns regarding general objectives of governmentKimberly processPromotion of broad-based socio-economic empowermentPromotion of small-scale and artisinal miningPromotion of investor confidenceDismantling of trade barriersUpholding int’l standards
Legal concernsConstitutionality of billCompliance with int’l trade commitmentsLegality of SDT selection process (“cherry picking”)Anti-competitive over-regulation (government diamond valuator)Money Bill
Note: All of these concerns are documented in detail in our written submission.
Confidential
30
Our conclusion – based on preliminary data:Negative impact may very well outweigh positive impact
Positive Impact of Bill Negative Impact of Bill
and othernd other nd other cprov
withoLegal
concerns
Legal aconcerns
Legal aoncerns
data situation isi
assessment very difficult
ut furth
collaborative efforts
Revenue reduction for producers
Revenue reduction for
Revenue reduction for producersproducers
12,000 jobs threatened in production
12,000 jobs threatened in
12,000 jobs threatened in productionproductionMore equitable access to
diamonds
More equitable access to diamonds
Cost advantage for manufacturers
Cost advantage for manufacturers
1,000 jobs created in beneficiation
1,000 jobs created in beneficiation
onal
detailed
er
Confidential
31
Overview of presentation
General principles of beneficiation
Assessment of the economic impact of the Diamonds Amendment Bill
Conclusion
Confidential
32
Conclusion: Assessment of the Economic Impact of the Diamonds Amendment Bill
Net impact of bill appears to be negative– 1,000 beneficiation jobs created– 12,000 mining jobs threatened
But we don’t know– The exact extent of positive impact
Level of price differential between South Africa and low-cost producerImpact of industry reaction on availability of rough in South AfricaImpact of 15% cost advantage on creation of jobs in beneficiation
– The exact extent of negative impactHow exactly the SDT will workHow many jobs may be jeopardized in miningHow to balance other concerns (legal and other side effects)
We should undertake a more comprehensive study toAssess potential positive and negative impact of billWhere appropriate, develop other means to achieve objectives
Chamber is keen to contribute byFacilitating industry processHas started to pull together fact-sheet
Confidential
33
FOR SOUTH AFRICA TO PROMOTE GREATER MANUFACTURING BENEFICIATION WHAT IS REQUIRED?
Don’t try and force mining companies to subsidise beneficiation or to go into areas where they have little competence or skills.
Provide an enabling environment that attracts the manufacturing fabrication companies to come and invest in SA. These include:– Improving access to foreign markets for manufactured products.– Quantum leap productivity levels.– Lowering the cost of capital in SA.– Access to inputs at world competitive prices (e.g. steel)– Providing the right types of skills for such projects.– Improving logistical infrastructure (cost, efficiency, etc.).– Incentives for R&D.
Confidential
34
BACKUP
Confidential
35
BACKUPCalculating cut-off points
Cost differential between South Africa and low cost producer Cut-off point $/ct
10 20 30 40 50 60 65 70 75 80
5% 200 400 600 800 1,000 1,200 1,300 1,400 1,500 1,600
10% 100 200 300 400 500 600 650 700 750 800
15% 67 133 200 267 333 400 433 467 500 533
20% 50 100 150 200 250 300 325 350 375 400
25% 40 80 120 160 200 240 260 280 300 320
30% 33 67 100 133 167 200 217 233 250 267
35% 29 57 86 114 143 171 186 200 214 229
40% 25 50 75 100 125 150 163 175 188 200
45% 22 44 67 89 111 133 144 156 167 178
50% 20 40 60 80 100 120 130 140 150 160
55% 18 36 55 73 91 109 118 127 136 145
60% 17 33 50 67 83 100 108 117 125 133
65% 15 31 46 62 77 92 100 108 115 123
70% 14 29 43 57 71 86 93 100 107 114
80% 13 25 38 50 63 75 81 88 94 100
85% 12 24 35 47 59 71 76 82 88 94
90% 11 22 33 44 56 67 72 78 83 89
95% 11 21 32 42 53 63 68 74 79 84
100% 10 20 30 40 50 60 65 70 75 80
As proposed by amendment bill
SA export
duty
Median of FRIDGE study and De Beers estimates
Confidential
36
BACKUPDe Beers Employees and Production
Mine number of employeesvolume produced
(carats) economic state of mine
potential 'jobs under threat' if mining bill is
implemented
potential 'production under threat' if mining
bill is implemented
Venetia 900 7,187,300 healthy - -
Finsch 1,600 2,108,481 healthy - -
Kimberly, underground 1,900 205,063 plans to close - -
Kimberly, surface 300 1,845,564 marginal 300 1,845,564
Cullinan 1,300 1,304,416 marginal 1,300 1,304,416
Namaqualand 2,500 909,706 marginal 2,500 909,706
Koffiefontein 500 113,481 plans to sell or close - -
The Oaks 70 68,943 plans to close - -
sum 9,070 13,742,954 4,100 4,059,686
