Good times roll ahead of Bots50 celebration

BG reporters
Monday, 08 August 2016
Good times roll ahead of Bots50 celebration

Botswana’s economic conditions have improved in the second quarter of 2016 owing to the stabilisation of the global commodity markets and to some extent the notable growth in diamond sales.

In just a month before the country celebrates its highly-anticipated 50th anniversary, the economic numbers jell well with what analysts said earlier in the year that the economy might be back on its feet in the second half of the year and beyond.
Econsult’s second quarter economic review compiled by Keith Jefferis and Sethunya Sejoe reveals that the second quarter of 2016 has seen some change of fortune in Botswana economy. The report reveals that the deterioration experienced towards the end of 2015 has been contained.

“This is largely the result of the stabilisation – albeit at a somewhat subdued level - of global commodities markets,” the report said. The economic review also says after a dismal performance in the second half of 2015, the recovery in sales of rough diamonds that started in the first quarter of 2016, continued through the second quarter. “The reduction of rough supplies in 2015 had the desired effect of unblocking the diamond pipeline – the downstream diamond traders, cutters, polishers and jewellery retailers – and restoring demand for rough. This recovery provided a major boost for export earnings and government revenues, such that the large balance of trade and fiscal deficits experienced towards the end of 2015 should have been eliminated, or at least significantly reduced,” said the Econsult report.

The Jefferis report however said this doesn’t mean that the diamond market is out of the woods yet as consumer demand for jewellery remains weak, especially in China, meaning that even a restored flow of diamonds through the pipeline is at lower levels than in recent years. The economic review report also stated that the ability of mid-stream players to hold diamond stocks is also under pressure, especially with the announcement by Standard Chartered Bank that it is withdrawing from the financing of diamond firms, which will take around $2 billion out of the global industry.

The economic review stated that even though the market has stabilised, major producers are being extremely cautious, and Debswana has no plans at present to increase production above the revised target of 20 million carats for 2016. Other signs of weakness are reflected in the decision by one of Botswana’s smaller diamond producers, Gem Diamonds, to reduce production at the Ghagoo mine. “It may also be one reason why Lucara Diamonds’ Lesedi La Rona gem from the Karowe mine – the largest rough diamond found in over 100 years – failed to reach its reserve price when put up for auction in London in late June. More positively, another small mine, Kimberley Diamonds’ Lerala Mine, re-opened in Q2,” said the report.

The economic review noted that the stabilisation of the global rough diamond market is also reflected in other commodities markets. It said by the end of June 2016, crude oil prices had risen by 85 percent from their mid-January lows, while copper and nickel prices have risen by 12 percent and 22 percent  respectively. The report stated that the recovery in base metals prices, while welcome for Botswana, does not, however, fundamentally change the critical situation facing the country’s largest copper-nickel producer, BCL.

“The company’s costs of production are well above current price levels, even with the recovery, and it is facing problems of low-grade ore, overstaffing, and the constant expectation that it will operate as a social welfare provider as well as a commercial entity,” said the report. The report said the company has high levels of debt, and as a loss-making fully government-owned entity, is dependent upon government’s financial guarantees and cash injections for its survival.

The economists said undoubtedly, BCL’s survival is critical for the town of Selebi-Phikwe and the surrounding region, given that – apart from government - BCL is the largest employer in central and north Eastern Botswana.On a related matter, this week De Beers, a leading diamond producer and marker’s $520m of rough-diamond sales at its most recent auction has raised hopes that the industry can avoid a slowdown in the second half of the year.

While this was the smallest sale by the world’s biggest supplier so far this year, continued demand during a typically slow period is being taken as a good sign by analysts including Edward Sterck at BMO Capital Markets.”This looks like an encouraging result given the seasonally quiet time of year in the diamond market,” London-based Sterck said in a research note on Tuesday.

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