SA DIAMOND INDUSTRY IN A GLOBAL CONTEXT SA, Australia, Canada and Russia have activity in all aspects of the diamond pipeline (value chain). SA produced 14,4 Mct in 2004 but its importance as a diamond mining country has declined SA’s cutting a polishing industry is estimated to be the 5th largest by value after India, Israel, the US and China (4.1% of total value) - Most of the global cutting and polishing industry has shifted to lower cost cutting centres such as India & China (66.1% of total value) - China and India’s capabilities have now extended to larger stones as skills have improved

CURRENT SITUATION 92% of local diamond production by volume and 49% by value is not economically cuttable in SA Section 59 agreements allow for duty free export of diamonds De Beers uses an aggregation system and re-imports 162% of Category 1 and 152% of high grade Category 2 Transhex and other producers sell their product on local bourses

FACTORS THAT DETERMINE SUCCESS IN : Trading hubs Included in established diamond demand networks Low duty or duty free import and export of diamonds Highly incentivised (incl. tax concessions or exemptions and limited or no exchange controls) Specialised financial services Jewellery manufacturing The SA Jewellery Industry is small in scale when compared to Europe, India and the US and has a small domestic market Competitiveness is highly dependent on productivity, cost competitiveness, scale, quality, design and brand names SA’s distance from major consuming markets is a major inhibitor

FACTORS THAT PREVENT SA FROM SIGNIFICANTLY EXPANDING DOWNSTREAM INDUSTRY Due to SA’s Distance from major diamond jewellery consuming markets Limited current scale, cost and quality competitiveness It will be very difficult for SA to significantly expand its share of any individual stage of the diamond pipeline given the highly competitive and globalised nature of the diamond pipeline

FEASIBILITY OF DEVELOPING THE SA INDUSTRY INTO A MAJOR PLAYER When assessed against the relative opportunity and cost of intervention in other priority sectors, intervention in the downstream diamond industry presents a much smaller opportunity and at a very high cost. This is because of : - Capital intensity - Barriers to entry - Risks - Global industry competition Therefore it is unlikely to radically grow the industry without significant financial resources, even with such resources, success can not be guaranteed because of the rapid progress being made in emerging competitor hubs e.g China and Vietnam One of the salient points of the study is therefore that great care should be taken when expending constituency resources on intervening in the sector, as the returns (social, financial and economic) may be limited.