SIERRA LEONE'S DIAMONDS REGAINING SOME SPARKLE?

UNCLAS SECTION 01 OF 02 FREETOWN 000205 SIPDIS SIPDIS DEPT FOR AF/W, AF/EPS, EB E.O. 12958: N/A TAGS: EAID ECON EMIN SL SUBJECT: SIERRA LEONE'S DIAMONDS REGAINING SOME SPARKLE? REF: 06 FREETOWN 586 FREETOWN 00000205 001.2 OF 002 -------------- Summary -------------- ¶1. Sierra Leone's legal export of alluvial diamonds lost some luster in 2006 with declines from 2005 of 17.25% in value and 12.31% in volume, ending seven years of dramatic increases. This decline was partially offset by a 3.99% rise in the value of kimberlite exports, but overall diamond exports were down 13.48% in total value. Diamond exports appear to be regaining their sparkle in 2007 with a 25% increase in the value of alluvials in January/February exports compared with the same 2006 period,and an overall increase of 37% in value when kimberlites are factored in. The 2007 figures are more significantly an 18% increase in value over January/February 2005, which was a record setting year for Sierra Leone. Whether these increases can be sustained throughout 2007 will depend on numerous variables including diamond quality, quantity, and prices; expansion of kimberlite mining; and disincentives for illegal alluvial mining and smuggling. The abysmal working conditions of alluvial diamond diggers remain problematic for Sierra Leone's stability, but are attracting world attention. End Summary. -------------- 2006 - A Dismal Year -------------- ¶2. 2006 was a bad year for Sierra Leone's diamond exports with a 13.48% decline in value to $125,304,841 from $141,940,244 in 2005. This was the first year that the total value of legally exported diamonds has declined since 1999 when total exports barely exceeded $1 million. ¶3. The average value per carat declined by 2.24% to $207.61 in 2006, down from $212.26 in 2005. However, the principal cause for the drop in export value was a 10.79% reduction in the volume exported to 603,565 carats, falling from 668,709 carats in 2005. Alluvial (riverine) production declined in value by 17.25% in 2006 to $101,857,434, compared with $119,429,528 in 2005. This reflects a 12.31% decline in legally exported production from 552,044 carats in 2005 to 491,526 carats in 2006, and 4.4% reduction in value per carat from $216.34 in 2005 to $207.23 in 2006. Kimberlite (volcanic stem) exports actually rose in value by 3.99% in 2006 to $23,447,407 from $22,510,716 in 2005. This increase was due to a 7.08% rise in value per carat to $208.28 in 2006 from $192.95 in 2005 despite kimberlite production falling by 4.13% to 112,039 carats in 2006 from 116,665 carats in 2005. ¶4. Given the history of diamonds in Sierra Leone, illegal smuggling of larger, better quality diamonds bypassing the Kimberley Process is immediately suspected for the decline of alluvial exports in 2006. According to a specialist in USAID's Integrated Diamond Management Program (IDMP),other factors may be at play. Diamond production was somewhat disrupted in 2006 by the cancellation of many small scale diamond licenses that were reallocated to larger mechanized, mainly foreign, private sector operations that did not go into full production during the year. This change in the sector might also have led to former license holders engaging in illegal mining and smuggling. There was a dearth or new diamond mining areas opening up, and evidence of falling production in existing alluvial mining sites. An exodus of Lebanese diamond dealers from the traditionally productive Koidu area suggests that those fields are being depleted. The imposition of 30% income tax on diamond exporters may have led to some of them bypassing the Kimberley Process for their higher value diamonds. According to a leading Lebanese diamond exporter, the income tax dispute in early 2006 affected alluvial exports for the entire year. -------------- 2007 - Diamonds Rebounding -------------- ¶5. Diamond exports have rebounded during January/February ¶2007. Their total value has increased by 37% to $21,918,026 as compared with $18,506,099 during the same period in 2006. Alluvial diamonds, which usually have a high gem quality content, have increased by 25% in value to $16,001,634 thus far in 2007 as compared with $11,945,411 in 2006. Alluvial FREETOWN 00000205 002.2 OF 002 production has improved by 17% to 70,101 carats and in price by 15% to $228 per carat in January/February 2007 when compared with 2006 figures. Kimberlite mining, which is more tightly regulated than alluvial mining, has improved even more in 2007. There was a 33% increase in total value to $6,983,409 over 2006, based a dramatic 104% increase in production to 47,685 carats despite a 35% drop in price per carat to $146 as compared with January/February 2006. Although kimberlite diamonds fetched only a per carat average of $102 in January 2007 due to their poor quality, higher quality kimberlite exports in February brought an average of $265 per carat. According to an industry insider, this may be because Koidu Holdings, the sole kimberlite company, has begun to take kimberlite stones from a new site in Tongo Fields. ¶6. After a dismal 2006, the improved figures thus far for 2007 have returned some sparkle to Sierra Leone's diamond sector. Compared with January/February 2005, which was a record setting year for Sierra Leone, the total value of legal exports is up by 18% based on a 16% increase in carats produced and a slight increase in price per carat. Whether Sierra Leone's volume of legal exports can be sustained following last year's drop-off remains to be seen. The country's leading alluvial diamond exporter has told the Ambassador that he expects 2007 to finish about equal to 2006 despite the strong start. -------------- Comment -------------- ¶7. After a year in which Sierra Leone's image has been battered by the "Blood Diamond" film and various documentaries including the History Channel's "Blood Diamonds" and CNN's "Blood on the Stone," the significant increase in Kimberley Process compliant exports is a positive development indeed for the diamond sector and for the country itself. Despite this good news the working conditions for alluvial diamond diggers remain abysmal. However, the attention being given to their exploitation by USAID's IMDP and the world media should improve their situation. At a minimum, the Diamond Areas Community Development Fund (DACDF),which assists diamond producing communities from a portion of the 3% export tax on alluvial diamonds, should increase from the $141,385 available in 2006. Any increase in the DACDF will benefit stability in Sierra Leone since diamond community discontent contributed to the conflict diamond situation during the civil war. End Comment. HULL