The world's biggest diamond producer De Beers condemned a proposed law to restructure the South African diamond sector on Tuesday, saying a 15 percent export duty could lead to smuggling and money laundering.
The government wants to open up distribution of diamonds, currently tightly controlled by De Beers, to stimulate more jewellery manufacturing and gem cutting in South Africa, the world's fourth largest diamond producer by value.
"The intent is good, but the unintended consequences of the act are potentially damaging to the South African diamond industry as a whole and to the global diamond industry," top De Beers executive Jonathan Oppenheimer told Reuters.
"A 15 percent export duty is a barrier which does not reflect the real mobility of diamonds...And any time you try to impose financial restrictions on the flow of diamonds they have traditionally tended to - the trade calls it 'submarine' - be smuggled," he said on the sidelines of a mining conference in Cape Town.
De Beers is 45 percent owned by diversified mining group Anglo American.
A Diamond Amendment Bill introduced by the government would remove exemptions from a 15 percent export duty, currently used by De Beers to ship South African production to London, where a global mix is created and then shipped to cutters and traders around the world.
The government argues that an export duty will encourage more local manufacturing, but Oppenheimer said that with labour costs much lower in India and China, the tax will prompt illegal activity.
"It also potentially could have significant impact in opening the door with these illegitimate flows to the use of these flows for money laundering and the like," said Oppenheimer, managing director of the South African unit of De Beers.
The government also wants to set up a state diamond trader to improve access of diamonds to new manufacturers, especially black ones in a sector still largely controlled by whites 11 years after the end of apartheid.
De Beers had offered the government a long "shopping list" of possibilities to improve the sector, but these were not accepted.
One of them included setting up a joint venture trading arm with the state such as De Beers runs in India with the government there, Oppenheimer added.
"We have in India a 50-50 partnership with the Indian government...and that is a relationship which works incredibly well. We bring the diamond skills and they bring an audit and government's function," Oppenheimer said.
"We talked to the government here about our experiences in India and, yes, that would have been one of the issues we talked around."
He declined to detail other proposals. Parliamentary hearings on the proposed law are due to begin on October 10.
Oppenheimer said diamond prices are expected to remain strong in the medium to long term due to a supply shortfall, but they would not grow at the same pace as they had recently.
De Beers raised prices three times last year, totalling around 14 percent, but has done so only twice this year in January and June, both times by 3 percent.
"I think we would see price increases at around about global GDP growth," he said, referring to the medium term.
The long-term outlook also looked healthy for supporting prices, but Oppenheimer said some analysts have exaggerated a supply shortfall when they say production will drop dramatically.
A forecast drop-off in production after 2025 is because companies do not want to spend money proving more reserves too far into the future, even though production will continue.
"If you look at De Beers production profile, we hardly have any production scheduled beyond 2025, yet I can give you every assurance that the vast majority of our mines, come 2025, will be showing a schedule that ends at 2050, and this keeps moving out," he said.