Ce: Resource Investor
Author: Paul Zimnisky
Up until recently the diamond industry had a structural flaw — just one player controlled it. De Beers was the diamond industry, and diamonds were synonymous with De Beers. However, over the last 25 years, a series of events led to the dismantling of the De Beers monopoly. Today, De Beers no longer has complete control of the diamond industry, and for the first time in a century, market forces, not the De Beers monopoly, drive the diamond market.
In the late 1800s after a massive diamond discovery in South Africa, a diamond rush was born, and businessman Cecil Rhodes bought as many diamond mining claims as he could, including farmland owned by the De Beer family. By the turn of the century, Rhodes had accumulated enough properties that his company accounted for the majority of the world’s supply of rough diamonds. He called his company De Beers Consolidated Mines Limited.
As De Beers maintained a hold on the worlds rough diamond supply through the first quarter of the 20th century, financer Ernest Oppenheimer began accumulating shares of De Beers whenever available, and reached a controlling stake of the company by the mid-1920s. Under Oppenheimer’s control, De Beers further expanded into every facet of the diamond industry, intent on monopolizing distribution. De Beers successfully influenced just about all of the world’s rough suppliers to sell production through the De Beers channel, gaining control of the global supply not produced by De Beers mines. The cartel was born, giving Oppenheimer the power to influence diamond supply and thus diamond prices.
The De Beers distribution channel, named the Central Selling Organization or CSO, (later changed to Diamond Trading Co. or DTC), had the power to sell what, when, and where they wanted to. In order to buy from CSO, membership as a “Sightholder” was required, which was completely the discretion of De Beers, as was the quality and price of the product being sold. No negotiation between the CSO and Sightholder occurred, all transactions were take-it-or-leave-it. In order to maintain a stable but rising diamond price, De Beers had the power to stockpile inventory in a weak market or raise the prices charged to Sightholders, and then in an excessively strong price environment (with the potential to damage demand), De Beers had the excess supply on hand to release to the market when needed, repressing disorderly price increases.
To keep the system intact, it was necessary for De Beers to maintain control of the world’s rough diamond supply via purchases through CSO. In the second half of the 20th century, as new world class mines were discovered in Russia, Australia and Canada, it became more and more difficult for De Beers to purchase all global production. The biggest risk to the survival of the cartel was for mines to begin selling directly to the market, thus bypassing De Beers.
Source: WWW International Diamond Consultants Ltd, Economic Times of India, and Authors analysis.
Russia (present day the world’s largest diamond producer by value) began producing diamonds in the mid-twentieth century. At first, the Russians agreed to sell production to De Beers keeping the cartel intact. However, this quickly became extremely costly to De Beers as the Russian mines produced greater quantity and lower quality stones than anticipated. This prompted De Beers to commence the ”Diamond is forever” marketing campaign, transforming the image of diamonds to a proxy for love, expanding demand of lower quality stones to a new middle class American market, in an effort to absorb the new supply. Another challenge emerged in 1963 when Anti-Apartheid legislation restrained the Soviet Union from dealing with a South African company. But the final blow to the arrangement came during the Soviet Union collapse in the 1990s, when political chaos and a weak ruble further separated Russia’s production from De Beers.
Shortly after losing control of Russian supply, the Argyle Mine in Australia, at the time the largest diamond producing mine in the world by volume, broke away from the DeBeers supply chain. Over the next few years, other mines followed suit, as new world-class mines in Canada sold supply independent of De Beers.
The emergence of new supply distributed outside of CSO meant that De Beers, was forced to hold back from selling large portions of its own inventory and to purchase excess supply from its new competitors in the open market, in an effort to maintain control of the market. By the end of the 1990s, De Beers’s market share had fallen from as high as 90% in the 1980s to less than 60%. De Beers no longer had control of the market in 2000, when the company announced a shift in strategic initiative to focus on independent marketing and branding, rather than generic diamond price control.
However, the monopoly officially ended in 2001, when several lawsuits were filed in U.S. courts alleging that De Beers “unlawfully monopolized the supply of diamonds, conspired to fix, raise, and control diamond prices, and issued false and misleading advertising.” After multiple appeals, in 2012 the U.S. Supreme Court denied final petition for review, and a settlement in the amount of $295 million with an agreement to “refrain from engaging in certain conduct that violates federal and state antitrust laws” was approved.
Source: WWW International Diamond Consultants Ltd, Gem Certification & Assurance Lab, Price Scope, and Authors analysis. Price constitutes various qualities of rough and polished diamonds, and shows diamond price deviation from starting basis of 100 beginning in 1987.
Shortly after losing control of Russian supply, the Argyle Mine in Australia, at the time the largest diamond producing mine in the world by volume, broke away from the DeBeers supply chain. Over the next few years, other mines followed suit, as new world-class mines in Canada sold supply independent of De Beers.
The emergence of new supply distributed outside of CSO meant that De Beers, was forced to hold back from selling large portions of its own inventory and to purchase excess supply from its new competitors in the open market, in an effort to maintain control of the market. By the end of the 1990s, De Beers’s market share had fallen from as high as 90% in the 1980s to less than 60%. De Beers no longer had control of the market in 2000, when the company announced a shift in strategic initiative to focus on independent marketing and branding, rather than generic diamond price control.
However, the monopoly officially ended in 2001, when several lawsuits were filed in U.S. courts alleging that De Beers “unlawfully monopolized the supply of diamonds, conspired to fix, raise, and control diamond prices, and issued false and misleading advertising.” After multiple appeals, in 2012 the U.S. Supreme Court denied final petition for review, and a settlement in the amount of $295 million with an agreement to “refrain from engaging in certain conduct that violates federal and state antitrust laws” was approved.
Source: WWW International Diamond Consultants Ltd, Gem Certification & Assurance Lab, Price Scope, and Authors analysis. Price constitutes various qualities of rough and polished diamonds, and shows diamond price deviation from starting basis of 100 beginning in 1987.
The way De Beers did business, which revolved around the central concept of controlling supply in the market, was simply not viable in a more competitive environment, and De Beers could not maintain the monopoly. From 2000 to 2004 diamond prices modestly declined, as the De Beers stockpile was liquidated into new demand coming out of Asia. By 2005, the inventory overhang had been lifted allowing market forces to drive diamond prices for the first time in a century, resulting in unprecedented price volatility. Diamond prices made a new high in 2007, followed by a violent sell off in 2008 and 2009 before rebounding to another new high in the summer of 2011.
With a market share of less than 40%, in 2011 the Oppenheimer family announced a complete exit from De Beers, ending almost a century-long ownership of perhaps the greatest monopoly in history.
About the Author: Paul Zimnisky
Paul Zimnisky, has worked in the financial industry for almost 10 years, primarily as a buy-side equity analyst focused on the metals and mining space, and as an ETF arbitrage trader. Paul currently creates and develops new exchange-traded products. Paul has a finance degree from the University of Maryland.
Gemma News Service 