If you are thinking of investing in diamonds this article aims to give you some background information about the company that has dominated the diamond market for over one hundred years.
It looks at the leading role played by De Beers since its formation in 1888. The De Beers story is a fascinating one and explains why diamonds are so highly valued today.
What was the influence of De Beers on the diamond market?
De Beers Consolidated Mines Limited was established by Cecil Rhodes and created a monopoly on the production and distribution of diamonds from South Africa.
Rhodes created various distribution arms including the London “Diamond Trading Company” and in Israel “The Syndicate”. Other miners and distributors joined De Beers with the shared philosophy of maintaining a diamond scarcity to sustain high prices.
When Rhodes died in 1902, De Beers controlled 90% of the world supply of rough diamonds.
Ernest Oppenheimer was a rival diamond producer who owned Anglo American Corporation. He bought into the De Beers board and by 1927 had risen to the role of chairman. With Oppenheimer at the helm, De Beers and the Central Selling Organisation (CSO) formed exclusive contracts with suppliers and buyers, making it impossible to deal in diamonds outside the De Beers empire.
The business model worked as follows:
- A De Beers subsidiary would purchase the diamonds
- De Beers would determine the quantity to sell and the price for the year
- Each producer would receive a proportion of the total output
- Buyers would resell diamonds as centres such as Antwerp and New York
Diamonds are forever
This business model worked very well until the 1930s during which time, the price of diamonds began to decline. This prompted De Beers to focus on marketing. They engaged a Philadelphia based advertising agency – N. W. Ayer & Son – to promote diamonds to the American people using the message that diamonds were synonymous with love.
The campaign persuaded men (and women) that the size of the diamond in an engagement ring demonstrated their love for their intended, creating the tag line “A diamond is forever”. The same techniques were used in Japan, Brazil and Europe.
An indication of its success was the rapid increase in Japanese brides wearing diamonds from 5% in 1967 to 60% in 1981.
New discoveries and the competition
The De Beers empire did come under threat from new diamond discoveries in Siberia and elsewhere. However, De Beers handled this by buying up almost all the output and creating a valuable partnership between De Beers and the USSR.
The situation in Botswana followed a similar course: Be Beers gave the government a 15% share in return for its diamonds which are mined and distributed through Debswana.
Despite various rebellions, De Beers maintained its stranglehold on the diamond market. Ten times a year it would sell diamonds at “sights” where it fixed both the number of diamonds available for sale and the price at which they would sell.
Up to 250 “Sightholders”* were invited to these events and they were given the option to buy or reject boxes but had no power to negotiate. Sightholders were compelled to reveal market information and inventory levels and also grant De Beers the authority to audit them. Failure to comply was punished by withholding supply.
Anti-competitive measures
Some well documented anti-competitive tactics of De Beers included the following:
- During the 1970s, Israeli merchants hoarded diamonds to drive up prices. Concerned that this would drive down prices when the diamonds were released, De Beers reduced their available supply by 20% and added surcharges to create price fluctuations. The Israelis were forced to sell their stocks.
- In Zaire, diamond dealers who were dissatisfied with the CSOs hold over the market, began selling diamonds on the industrial diamond free market. De Beers responded by flooding the market with similar diamonds, eventually driving down prices.
De Beers today
More recently, countries with large stockpiles of diamonds such as Russia, Canada and Australia refused to cooperate with the De Beers single channel system. Unable to force them to do so, De Beers switched its strategy from controlling the world supply of rough diamonds to promoting its brand of diamonds and opening retail outlets with brands such as Louis Vuitton.
The venture was highly successful, with profits increasing substantially; however, its market share in diamonds fell from almost 90% in 1987 to 35% in 2011. While De Beers no longer has a stranglehold on the diamond market, it remains highly influential. It controls around 30% of rough diamond sales making it the sector’s most significant player.
The Oppenheimer family sold its majority ownership to Anglo American plc in 2011. Anglo American plc holds 85% of De Beers stock. The largest shareholder of Anglo American is the South African government which controls 15% of the shares.
*What are De Beers Sightholders?
These are companies that are members of the De Beers Global Sightholder Sales network, authorised by De Beers to purchase bulk sales of rough diamonds.
Currently, 90% of De Beers diamonds are sold through the network to either Global Sightholder Sales customers or Accredited Buyers. The former has a term contract supply, while the latter purchase diamonds on an ad hoc basis.
Customers who purchase diamonds from De Beers are free to sell them anywhere in the world. However, to provide beneficiation to countries of its partners, De Beers ring fences some of the supply to sell to those countries for cutting and polishing.
Businesses that wish to apply for Sightholder status must, with some exceptions, demonstrate a turnover of at least $30 million a year and annual average diamond purchases of over $20 million.
Diamond industry
If you want to learn more about the diamond industry, then please click here.
