28-07-2012, 04:04 PM
De Beers and Beyond: The History of the International Diamond Cartel
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Diamonds are forever
To hear these words from a person who attributes
his entire wealth and power to the
trade of diamonds illustrates the peculiar nature
of the diamond market: Jewelry diamonds
are unjustifiably expensive, given they
are not actually scarce and would fetch a price
of $2 to $30 if put to industrial use. Still,
by appealing to the customers’ sentiment, diamonds
are one of the most precious luxury
items and enjoy almost global acceptance.
This fact is often attributed to the history
of one company. DeBeers, founded by Cecil
Rhodes in 1870, has been a highly successful
and effective controller of the diamond market,
having developed a unique purchasing and
marketing cartel that has influenced prices in
the market virtually undisturbed for almost a
century.
Diamonds and the Cartel
For centuries, the only two countries producing
diamonds were India and Brazil. Up to
the middle of the 19th century, the world
supply of diamonds was so scarce that even
monarchs and noblemen found it hard to get
hold of them. The idea of making diamonds
available to the general public seemed unthinkable.
When diamonds were first found
in South Africa in 1867, however, supply increased
rapidly, although the notion of diamonds
as a precious and rare commodity remained
to the present day.
The cartel under threat
Israel: Downstream Rebellion
The huge profits in virtually every sector of
the industry finally turned out to be the major
stumbling block for DeBeers in the mid-1970s.
In the 1970s, Israel was going through a period
of high inflation; diamonds were one of
the few stable currencies and means for storage
of value; diamonds as collateral were the
best way of securing preferential loan rates.
This induced merchants to hoard a significant
amount of diamonds with a view at reselling
them later. As a result, the supply of
diamonds was artificially reduced, driving up
prices.
Zaire
A brief period of stable activity was soon disrupted
by another attack on the cartel. Zaire
felt that the terms they were given by the CSO
fell below their expectations. Zaire claimed
they were charged a 20 per cent handling fee
on their diamond sales, and that they could
easily recover some of that on the free market
for industrial diamonds while undercutting
the cartel’s artificially high prices. And so
they did. The timing of Zaire’s move proved
rather unfortunate, however. Because the cartel
had run up huge stockpiles of all kinds of
diamonds, DeBeers was quite prepared to release
some of it in the market at a price much
below the prevailing market price. Zaire, who
contributed less than 3 per cent of world production,
was in no position to push prices upwards,
and had to suffer a dramatic drop in
its revenues.
Russia
As early as in 1957, large quantities of diamonds
were discovered in Siberia. DeBeers
quickly realized the latent threat posed by
these supplies and allegedly negotiated an
agreement with the Soviet government to
channel their diamonds through the CSO. Understandably,
the terms were never revealed,
but industry sources were convinced that De-
Beers made sure virtually no Siberian gems
would enter the market through other channels
than the CSO.4 It was estimated that Soviet
production represented between 20 and 30
per cent of world production, or some 10 to 11
million carat. DeBeers, under the estimated
terms of the deal, guaranteed the purchase of
95 per cent of Soviet production, while allowing
the Soviet diamond industry to cut, polish,
and sell the remaining five per cent autonomously.