“A diamond is forever”, so the saying goes. Marilyn even sung that diamonds are a girl’s best friend. Even I find myself fawning over a ring or necklace in a jewelry store window just as long as anyone else, but I do also realise that my chances of ever owning such a piece are slim to none.
So how have we arrived to a point where we go gaga over what is simply just a shiny old rock?
The story of diamonds really is a true love story… the love of money. Throughout history, diamonds really were a rarity, adoring only the heads of royalty and the hands of the nobility. However, the discovery of diamonds in South Africa and other countries in the late 1800’s flooded the market. For the businesses trading in the diamond commodity, this would prove disastrous and lead to a collapse in the demand for diamonds.
What was needed was an ingenious plan to re-brand and advertise diamonds as an intrinsically covetable and treasured commodity. It is here we come across DeBeers, the most important name in diamonds ever since.
The start of The diamonds cartel
Cecil Rhodes was the English businessman who broke into the South African diamond market by renting out water pumps to larger contractors before buying up his own diamond mines. After buying out a fellow entrepreneur, he established the DeBeers Mining Company, named after the former owners of one of his mines, in 1880.
By consolidating with smaller claim holders and committees, it took only eight years for DeBeers to own virtually all of the diamond mines in South Africa. In 1888, Rhodes’ DeBeers Consolidated Mines Ltd had a monopoly over the production and distribution of all diamonds coming out of the country.
In an attempt to control supply and demand, and subsequently, prices; Rhodes set up the Diamond Syndicate, allowing other diamond traders to join and distribute diamonds around the world under one name, thus creating a scarcity of diamonds and keeping their prices high. Such was the level of DeBeers success, that diamonds are the only commodity to have continuously risen in value since the Great Depression without fluctuation. This is however, equally in part due to the success of the greatest advertising campaign of the 20th century – ‘A diamond is forever’. The notion that diamonds are precious, everlasting, rare and valuable gems exists to this day, to the point where in every mainstream culture and society, the idea of getting married or celebrating any meaningful milestone without a ‘rock’ is quite simply alien to us all.
Towards the end of Rhodes’ life, DeBeers controlled 90% of the world’s production and distribution of diamonds. However, it was Ernest Oppenheimer who made DeBeers into the empire it is today. The owner of a rival diamond production company, Oppenheimer slowly bought his way onto the board at DeBeers and by 1927 he was Chairman of the Board.
Under his leadership DeBeers secured exclusive contracts with producers, suppliers and buyers which effectively made it impossible to trade in the industry without them. What resulted was the greatest and most successful cartel of the 20th century.
The success of the cartel throughout the 20th century has been down to DeBeers’ ability to manipulate the international diamond market and artificially prop up prices. The company dedicated much time and effort in convincing independent diamond producers to join their distribution channels, and flooding the market with diamonds similar to those sold by the producers who refused the offer. They also procured and stockpiled diamonds that had been produced by other manufacturers in an attempt to limit supply and ensure prices were kept at premium highs.
The company set up the Central Selling Organisation (CSO) conglomerate to regulate the quantity and price of diamonds on the market. The CSO allows for DeBeers to determine the amount of diamonds it plans to sell each year. Subsidiaries buy them from any of the producers in the cartel; who are guaranteed a fixed percentage of the total output and are charged a handling fee between 10-20% for the pleasure.
Through the CSO; DeBeers would hold ten sights a year, where they bring packages of diamonds to be sold on a take-it-or-leave-it basis. Diamond dealers must be invited to attend the sights and such is their exclusivity, many do not want to risk losing this privilege by refusing or haggling on the offered packages. The dealers would then go on to trade the diamonds on the Bourse in the main international diamond centres of Antwerp, Tel Aviv and New York. During the height of the power and influence of the cartel, over 85% of the world’s diamonds were traded in this way.
Economic theories tells us that for a cartel to remain functioning, for any extended period of time, is practically impossible. In this case, DeBeers, who restrict the supply of diamonds, would expect to be challenged by the members who would secretly cut their prices in an attempt to increase their share of the market, and also by new suppliers and producers, who join, enticed by the high profits of the other members. How then, did DeBeers operate and maintain a flourishing cartel that was in flagrant violation of every competition ad trading law in existence on the free market? More importantly, why was DeBeers allowed to run this cartel, when others, such as OPEC, are so heavily criticised and prosecuted?
Firstly, diamonds, unlike oil, are not marketed as a necessity for everyone. They’re advertised to the masses as a means of bringing a little luxury into their lives. Whilst we may hold a love for diamonds that exceeds all rationality, we can live without them. We can’t however, live without oil. For this reason, many governments and businesses do not fight for the drilling and distribution rights of what is quite honestly, a commodity in natural abundance.
Oil however, is not in infinite abundance. Oil is money, and money makes the world go round. If OPEC sets artificially high prices, the effects reverberate around the world. It’s very much a reverse supply and demand scenario. OPEC can control the supply and price of oil, knowing it will have zero effect on demand. Therefore it is in the interests of many governments to limit the powers of such a cartel. In this sense, OPEC is the younger, albeit more evil brother of the cartel world. Outside of the free market, who really cares if organisations fix prices for lumps of shiny carbon when we are facing a disaster of unprecedented proportions if the oil runs out?
The main answer lies in the fact that DeBeers has always been a South African company. Whilst many other countries have their own plentiful diamond resources; South Africa remains one of the largest diamond producers in the world, and the government nationalised all diamond mines many years ago. So now, anyone who discovers a diamond mine on his land also discovers that that land automatically becomes government property. In collusion with DeBeers, the South African government would then leases out drilling and distribution rights to operators within the cartel.
With every new country that discovered plentiful diamond resources, the fear set in that the government would attempt to sell on the open market, however DeBeers have played their cards right, and managed to welcome another cartelist into the fold with the promise of their own quotas and pay outs.
However, in recent years the influence of the most powerful cartel in history has wavered, some may even say it has collapsed and DeBeers is no longer the empire it once was. Revolts in some African countries and in Israel, followed by the loss of Australian, Canadian and Russian producers and suppliers who began refusing to co-operate with the distribution channels set by the company, forced the company to re-evaluate its strategy, forcing it to focus solely on its own brand and retail operations.
All this, and the blood diamond disasters in the 1990’s led; in 2011, the Oppenheimer’s to sell their 40% stake in the company, thus ending almost a century of control of the world’s largest diamond company.
Today, DeBeers is still one of the most significant names in the diamond industry. Whether people care to admit it or not, the mere mention of a DeBeers diamond draws gasps of ooh’s and aah’s, and conjures an image of a quality and craftsmanship that, even those who publically decry the company can fail to admire.
Whilst for almost a century, the cartel held back many players in the diamond industry, the success of the cartel, not only in maintaining artificially high prices and profits for its members, but in promoting the diamond as a gemstone above and beyond all others, as one that is impossible not to covet; ultimately led the market to where it is now. And for that, the industry can only thank DeBeers.