DE BEERS, THE OPPENHEIMERS AND THE DE BEERS DIAMOND MONOPOLY

DE BEERS

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De Beers, the powerful South African diamond enterprise, controls about 40 percent of the gem-quality diamond trade (43 percent from its mines in southern Africa and the rest through contracts to sell diamonds for Russia and Canada). De Beers is still the world’s biggest diamond miner. It vies for the No.1 spot in carat terms with Russian state-owned miner Alrosa. De Beers used to control 80 percent of the market. In the 1920s, it controlled 90 percent. In 2000, it controlled about 75 percent of the rough diamond market and posted sales of $5.6 billion.

De Beers was founded in 1888 and survived two world wars, the great Depression and the uncertainty of consumer demand. It has assets of $21 billion and controls an empire whose reach extended from the great diamond mines of South Africa, Australia, and Siberia and the sorting rooms of London, Antwerp and Tel Aviv. The focus of the distribution side of its business is it 125 major trading partners.

De Beers wholly owns all 11 of its diamond mines in South Africa, Botswana and Namibia and control 50 percent of the world's rough stones in value terms. It owns the purchasing rights for mines in Russia and Australia. Major diamond-producing countries with mines not controlled by De Beers include Angola, Zaire, Ivory Coast and Brazil. Most of the their non-South African assets are held by the Swiss company called De Beers Centenary AG.

On De Beers status in 2011, The Economist reported: “De Beers, however, is no longer the diamond geyser it once was. In the 1990s it mined half the world’s stones and controlled the sales of 80 percent. But then shoppers started to worry about “blood diamonds” that might finance Africa’s nasty wars. Tracing a gem’s provenance is hard. So, to avoid the risk of bad publicity, De Beers decided to market only those it dug up itself. [Source: The Economist, November 12, 2011]

“Its market share tumbled. Now it produces 35 percent of the world’s diamonds by volume and faces far stiffer competition. Alrosa, Russia’s state-backed diamond miner, now rivals it.At the same time governments, which typically control mineral rights, are driving ever-harder bargains. Botswana pockets around 80 percent of the profits from its joint venture with De Beers, which yields a whopping two-thirds of De Beers’s sparklers. Botswana also has a pre-emption right over the Oppenheimers’ shares, so it may yet increase its stake in De Beers from 15 percent to 25 percent. De Beers operates in some tricky countries: Angola is unstable and South Africa has politicians who would love to nationalise its mines. Anglo’s recent strategy has been to mine in easier places; the De Beers deal may drag it deeper into quagmires. [Ibid]

Websites and Resources on Gems: All About Gemstones allaboutgemstones.com ; Minerals and Gemstone Kingdom minerals.net ; International Gem Society gemsociety.org ; Wikipedia article Wikipedia ; Gemstones Guide gemstones-guide.com ; Gemological Institute of America gia.edu ; Mineralogy Database webmineral.com ;

Websites and Resources Diamonds: Info-Diamond info-diamond.com ; Diamond glossary and FAQ heart-in-diamond.com ; Diamond Facts diamondfacts.org/about/index ; Diamond Mining and Geology khulsey.com/jewelry/kh_jewelry_diamond_mining ; Diamond Mine mining-technology.com/projects/de_beers ; Costellos.com costellos.com.au/diamonds ; DeeBeers debeers.com/page/home/ ; Wikipedia article Wikipedia ; American Museum of natural History amnh.org/exhibitions/diamonds ;

Book: The Heartless Stone: A Journey Through the World of Diamonds, Deceit and Desire by Tom Zoellner.

De Beers Monopoly

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DeBeers in Beverly Hills
De Beers is arguable the world's most effective, successful and profitable commodity cartel and monopoly in existence today. It controls every phase of the business: mining, distribution and marketing. Fluctuations in supply and demand have traditionally been regulated through a stockpile of unpolished diamonds in the London office vaults. It is the world’s largest stockpile of its kind and has traditionally been valued in the billions of dollars. In the past any group that threatened the monopoly was harshly punished by De Beers who flooded the market from its stockpile

De Beers claims that their monopoly is benign and it benefits everyone involved, the same argument made by Bill Gates for Microsoft. In their defense, they have helped keep prices for diamonds high and stable, while prices for things like gold and silver have plummeted, hurting everyone involved in those commodities. Dealers complain, however, that there never seems to be enough diamonds to meet demand and they have to pay the prices dictated by De Beers.

In a interview in 1979 Harry Oppenhiemer, Sir Ernest's son, told National Geographic: "People call us a monopoly, but we cannot control production to any extent, nor can we control the market. We do have enough money to stockpile gems and control prices. The price fluctuations accepted as normal with other raw materials would be destructive of public confidence in the case of a pure luxury item such as gem diamonds. If this is a monopoly, it benefits all concerned: producer, dealer cutter, jeweler, and consumer."<>

In the 1990s a glut of new diamond supplies saturated Western markets and pushed De Beers to the brink of crisis and caused diamond prices to fall. Threats came from Russia and Angola, which "leaked" million of diamonds on to the world market ( See Russia and Angola) and Northwest Territories of Canada, where rich deposits of gem-quality diamonds have recently been discovered; and large mines in Australia.

Tom Zoellner wrote in the Washington Post, “The Oppenheimer family's iron grip on the global supply chain fell apart in the 1990s when Alrosa, a diamond company owned by the Russian government, and the Argyle Diamond Mine in Australia began to sell their stones independently. De Beers's share of the rough-diamond trade is now 40 percent and falling. Interestingly, though, the end of the De Beers monopoly has not led to aggressive underbidding: Everyone involved seems to recognize that price wars could kill the diamond goose. And stockpiling still happens. Although a healthy 163 million carats or so are mined annually, a certain amount of that yield is withheld from the marketplace. Alrosa, in particular, sold a substantial percentage of its diamonds to a metals bank in 2009 rather than risk flooding the market in shaky economic times. [Source: Tom Zoellner, Washington Post , July 4, 2010]

The Oppenheimers

The Economist reported: “The Oppenheimers have been in the diamond business for more than a century, including over 80 years with De Beers. Nicky’s grandfather Ernest settled in South Africa in 1902, having been posted to the diamond-boom town of Kimberley at the age of 22 as an agent for a London-based firm of gem traders. By 1917 he had set up his own mining company, Anglo American. A few years later he won control of De Beers, a diamond miner that had been founded in 1880 by Cecil Rhodes, a British-born colonialist. By the time Rhodes died in 1902, De Beers controlled 90 percent of the world’s diamond production. Rhodes’s immense fortune still pays for people like Bill Clinton to study at Oxford. [Source: The Economist, November 12, 2011]

“Since 1929, when Sir Ernest (knighted for war services in 1921) took over as chairman, the Oppenheimers have led De Beers almost without interruption, massaging the price of diamonds by hoarding them and occasionally selling part of the firm’s stockpile. The family has wielded political influence, too, mostly bankrolling liberal causes. Both Ernest and his son Harry served in South Africa’s parliament: Ernest for 14 years in the run-up to the second world war, and Harry for nine years as a member of the anti-apartheid opposition. [Ibid]

De Beers Business

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DeBeers in San Francisco
De Beer's has cornered the diamond market by setting diamond prices and controlling the main marketing channel for the world diamond supply through a select group of 125 buyers known as "sightholders" in London. Lucern and Johannesburg. The Central Selling Organization (CSO), the De Beers marketing network, handles most of diamonds from mines it doesn't own by controlling their production through purchasing rights agreements.

De Beers stock increased in value between 1984 and 1994 by 465 percent. In the late 1990s the stock didn't perform so well. In 1999 and 2000 De Beers sold half of its $5 billion stockpile.

In July 2000, De Beers announced that it would retreat from its 70 year practice of "supply management"---better known as "monopoly pricing" in which it controlled prices by stockpiling diamonds. The company said it would no longer stockpile diamonds to create false scarcity. Its aid it would reduce its $3.9 billion stockpile of uncut diamonds to $2.5 billion by the end of 2001.

In 2001, the Oppenheimers turned De Beers into a private company through a leveraged buy out organized by the Oppenheimer family and the Anglo American mining giant, both of which hold 45 percent of the new De Beers Investment.

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Oppenheimer Diamond
DeBeers flooded the market with an estimated $5 billion worth of rough diamonds when it was privatized in 2001. The move led to a suppression of diamond selling that lasted several years.

DeBeers remains powerful despite being squeezed my competitors in Canada, Russia and Australia. De Beers' main rival is Rio Tinto. In November 2000, De Beers lost out to Rio Tinto in its bid to buy 40 percent of Argyle, the world's largest mine, in the Kimberly region of western Australia.

In 1945, the United States began antitrust proceedings against De Beers. The company left and to this day has no business interests in the United States. In 1994, De Beer was indicted from price fixing. Its executives never set foot in the United States for fear of being subpoenaed. European regulators have opened an antitrust case against De Beers and plan to rearrange its relationships with its trading partners in the raw-diamond market.

DeBeers spends $100 million on exploration each year. It brought four mines news online in 2008. The most promising new kimberlite sources are in Angola and the Democratic Republic of Congo.

Diamond Sales in London

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De Beers London compound
Most of the world's gem-quality diamonds are sold by De Beer's Central Selling Organization at DeBeers headquarters at 17 Charterhouse Street near Smithfield Market in central London. The fortress-like headquarters is protected by one the world's most sophisticated electronic surveillance system. The buildings are made of thick concrete. Getting in requires negotiating your way through a maze of locked doors and red security zones. <>

Ten times a year 100 dealers from around the world are invited by De Beers to a second floor room at the London headquarters to buy these diamonds. The dealers, called sightholders, are selected at least partly because they do not complain about quality and they will not sell too many of the diamonds at wholesale prices. After being offered tea or coffee, the sightlholders, nearly all men, are brought lunch-box-size, yellow, plastic briefcases that contain slightly less than half the total carats of gem-quality diamonds released to the world every month.

The prices for diamonds over 10.8 carats are set but negotiable. Those for diamonds under 10.8 carats are not negotiable. Three weeks before the “sight” dealers submits lists of request. During the "sight" they are offered an allotment of different size and different quality diamonds in a plastic zip bag inside briefcases. The allotment is either accepted in it entirety at a price set by De Beers or rejected. It is not possible pick and choose. If a dealer selects a package he has one week to pay for it in United States dollars.<>

The diamonds come from Zaire, Tanzania, Russia, Sierre Leone, South Africa, Botswana, Namibia and several other countries. The cost of each box is $1 million to $30 million. It is implicit that the dealers will make healthy profits as long as they follow the rules.

For a long time the number of sight holders was limited to 100. When one of them left they were decertified and a new one was selected. Of the 330 "sightholders," in the 1980s 64 were from the United States, 58 from India, 51 from Israel, and 90 from Belgium.<>

Diamond cutters and merchants generally are not able to buy diamonds from sightholders. They have to get the rough diamonds from “secondary dealers.”

De Beers Consumer Marketing

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De Beers in Hong Kong
De Beers is credited with opening up the diamond market to ordinary people. Before it came along aristocrats and monarchs were the only people who could afford diamonds De Beers introduced the "Diamond Is Forever" advertising campaign in 1939 and has used with great effectiveness all over the world since then.

De Beers spends $180 million a year on advertising, most on glossy magazines. Their advertisement, known in the advertising trade as "shadows," with an elusive female figure and her lover, is regarded as one of the most successful advertise campaigns in the history of business. The advertisements are geared both for women, who love and wear the diamonds, and men buy them and win or show their love with them.

De Beers introduced the idea of diamond engagement rings. Engagement rings were not been part of Japanese courtship ritual until the diamond cartel De Beers created a market for them with television advertising and print ads in women's magazines beginning in the 1960s, presenting them as symbols of Western sexuality and affluence. In the 1966 only 6 percent of Japanese brides received any sort of engagement ring, and those who did usually received a pearl one. Only 1 percent received a diamond ring.

By the early 1980s, two thirds of all engaged women received a ring, and three quarters of them got diamond rings. By the early 1990s, 90 percent fo Japanese brides received a diamond ring when they got married. The Japanese retail diamond market was worth $12.6 billion in 1991, and despite the collapse of the bubble economy Japan remains the world’s second biggest market for diamonds. [Source: Washington Post]

De Beers established a diamond retailing venture with the luxury goods company of LVMH of France.

In 2001, De Beers introduced the of branding its diamonds with a De Beers label and marketing the De Beers brand. They did this partly so that De Beers would no be associated with "conflict diamonds." The De beers diamonds cost about 10 to 15 percent more than comparable diamonds without the De Beers label.

Lev Leviev, the Man Who Broke the DeBeer’s Cartel

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Lev Leviev
Lev Leviev is the founder and head of company that is the world’s leading diamond cutter and polisher. A Bukharan Jew born in Uzbekistan, he is regarded as the richest man in Israel. His real estate holdings span the globe from the former Soviet Union to Europe to the United States. Among his assets are railways in Russia, 7-11s in Texas, shopping malls in Israel and the former New York Times building in Manhattan, which alone is said to be worth $525 million. Trained as a diamond cutter, he grew up poor, emigrated to Israel as a teenager in 1971 and is so confident of his cutting skills and steady hands that he has performed more than a thousand ritual circumcisions---many on the sons of employees in his various businesses. In 2007 he was ranked by Forbes as the 210th richest man in the world. The magazine estimated his worth to be $4.1 billion. Others say the true figure is close to $8 billion. He is leading benefactor is Jewish causes. [Source: Zev Chafets, New York Times magazine, September 16, 2007]

Leviev is credited by some with breaking the back of the DeBeers cartel. Working out of the office of his U.S. diamond company, LLD USA, situated in Manhattan’s diamond district, he was able to achieve what he did by getting his hands on a large share of the world’s uncut diamonds, which traditionally have been at the heart of DeBeer’s ability to maintain its monopoly. A Tel Aviv diamond merchant told the New York Times magazine, “When Leviev started out, all he had was an amazing amount of ambition and the ability to understand the stone, Understanding the stone---that was the key.” Leviev himself said, “I never doubted that I would get rich. I knew from the time I was 6 hat was destined to be a millionaire. I’d go with my father to shops, and while he talking business, my eyes automatically counted the merchandise.”

Leviev’s first big break came when he became a DeBeers’s sightholder, a milestone he reached through hard work and harnessing the industriousness of his family. His second big break came when he forged crucial contacts in Russia in 1989 as the Soviet Union was coming apart. To do that he had to give up his sightolding place, a tremendous sacrifice.

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Lev Leviev and Putin
Leviev came to Moscow on the invitation of the Soviet minister of energy and was able to exploit his connections in the Jewish community to set up diamond-rleated businesses in Russia. “When I got there, Gorbachev was till power, but you could see that things were coming apart,” he told the New York Times magazine. In Russia, Levied established a high-tech cutting and polishing plant and showed the Russians how they could take control of their own diamond industry. In Angola he forged close ties with country’s president , Jose Eduardo Dis santos, who speaks fluent Russian from his days as an engineering students in the Soviet Union.

The Tel Avi diamond merchant said, “he was breaking the rules, going after the source. When he succeeded in Russia, and then in Angola, others saw it and were suddenly emboldened. That’s how Leviev cracked the DeBeers cartel. With the instincts a tiger and the balls of a panther.” Leviev now presides over a top to bottom diamond company that embraces mines in Russia, Angola and Namibia, cutting and polishing operations and outlets that sell diamonds wholesale and retail.

Anglo American Buys the Oppenheimer’s Stake in DeBeers

The Economist reported: “Anglo American, a big mining firm, struck a deal on November 4th at the loftier end of the market. It agreed to pay the Oppenheimer family (see article) $5.1 billion for their 40 percent stake in De Beers, the world’s leading diamond miner, to add to the 45 percent that Anglo already owns. It looks a fair price; the diamond industry’s prospects are sparkly. Anglo has not distinguished itself in the past decade. A plodding general miner, it may find it hard to haggle with the canny and highly knowledgeable dealers who are the prime customers for rough diamonds. [Source: The Economist, November 12, 2011]

“Anglo will have to compete for new mines with other giants, such as BHP Billiton and Rio Tinto, which between them dig 17 percent of the world’s diamonds. Ambitious smaller miners, such as South Africa’s Petra Diamonds, are also looking to stick their picks in. More competition means De Beers can no longer control prices the way it used to: by buying diamonds when markets are weak and selling when they strengthen. The Oppenheimers may have decided that De Beers is past its prime, and opted to turn their “glass with attitude” into cash. [Ibid]

“Most people would be overjoyed to pocket $5.1 billion. But Nicky Oppenheimer, the chairman of De Beers, said that it was with a heavy heart that his family had decided to sell its remaining 40 percent stake to Anglo American, a mining behemoth. The deal marks the end of an era for South Africa’s foremost mining dynasty. [Ibid]

Oppenheimers After De Beers

The Economist reported: “Of late, however, the family’s influence has waned. Some wonder whether Nicky and his son Jonathan have the same drive and acumen as their swashbuckling forebears. And Anglo American, the firm their family founded (and in which it now has a stake of 2 percent), moved its headquarters to London in 1999. Nicky Oppenheimer insists that the family will stay connected with South Africa: they are still based in Johannesburg. [Source: The Economist, November 12, 2011]

“What will the Oppenheimers do with their new pile of cash? The deal will take months to complete, so they have time to ponder. Under its terms, they are barred from dabbling in diamonds for two years. But other possibilities abound. [Ibid]

“The family has two investment arms. One, called Stockdale Street Capital, invests largely in medium-sized firms in South Africa. The other, Tana Africa Capital, is a joint venture with Singapore’s sovereign-wealth fund, Temasek, and invests in the rest of Africa. Among other things, it holds a stake in a Nigerian firm that sells powdered milk, and it plans to build up five to ten substantial firms over the next decade. [Ibid]

“At the moment, Tana is focused on fast-moving consumer goods and agriculture, and to a lesser extent on building materials, health and education. The new money could go into any or all of these areas, says James Teeger, a family spokesman. And the Oppenheimers may also look at infrastructure and energy, two of the hottest businesses south of the Sahara. Nicky Oppenheimer is said to be furiously jetting around looking for shrewd places to inject his cash. [Ibid]

De Beers Boasts Profits of $986 Million in 2011

AFP reported: “De Beers announced an “exceptional” year in 2011, with profits up 72 per cent to $939 million on surging consumer demand, the company said. De Beers posted a 21 per cent rise in 2011 earnings on the back of a record sales boom at the start of last year, but the diamond producer reported a dip in annual production and said it expected to continue to rein in output growth in 2012. [Ibid]

“The diamond giant said it expected jewellery demand to continue to grow thanks to improving US demand and growth in China, though at a lower pace after 2011 records, amid uncertain markets. It also said it would continue to prioritise maintenance at its mines as it awaited improved demand, and did not expect to increase production in 2012. [Ibid]

“De Beers said earnings before interest, tax, depreciation and amortisation (EBITDA) totalled $1.7 billion. Underlying earnings rose 62 per cent to $968 million. The diamond miner said sales of rough diamonds by its Diamond Trading Company were up 27 per cent at $6.5 billion. Diamonds represented roughly five per cent of Anglo’s earnings in 2010, but that could rise to as much as a fifth of earnings by 2013, according to some analysts’ estimates, as a result of shifts including the acquisition of the Oppenheimer stake. [Ibid]

“Anglo said the contribution to its underlying earnings from its De Beers stake totalled $443 million in 2011. De Beers said it recovered 31,3 million carats, down from 33 million a year earlier, due to lower production in the second half as the producer preferred to carry out maintenance and reduce production in the light of world diamond prices. [Ibid]

De Beers, Africa, Canada and Russia

Most of DeBeers diamonds come from the Oropa mine in Botswana. [Ibid]

“De Beers and Russia control most of the world's diamonds. [Ibid]

“In 1999, there were concerns that De Beers monopoly would be undermined by the opening of the huge Ekati mine in Canada, which is 51 percent owned by Broken Hill Proprietary Co. (BHP), a competitor from Australia. In the end BHP made a deal with De Beers that kept the monopoly intact. [Ibid]

De Beers and Russia

The relationship betwee De Beers and Russia go way back. In 1958, when news of diamond discoveries in Siberia caused de Beers stock to plummet 25 percent, Oppenheimer sent representatives to Moscow to work out a deal. Despite their reluctance in dealing with a classic imperialist monopoly in country with a racist government, the Kremlin made a long-term agreement with De Beers, who promised to buy Russia's entire production of rough diamond and guaranteed high prices. The negotiations were held in secret and transactions were conducted by front companies in Luxembourg and Switzerland. [Ibid]

“After the collapse of the Soviet Union in 1990, the new cash-starved government demanded a better deal. The result was a five-year contract in which De Beers promised to buy 95 percent of Russia's rough diamond production for the astronomical sum of $1 billion annually. [Ibid]

Russia Diamond Leaks

The Russia-DeBeers agreement held firm until 1992, when Russia's Communist Party dissolved and the control by Committee of Precious Metals (CPM, the government body responsible for overseeing the diamond industry) of the remote areas, including the diamond-producing regions in Siberia, disintegrated and the Siberian diamond producing mines and the local governments began acting on their own. Local Russian governments sought diamond export for themselves and local mines began selling diamonds directly to cash markets, bypassing De Beers. [Ibid]

“Diamonds from the mines in Yakutia began leaking into the open market in 1993. The leak became a flood estimated at $1 billion a year in 1994 and $800 million in 1995. The source of the leaked stones was believed to be a top-secret cache, stockpiled since the Soviet era. In 1996, the head of CPM was dismissed for his involvement in the leakage and the loss of $178 million worth of gold, diamonds and other valuables that disappeared without prepayment on the way to San Francisco. [Ibid]

“In 1996, Russia reportedly earned between $2 billion and $3 billion from contract sales and leakages. Several De Beers "sightholders" lost their invitations for buying leaked Russian diamonds on the open market. [Ibid]

De Beers Fights Back Against the Diamond Leaks

In retaliation for the keals, De Beers moved to plug the leaks on the supply side and cutting prices by 11 percent of smaller-sized gems, which made up most of the leakages, costing cost the Russians tens of millions of dollars. Cartel executives in Moscow hammered out revised purchasing agreements with Russia, arguing that without De Beers, the long-tern value of Russia's diamond resources would sink. [Source: Steve Coll, Washington Post, March 22, 1994]

“By the time the 1990 agreement expired in December, 1995, Russia and De Beers were highly distrustful of another and limped along, extending their agreement in a month-by-month basis. De Beers stopped negotiating with the government and conducted most of its business through the Russian mining conglomerate ARS. Russia repeatedly asked for a $5 billion a year deal. [Ibid]

“One diamond businessman in Antwerp told Time, "Russia doesn't have to stay with De Beers but De Beers cannot operate as a monopoly without Russia...De Beers has much more to lose than Russia. You never see countries go bust." Another expert said, "The question for de Beers is 'Are they are buddies, Do we give them money, or do we starve them. In the short term, De Beers could run Russia over like tank. In the long term, they will have problems if they run Russia over. That is the strategic problem.” [Ibid]

Image Sources: Wikimedia Commons. De Beers, Lev Leviev from the New York Times

Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, The Guardian, National Geographic, The New Yorker, Time, Newsweek, Reuters, AP, AFP, Wall Street Journal, The Atlantic Monthly, The Economist, Global Viewpoint (Christian Science Monitor), Foreign Policy, Wikipedia, BBC, CNN, NBC News, Fox News and various books and other publications.

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© 2008 Jeffrey Hays

Last updated August 2012

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