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Ed. Chapter 9: De Beers Abandons Its Diamond Monopoly

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Ed. Chapter 9: De Beers Abandons Its Diamond Monopoly WEB: Salvatore’s Managerial Economics in a Global Economy, 7th ed. Chapter 9: De Beers Abandons Its Diamond Monopoly In 1887, Cecil Rhodes created the De Beers Consolidated Mines Company, which controlled about 90 percent of the total world supply of rough uncut diamonds with its South African mines. Until 2001, De Beers produced about half of the world's diamonds in its mines in South Africa, Botswana, and Namibia, and marketed about 80 percent of the world's diamonds through its London-based Central Selling Organization (CSO). Producers in Russia, Australia, Botswana, Angola, and other diamond-producing nations sold most of their production to De Beers, which then regulated the supply of cut and polished diamonds to final consumers on the world market so as to keep prices high. When there was a recession in the world's major markets and demand for diamonds was low, De Beers withheld diamonds from the market (i.e., stockpiled them) in order to avoid price declines until demand and prices rose. In short, De Beers acted as a monopolist and earned huge profits for itself and other producers by manipulating the world supply of diamonds. De Beers also advertised diamonds to drum up demand with the famous slogan "diamonds are forever" from the 1971 James Bond movie by the same name. In 2005, De Beers controlled two-thirds of the world’s $8 billion market of uncut rough stones, while worldwide retail sales of diamond jewelry by De Beers and other firms exceeded $60 billion (half of which in the United States). De Beers has had a monopoly in the marketing of diamonds since 1887 through wars, financial crisis, racial strife, hostile governments, and attempts by independent producers to circumvent the monopoly. When the former Soviet Union and Zaire started to sell large quantities of industrial diamonds on the world market outside the CSO in the early 1980s, De Beers immediately flooded the market from its own stockpiles (in excess of $5 billion in 2001) driving prices sharply down, thus convincing the newcomers to join the cartel. And when large quantities of diamonds smuggled from Angola flooded Antwerp in 1992, De Beers purchased up to $400 to $500 million worth of these diamonds to prevent a collapse in prices. But faced with increased production by Russia (which sold only half of its diamonds through CSO) and new suppliers from Australia and Canada, and embarrassed by disclosures that to prop up prices it had bought “blood or conflict diamonds” from rebels in Angola, De Beers abandoned its cartel arrangement in 2001 and began concentrating instead on an advertising- driven strategy through its marketing arm, the Diamond Trading Company (DTC), to increase sales of its diamonds as branded luxuries. In 2001 De Beers also reorganized itself into a private company with two independent units, one that continued to sell uncut stones and the other (Be Beers LV) a retail joint venture with LVMH Moet Hennessy Louis Vuitton. De Beers' diamond sales declined sharply in 2009 as a result of the deep global financial crisis, but it rebounded strongly in 2010. SOURCE : “How De Beers Dominates the Diamonds,'' The Economist, February 23, 1980, pp. 101-102; “Can De Beers Hold to Its Own Hammerlock?” Business Week, September 21, 1992, pp. 45-46; "Disputes Are Forever," The Economist , September 17, 1994, p. 73; “The Rough Trade in Rough Stones,” Forbes , March 27, 1995, pp. 47-48; “De Beers Halts Its Hoarding of Diamonds,” New York Times , July 13, 2000, p. C1; “$17.6 Billion Deal to Make De Beers Private Company,” Financial Times , February 16, 2001, p. W1; “Bumpy Start for De Beers’ Retail Diamond Venture,” The New York Times , November 11, 2002, p. W1; “De Beers Sees More Jewelry Demand,” Financial Times , April 12, 2005, p. 26; “De Beers Braced for Turnover to Halve on Grim Diamond Outlook,” Financial Times (April 9, 2009), p. 1; and http://www.forexyard.com/en/news/De-Beers-sees-2011- diamond-price-growth-shy-of-2010-2011-01-17T163215Z-INTERVIEW. .
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