De Beers and Beyond: The History of the International Diamond Cartel∗ Diamonds are forever hold of them. The idea of making diamonds available to the general public seemed un- A gemstone is the ultimate luxury thinkable. When diamonds were first found product. It has no material use. Men in South Africa in 1867, however, supply in- and women desire to have diamonds creased rapidly, although the notion of dia- not for what they [diamonds] can do monds as a precious and rare commodity re- but for what they desire.1 mained to the present day. Similar to the gold miners in California, dia- To hear these words from a person who at- mond miners in South Africa tended to rush to tributes his entire wealth and power to the the latest findings.2 As a matter of principle, trade of diamonds illustrates the peculiar na- diamond miners preferred to work by them- ture of the diamond market: Jewelry dia- selves. However, the scarcity of resourceful monds are unjustifiably expensive, given they land and the need for a minimum of common are not actually scarce and would fetch a price infrastructure forced them to live together in of $2 to $30 if put to industrial use. Still, limited areas. In order to fight off latecom- by appealing to the customers’ sentiment, di- ers and to settle disputes, Diggers Committees amonds are one of the most precious lux- were formed and gave out claims in a region. ury items and enjoy almost global acceptance. Each digger would be allocated one claim, or, This fact is often attributed to the history at most, two. of one company. DeBeers, founded by Cecil Since digging diamonds on a larger scale Rhodes in 1870, has been a highly successful was virtually impossible for individuals, small and effective controller of the diamond mar- claimholders soon merged into larger ones. ket, having developed a unique purchasing and Moreover, equipment for digging, hauling the marketing cartel that has influenced prices in dirt up and pumping water out of the mines the market virtually undisturbed for almost a was purchased or rented by groups of min- century. Lately, however, there are signs that ers, thereby forced to cooperate even more more and more players seem ready to challenge intensively.3 Cecil Rhodes was one of the DeBeers’ dominance, and ever since, DeBeers first businessmen to rent out pumping equip- has struggled to keep the cartel intact. ment and soon realized that he had tapped a vast market potential. He reinvested the ini- tial proceeds from equipment rental in acquir- Diamonds and the Cartel ing claims. By 1880, he held a large enough share of diamond claims to justify a separate For centuries, the only two countries produc- company purely concerned with managing the ing diamonds were India and Brazil. Up to mines: thus DeBeers Mining Company was the middle of the 19th century, the world created. By 1887, the company was the sole supply of diamonds was so scarce that even owner of South African diamond mines. monarchs and noblemen found it hard to get Concurrently, Cecil Rhodes took control of ∗This case was written by Tobias Kretschmer un- the distribution channels through “The Di- der the supervision of Professor Lu´ısCabral. Finan- amond Syndicate,” an alliance of merchants cial Support by the Material or Research Fund from London Business School is gratefully acknowledged. 2In fact, most of the early diamond miners used c 1998, London Business School. to be gold diggers, attracted by the enormous riches 1Nicky Oppenheimer, DeBeers deputy chairman, at surrounding diamonds. a Foreign Correspondents Association Lunch. (Source: 3The diamonds were located in increasingly lower Reuters.) soils that contained underground water. 1 in Kimberley who abided to Rhodes’ terms (which represented about one half of total sup- of business, recognizing that their own inter- ply). Each year, DeBeers determines the to- ests and DeBeers were compatible in that both tal amount of diamonds it plans to sell in aimed for high prices and a notion of scarcity. the market. Each producer is guaranteed a In the following three decades, a German fixed percentage of total output, that is, De- immigrant named Ernest Oppenheimer estab- Beers commits to buy that amount and market lished himself as a prominent figure in the it through the CSO. Producers, in turn, are South African diamond and gold industry. Af- charged a handling and marketing fee, rang- ter some time as a diamond expert, he en- ing between 10 and 20 per cent, depending on tered the gold business by creating the Anglo- the amount purchased and the general demand American Corporation of South Africa, own- situation. ing a dominant share of South Africa’s gold mines. His greatest ambition, however, was The Central Selling Organization serves as to gain a place on the board of DeBeers, the a clearinghouse for the entire industry. It reg- company he felt would provide him with the ulates the quantity and price in the market. best opportunities to expand his knowledge Packages of diamonds are bought and sold at and power in the diamond industry. Op- sights, held ten times a year in London, on a penheimer sensed that the structure of the take-it-or-leave-it basis. As it remains a priv- syndicate would provide DeBeers with insuffi- ilege to attend sights by the CSO, few deal- cient power to control the distribution of di- ers dare to refuse a package offered to them. amonds in the long run. In particular, he The attempt to haggle over quantity and price was aware of the danger that the members of the offered package could well lead to the of the syndicate might be tempted to break sightholder not being invited again. Over 80 away in the expectation of greater quantities per cent of the world’s diamonds were traded and prices. DeBeers board members, however, through the CSO in its early days. Recent de- viewed Oppenheimer as an overambitious nou- velopments have caused a downward trend in veau riche, and blocked his way into the board this percentage; present estimates range be- for decades. Not to be discouraged, Oppen- tween 65 and 75 per cent. heimer gradually bought blocks of DeBeers shares whenever they came up for sale, un- The buyers from CSO are mainly diamond til finally he was one of the two most signifi- dealers who have the stones cut and polished cant single shareholders, the other being Solly and resell them at one of the world’s main di- Joel, his friend and business partner. At last, amond clearing centers: Antwerp, New York, Oppenheimer gained full control and owner- and Tel Aviv. ship of DeBeers in 1926. Soon after, he was named chairman. An even larger company, One of DeBeers’ main roles is to maintain the Diamond Corporation, was formed that the notion that diamonds are a scarce com- had subsidiaries dealing with producing and modity. This they do by means of advertising selling diamonds all over the world. Outside and by purchasing excess supplies when that is contracts were practically made impossible by needed to avoid price decreases: as a matter of an exclusivity requirement that each supplier principle, prices are never lowered by DeBeers. was forced to sign with the CSO. This tightly-knit organization has proven ben- Over time, new discoveries of diamond re- eficial for most in different ways: producers, serves in Australia, Siberia, and Western often state-run diamond mines in developing Africa became known and eroded the com- countries relying heavily on diamonds, are pro- pany’s monopoly position in diamond sup- vided with a stable inflow of foreign currency. ply. Harry Oppenheimer, Ernest’s son, quickly Dealers enjoy stable price increases which can realized the threat this implied and focused easily be passed on to consumers. DeBeers, his efforts on maintaining power in distribu- however, seems to be benefiting the most from tion through the Central Selling Organization the agreement, asking for what producers of- (CSO), the company’s marketing arm. ten perceive as inappropriately large fees and The structure of the DeBeers conglomer- in turn charging prices to merchants at their ate has remained widely unchanged ever since: own discretion. The temptation for both pro- A subsidiary of DeBeers buys diamonds from ducers and dealers to by-pass the CSO is there- all producers, including DeBeers’ own mines fore quite significant. 2 The cartel under threat lized. Israeli dealers disposed of their stock and conceded their price and quantity-setting Israel: Downstream Rebellion autonomy to DeBeers again. They paid a con- siderable price for their defection, however. In The huge profits in virtually every sector of the late 1970s, one in every four employees the industry finally turned out to be the major in the Israeli diamond industry lost his job. stumbling block for DeBeers in the mid-1970s. Moreover, many Israeli dealers lost their cher- In the 1970s, Israel was going through a pe- ished position in the CSO’s circle of proteges. riod of high inflation; diamonds were one of While DeBeers successfully managed to the few stable currencies and means for stor- whip the mutineers back into place, it suffered age of value; diamonds as collateral were the from the events in the late 1970s for some years best way of securing preferential loan rates. to come. Contrary to their previous policy of This induced merchants to hoard a signifi- controlled price increases and demand regula- cant amount of diamonds with a view at re- tion, DeBeers too was enticed to take advan- selling them later. As a result, the supply of tage of the bear market for diamonds.