Diamonds represent one of the world’s most valuable and sought after natural resources. The global retail value of diamond jewelry is estimated to be $72 B, with an average of 130 M carats of raw diamonds being produced annually. Prior to 1867, however, diamonds could only be found in Brazil or India, or on the hands of the wealthy elite, and annual gem diamond production amounted to little more than a few pounds.
The nature of the diamond trade changed drastically following the discovery of diamonds in South Africa and the ensuing mining mania, which mirrored the California Gold Rush of 1849. The De Beers Mining Company, founded by Cecil Rhodes in 1870, emerged victorious from this frenzy and established a monopoly that would dominate the industry for decades to come; by 1887, De Beers was the sole owner of South African diamond mines.
The De Beers monopoly was built upon supply control. In order to regulate the supply of diamonds into the market, De Beers took control of distribution channels and formed the Central Selling Organization (CSO), which functioned as the company’s marketing apparatus and controlled around 90 percent of the world’s diamonds. CSO suppliers, eager to sell their stones, were forced to sign an exclusivity agreement that prevented them from forming outside contracts with other distributors.
With the CSO in place, the De Beers conglomerate functioned as follows: De Beers determines the amount of diamonds that it plans to sell in a given year. Each producer is promised a fixed percentage of this total quantity, meaning De Beers pledges to buy that portion of diamonds from the producer and bring them to market through the CSO. Once the number is set, a subsidiary of De Beers purchases diamonds from all producers, including De Beers own mining operations. De Beers then sells the diamonds to dealers via the CSO and charges producers a handling and marketing fee. To prevent price decrease, De Beers purchases any excess supply of diamonds in the market and stores them in its infamous vaults.
The ability of the De Beers cartel to control prices was threatened by economic depression and outside actors. When inflation was high or the stock market was suffering in a given country, investors would capitalize on the stability of diamond prices by holding large quantities of the gem. De Beers faced the threat of a market flooding if these investors were to engage in a mass sell-off.
Additionally, as has been noted in previous blog posts, cartel members are always haunted by the prospect of profits that could be made outside of the fixed arrangement. In 1957, Russia entered the picture following the discovery of large quantities of diamonds in Siberia. De Beers recognized the threat and struck a deal with the Soviet government to purchase 95 percent of Russia’s annual rough diamond output at a 10-20 percent premium, thus ensuring that all Russian diamonds could be properly channeled through the CSO. Following the collapse of the Soviet Union, Russia was in a state of economic decline and sensed the substantial revenue increase it could realize were it to take its diamonds straight to market. In 1984, Russia broke from the cartel and flooded the Antwerp clearing house with polished diamonds. As a result, De Beers experienced a sharp decline in profits, and other suppliers threatened to follow in Russia’s footsteps.
Although De Beers was eventually able to renegotiate with Russia under new terms, the integrity of the monopoly had been compromised as the power had swayed in favor of the producer. By the 1990’s, several new sources of diamonds had emerged and De Beers could no longer maintain near-complete control of the diamond trade.
In 2013, for the first time in 100 years, market forces were recognized as the driver of diamond prices, not monopolistic behavior. De Beers now controls only 35 percent of the world’s diamonds, compared to 90 percent for most of the 20th century, and the company posted a 45 percent decrease in operating profit in 2015.
To keep profits from falling each year, major producers rely on demand driving ad campaigns instead of supply controlling market manipulation. The diamond industry has shifted its focus away from the U.S. and Europe and onto the newly minted upper classes of China and India.
Despite the industry’s best efforts, diamond prices fell roughly 15 percent in 2015 and threaten to continue on the recent downward trend. Moving forward, the industry will either have to penetrate new markets or come to terms with the shrinking size of its consumer base.
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