New York University Economic Theories Essay
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March 20, 2019
By Paul Zimnisky, CFA
paul@paulzimnisky.com
Rough Diamond Index
De Beers market share stood at over 80% as recently as the late-1990s however a series of events over the next 25 years led to the erosion of perhaps the
most famous monopoly in modern history. Today, De Beers no longer has the grasp it once did and now diamond market fundamentals are influenced by
forces outside of the companys control.
In the late 19th century a massive diamond discovery in South Africa prompted a diamond rush. Businessman Cecil Rhodes bought as many diamondmining claims as he could and his accumulation of properties eventually became De Beers Consolidated Mines Limited. De Beers maintained a hold on
what was a relatively small industry at the time by expanding the business outside of mining with a focus on monopolizing diamond distribution.
Eventually, the company influenced most the worlds diamond producers to sell production through De Beers’ channel. This in effect gave the company
control to influence supply to market and thus prices.
Through the company’s distribution channel, operating under the unassuming moniker “Central Selling Organization,” or CSO, De Beers only sold to a
select group of rough diamond buyers that were willing to forgive negotiating power for exclusive rights to consistent primarily-market diamond supply.
In order to maintain stable and rising diamond prices, De Beers maintained and managed an inventory stockpile. In a weak market De Beers would
constrain supply of goods which would allow for stable-to-modest price increases. In a strong demand environment De Beers would release excess supply
from inventory, in effect repressing disorderly price increases and maintaining price stability.
To keep the stockpile supply management strategy intact it was necessary for De Beers to maintain control of global rough diamond supply. However, in
the second half of the 20th century, as new world-class diamond mines were discovered in Russia, Australia and Canada, it became increasingly difficult
for the company to maintain control. At this point the greatest risk to the survival of the cartel was for the newly discovered supply to be sold outside of
De Beers.
When the Soviet Union began producing diamonds in the 1950s the government agreed to sell its production through De Beers. However, the arrangement
was first weakened in the 1960s when anti-Apartheid laws complicated the relationship with De Beers, a South African company. Decades later, the
relationship was pressured further when the Soviet Union collapsed and political chaos and a weak ruble strained the arrangement. In 2009, the Russian
Federation through its production company, ALROSA (RTS: ALRS), finally terminated its supply relationship with De Beers.
Shortly after De Beers began losing Russian supply in the 1990s, Rio Tinto (LSE: RIO), the operator of the Argyle Mine in Australia, separated from the De
Beers in order to exercise its own marketing and selling freedom. At the time, Argyle was the largest diamond mine in the world producing over 40
million carats annually, representing almost a third of global diamond output by volume. Over the next few years, other mine operators followed suit,
including new world-class producers in Canada which chose to sell all, or part, of their supply independent of De Beers.
In an effort to maintain control of supply, De Beers began buying diamonds in the secondary market at a premium. However, the strategy was short lived
as it was cost prohibitive. Then in 1994, a violation of the Sherman Antitrust Act for anti-competitive business practices was filed against De Beers in U.S.
court. The case was not settled until a decade later. Similar suits were filed by the European Union.
A De Beers Diamond Jewellers retail store in midtown Manhattan. Image source: Paul Zimnisky
By the end of the century, De Beers market share had fallen from as high as 90% to less than 60%. In the early 2000’s, De Beers announced a shift in
strategic initiatives, including a new focus on independent marketing of the De Beers brand. Around the same time the company changed the name of its
distribution arm to DTC, or Diamond Trading Company, from CSO.
In addition to the anti-trust suits, in 2001, several law suits were filed in U.S. courts alleging that De Beers unlawfully monopolized the supply of
diamonds, conspired to fix, raise, and control diamond prices, and issued false and misleading advertising. After multiple appeals, in 2012 the U.S.
Supreme Court denied final petition for review, and a settlement approaching $300 million was finalized with an agreement for De Beers to refrain from
engaging in certain conduct that violates federal and state antitrust laws.
Anti-competitive legal action by the diamond industrys most important end-consumer markets as well as competition of new supply restricted De Beers
ability to operate the way that it had for most of the 20th century. From 2000 to 2004 the company liquidated its strategic diamond stock pile, then in
2008, De Beers ended its famous A Diamond is Forever generic diamond marketing campaign. As of the end of 2018, De Beers market share by value sat
at estimated 35%.
As the end of the second decade of the 21st century approaches, the resilience of the diamond industry continues to be put to test as ever-changing
consumer spending preferences, declining marriage rates, depletion of legacy mines and the threat of lab-created diamonds prove to be new challenges.
—
De Beers is currently 85%-owned by global diversified mining company Anglo American (LSE: AAL) and 15% by the Government of Botswana. Most of the
company’s subsidiaries are joint ventures with government partners.
Paul Zimnisky, CFA is an independent diamond industry analyst and consultant based in the New York metro area. For regular analysis of the diamond
industry please consider subscribing to his State of the Diamond Market, a leading monthly industry report. Paul is a graduate of the University of
Maryland’s Robert H. Smith School of Business with a B.S. in finance and he is a CFA charterholder. He can be reached at paul@paulzimnisky.com and
followed on Twitter @paulzimnisky.
Disclosure: At the time of writing Paul Zimnisky held a long position in companies with exposure to the natural diamond industry including Lucara
Diamond Corp, Stornoway Diamond Corp, Mountain Province Diamonds Inc, Diamcor Mining Inc, North Arrow Minerals Inc, Tsodilo Resources and Signet
Jewelers.
***
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Note: On this site, man-made diamond, lab-diamond, lab-created diamond, lab-grown diamond and synthetic diamond are used synonymously.
More information can be found here.
Disclaimer: The views expressed on this site are strictly that of Paul Zimnisky, and are based solely on observations and opinions. Paul Zimnisky has
made every effort to ensure the accuracy of information provided, however, accuracy cannot be guaranteed. Information on this site is strictly for
informational purposes and should not be considered investment advice. Consult your investment professional before making any investment decisions.
Paul Zimnisky does not accept culpability for losses and/ or damages arising from the use of content on this site. Third party use of content on this site
is only permitted with the permission of Paul Zimnisky.
Disclosure: As of April 2022, Paul Zimnisky held a long equity position in Lucara Diamond Corp, Star Diamond Corp, North Arrow Minerals Inc, Brilliant
Earth Group and Barrick Gold Corp.
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EXECUTIVE LIFESTYLE
The Incredible Story Of How De Beers Created And Lost The
Most Powerful Monopoly Ever
Eric Goldschein Dec 19, 2011, 2:00 PM
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