Debeers Term Papers

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.

Source:
http://www.miningartifacts.org/South-African-Mines.html

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.

Rough Diamond Prices: 2011 – 2015 Source:
http://roughdiamondbuyers.com/?tag=rough-diamond-prices

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.

 

 

Sources
Biesheuvel, Thomas. “Diamonds’ Former Monopolist Bows to Market Forces to Spur Demand.” Bloomberg Business. Bloomberg, 8 Sept. 2015. Web.

Epstein, Edward J. “Have You Ever Tried To Sell a Diamond?” The Atlantic. Atlantic Media Company, 1982. Web.

Goldschein, Eric. “The Incredible Story Of How De Beers Created And Lost The Most Powerful Monopoly Ever.” Business Insider. Business Insider Inc., 19 Dec. 2011. Web.

Kuo, Lily. “De Beers (and the Entire Diamond Industry) Pins Its Hopes on China and India.” Quartz. Atlantic Media Company, 18 Feb. 2013. Web.

Kretschmer, Tobias. “DeBeers and Beyond: The History of the International Diamond Cartel.” New York University Online. London Business School, 1988. Web.

O’Connell, Patricia. “The Issue: De Beers’ Multifaceted Strategy Shift.” Bloomberg Business. Bloomberg, 6 Jan. 2009. Web.

Zimnisky, Paul. “Diamonds: Driven by Market Forces for the First Time in 100 Years.” ResourceInvestor.com. 9 Apr. 2013. Web.

This entry was posted in Uncategorized and tagged Cartel, De Beers, Diamonds, monopoly, Russia by Walker Helvey. Bookmark the permalink.

Research Paper on Monopoly

Abstract

The research paper is focused on De Beers and its status of a monopoly. At the beginning of the paper the current status and situation in the company are briefly discussed. Then a historical background and the origin of the company are described. It is followed by the steps undertaken by the company to gain the status of a monopoly and which keep it as such till the present moment. Then the basic principles which help the company to dominate in the world market are analyzed. 

After that the paper focuses on the main obstacles De Beers had to overcome on its way to the monopoly status and it faces nowadays. Finally, the paper is concluded by perspectives of the company and its possible future status. 

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Introduction

De Beers is one of the well-known monopolies in the world that had gained its status quite a long time ago and nowadays occupies leading if not dominating positions in its niche of the market. Quite interesting is the fact that the company is thought by many, mainly non-specialists, as the company selling and producing cut diamonds all over the world. The latter is an obvious mistake that would be discussed later in this paper. But what may be really said without any doubts is the fact that the company is a monopoly which main business concerns diamonds. Whatever one may think about it the company exists well despite numerous limitations from the part of different countries, particularly the USA. Naturally, such a company cannot fail to be in the centre of attention of many specialists in the domain of economy, management, marketing, etc.

In this paper a particular attention should be given not only to the current situation within the company and its position in the international market, but its origin and development of the company would be also discussed as well as the process of its transformation into a monopoly and the obstacles the company faced on its way to the world domination in its sector of the world market. Finally, an essential part of the paper would be perspectives of De Beers, at least in the nearest future.

De Beers: What Kind of Company is it?

At the very beginning it is extremely important to dispel the myths concerning De Beers as a company because it would significantly contribute to the understanding of the current position of the country and equally trace its development. It is not a secret that there are a lot of myths about De Beers. Probably, it is the result of an unprecedented and phenomenally long period of time the company is a leader of its sector of the market. In fact, De Beers is a leader of its industry practically throughout all its history that can be hardly compared to any other company in the contemporary world.

That is why it sounds very surprisingly if one estimates that De Beers is, for instance, a retailer or manufacturer of cut diamonds. It is a silly mistake that cannot be even taken into consideration. Nowadays, the company actually is the world leader in the mining and buying rough diamonds, some experts name its share as a buyer of rough diamonds about 70-90 per cent. As a result the company occupies a dominating position in this market and consequently may dictate its conditions to its few competitive companies and its customers. The company also may regulate and fix prices on its products, i.e. rough diamonds, and be a so-called arbiter of their prices.

Naturally, a company that has interests in many countries, where any business dealing with diamonds exists, cannot be limited within geographical borders of one country only. So, De Beers is an international company operating practically all over the world with certain exceptions. As for its main activities, it basically buy rough diamonds from diamond mines owners and resell them to cutters.

What doest then indicate that De Beers is a monopoly? Actually, these are traditional factors, namely they are the size of sells (as it has been already mentioned De Beers sells about 90 per cent of world rough diamonds production), the company also sells commodity with no other substitutes, finally it restricts output and its responds to changes in the market demands. As a result, De Beers is considered to be one of the most successful monopolies of the 20th century since it manages to regulate prices of its products which are constantly rising.  There are only few companies De Beers may be compared to, for instance Microsoft or Rockefeller’s Standard Oil, but the latter two companies are relatively young in comparison to De Beers.

Nowadays, the company works in many countries but there are particularly important regions like where the company has its mines and consequently strong interests. Republic of South Africa, Sub-Saharan countries, Siberia, Australia, Canada may be referred as vitally important regions for De Beers and they are regions where the company either works or has its own interests in.

Naturally, company possessing such potential and power should be defined as a monopoly.

The Origin of De Beers

The next question that naturally arises is the question of origin of De Beers and what is the source of its power, or in other words how the company managed to achieve such results and gain the dominating positions in the world market.

The history of De Beers starts with the end of the 19th century, namely the date of foundation of the company is considered to be the year of 1888. Taking into account that the company could not exist in isolation and depended on the circumstances and historical realities existing at that epoch it is necessary to dwell upon some facts which if not defined then significantly influenced the further development of De Beers as a monopoly.

So, at that period of time, particularly at the beginning of the 19th century, diamonds were quite rare and consequently the demand on this product was extremely high. There was only small quantity of diamonds discovered in India and Brazil. Moreover, no diamond mines were discovered yet. It seems to be quite contrasting to the current situation when diamonds are mined practically on every continent but the success of De Beers is that it manages to sustain the uniqueness of diamonds even though in reality it is not an absolutely truthful information. It is also noteworthy that first diamond mines appeared in 1869 in the colonies of Southern Africa where De Beers started and continues to operate and actively exploit local rough diamond resources. The creation of first diamond mines resulted in drastically increased number of diamonds available in the market. As soon as first mines appeared the first mine owners appeared as well, mainly these were diamond hunters who were either successful or rich enough so that they could buy and own mines.

At this period of time, i.e. in 1870-s first attempts to create a kind of organization or a company were made by mine owners. Particularly important seems to be the fact that Cecil Rhodes bought the rights to two mines on the farm of Nicolas and Diedrick De Beer in the Cape Colony, which is now South Africa, that was probably the first roots of the future De Beers’ monopoly. It is not surprisingly that mine owners and diamond hunters soon realized that the diamond prices and consequently their own prosperity depended on scarcity of diamonds as it contributed to the growth of demand on the product.

Naturally, soon they came to the realization that they had no other real alternative to prosperity than to merge their interests into a single entity, in other words they realized that being united in one company they would be stronger than working individually. It was obvious that the merger, or the creation of a united company would permit to control the mines’ production and keep the illusion of scarcity of the product, which already had been not so rare as it used to be at the beginning of the century.

As a result of such a merger, De Beers Consolidated Mines Limited appeared. It was established on 12th March 1888 with Rhodes as its founding chairman. So, this date marked the birthday of the future world monopoly.

First Steps of De Beers on its Way to the World Monopoly

At the beginning of its existing this South African company was granted an official listing in Johannesburg Stock Exchange in August 1893 that meant the intention of the company to attract additional investments from different financial sources and not only mining and selling of rough diamonds itself. Work of the company seems to be impressive if not shocking because in less than two years, i.e. till 1890, the company had already controlled 95 per cent of the world’s diamond production. The company achieved such a result due not at the last turn to its wise strategy and acquisition of any mine that was discovered in the region. In this context, the following step of the chairman of the company, as it has been said it was Rhodes, was the decision for a single channel of diamond distribution in February 1890.

After such a decision, a group of ten Jewish merchants that called London Diamond Syndicate was created and they agreed to be purchasing the entire production from all the De Beers mines and then resell them to cutters and wholesalers in Antwerp.

However, it turned to be crucial for the initial owners of De Beers because one of these merchants, whose name was Ernest Oppenheimer, started to buy his own mines under the brand of Consolidated Diamond Mines and soon he became a strong competitive to De Beers. Furthermore, he did not only start to compete with De Beers but he finally took over the company and became probably the most prominent figure in the history of De Beers and one of it’s the most famous chairman who created the basis for the future prosperity of the company and its dominant position in the whole world. He became a chairman in 1929 and, by the way, his family, i.e. the family of Oppenheimer still controls the whole company and the idea of the founder of the Oppenheimers clan that “the only way to increase the value of diamonds is to make them scarce, that is to reduce production” (Stein 2001:235) became the cornerstone idea of De Beers strategy and ideology for decades and it actually remains up-to-date even now, probably even more than ever before.

On analyzing this slogan and the corresponding actions from the part of De Beers, it is possible to conclude that the company acts as any monopoly should act I order to gain the world domination. So, the company artificially restricts output and it responds correspondingly to the changes in the market demand. De Beers also continues its old strategy to buy all new diamond discoveries. As a result, the new supply does not enter the market and consequently creates all the possibilities for De Beers to control the market, output, prices, etc. providing its monopoly in the world market.

Rules of the Game

On occupying the dominant position in the market De Beers could not exist as a monopoly if it did not follow certain rules of game that the company actually created itself.

Traditionally, the company dictated its rules of games to others. For instance, the company sold boxes of diamonds to its clients and fixed the price for them and the buyer actually did not even have a chance to choose whether to buy or not, or what price to pay. De Beers could simply refuse to sell diamonds to such ‘fussy’ clients due to its position as a monopoly it could do it without any negative consequences.

A traditional scheme of selling rough diamonds may be described as follows. Firstly, De Beers sends invitations to 250 chosen clients (diamond cutting factories in different countries and regions, including New York, Tel Aviv, Antwerp, etc.) to attend ten annual so-called ‘sights’. By the ‘sights’ are meant gathering in London to transfer a pre-selected number of diamonds from De Beers stockpile to the clients. Such gatherings are actually the best possibility to deal with De Beers but the peculiarity caused by the monopolistic position of De Beers is that the company chooses its clients and fixes prices and quantities of rough diamonds it is going to sell. Finally, the client simply receives a small box, which contains uncut diamonds and a paper with the price of the box, which traditionally varies from 1 to 25 million dollars.

However, it is not the only thing that helps De Beers to control the market and be a monopoly. There is also a set of rules that the company and its partners have to follow, willingly or not. Firstly, it is De Beers that decides who gets which diamond. Secondly, there cannot be any haggling over price. It means that, as it has already been mentioned, De Beers fixes the prices, which are usually 25 per cent less than the wholesale prices for uncut diamonds, and the client does not really have any choice. Furthermore, it is forbidden to the clients to resell uncut diamonds that naturally support De Beers’ position as the only seller of rough diamonds because in the case of reselling uncut diamonds some company might buy a huge amount of such diamonds and consequently compete with De Beers as it happened in 1977 when Israeli dealers bought unopened uncut diamonds boxes and got a stockpile similar to De Beers one. The problem was solved only due to the ability of De Beers to force diamonds out of Israeli by managing Israeli banks. Another important rule is that clients have to provide information to assess the diamond market. It is done though the filling by the client of a questionnaire in which he indicates the number of uncut diamonds in inventory, diamonds in process to cut and future sales. De Beers from its part audits their cutting factories in surprised visits. Finally, De Beers stands on the ground that diamonds should not be sold in ‘weak hands’. It is done to keep the price high.

In order to summarize al the rules and regulations from the part of De Beers that permits the company to remain to be a monopoly, it has to be singled out that it is De Beers that decides how much diamonds and of which quality will be distributed in total, how this supply will be divided among clients, and finally it defines the price of diamonds.

Obstacles on the De Beers’ Way

At first glance on the facts discussed above one may think that De Beers has and never had any problems but reality is quite different in fact. It has already been said what the problem De Beers had in 1977 with Israeli dealers but it was not the most serious one. As one of the most serious crises may be treated the period of the Great Depression when not only separate companies but the whole world economy was probably in the deepest economic crisis in the 20th century. De Beers couldn’t avoid the crisis either.

One of the most serious consequences of the Great Depression for De Beers was a dramatic decrease of the demand on diamonds. In such a situation, London Diamond Syndicate could not absorb the world’s diamond production at the high prices that resulted in huge stockpiles and the necessity of putting them in the market. Oppenheimer, realized that would obligatory fall that could lead to the lost of people’s faith in diamonds. That is why he decided to take over the Syndicate and renamed it Diamond Trading Company and started to sell diamonds to a selected group of cutters that abide De Beers’ rules. Furthermore, in order to eliminate an excessive supply all major mines in South Africa were closed and the supply was cut from 2,242,ooo carats in 1930 to 14,000 carats in 1933.

Another problem rose when new discoveries were made in Congo. To control the supply De Beers should keep controlling new supplies, particularly in Congo and the company had to sign a deal with Belgium government according to which diamonds from Congo could be sold only to De Beers. In exchange Antwerp remained the main centre for cutting diamonds. As a result, the production of diamond mines in Congo was in accordance with a quota set by De Beers. Later similar situation happened with discoveries in Australia, Siberia and Canada. In such a way De Beers managed to remain the sole buyer of their production at guaranteed high prices so as to safeguard the control of the world supply.

Another very serious test for De Beers was so-called ‘blood diamonds’ from Angola. This country suffered from 25 years civil war and diamonds along with oil were the main source of income for the country. Naturally, De Beers bought a lot of diamonds, including those, which were from the territories controlled by rebels. As a result, the company was blamed at the support and financing of rebels that threaten to the image of the company and could become a PR nightmare. Finally, the company had to close its buying offices in Angola and the Democratic Republic of Congo in order to avoid the backlash of the consumers.

Finally, the problem that still exists and is one of the main problems for De Beers nowadays it is the problem of American market. Actually, the problem is that American market is closed for De Beers because it is a monopoly, while American anti-trust regulation prevents such kind of companies work in the USA. It is particularly important that practically a half of the world’s retail diamond business industry is in the USA. That is why the only activity possible for De Beers in the USA is advertising and the company cannot operate in this country but is presented only by a marketing firm Ayer’s. The solution of the problem of American market remains one of the main for the nearest future.

Conclusion: Perspectives of De Beers

Taking into account the current situation in the world market and the current problems De Beers faces it is possible to forecast the company’s perspectives in the nearest future. It is evident that for De Beers the status of a monopoly gives a lot of advantages but nowadays the access to probably the largest market in the world is practically restricted and it cannot operate freely as in other countries. In long term perspective it may threaten the status of De Beers as a monopoly. That is why the company has to undertake a number of steps to solve the problem and finally enter American market. And, as some specialists indicate, De Beers has already started this process. It goes so far that the company even consider the possibility to refuse from the status of a monopoly declaratively in order to stimulate the situation in the world market but according to pragmatic view the company simply intends to start business in the USA. Taking into consideration De Beers’ actual position it still remains a monopoly but even if the status would be changed it is hardly possible to find any equal competitive company that could really oppose to De Beers. So, in all probability the company and its status would remain unchangeable and ‘diamonds will be forever’1 as long as De Beers controls all diamond mines in the world and women regard them as their ‘best friends’.


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