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07/27/2000
Diamonds / DeBeers
A few weeks ago in my "Week in Review" I wrote a semi-
facetious comment about diamonds, having just learned that the
UN Security Council had voted to ban them from Sierra Leone.
I explained that from a supply / demand standpoint, a purchaser
better act fast.
So what happens? A few days later DeBeers, the South African
diamond king who controls two-thirds of the trade, announced
they would no longer accept diamonds from all "war-originated
zones," or "conflict zones." But, more importantly, DeBeers
now realizes that they have to totally change their way of doing
business...more on this later.
The diamond business is a $7 billion world industry; about $56
billion at the retail level. DeBeers was founded back in 1880 by
Cecil John Rhodes, a British citizen who had emigrated to Natal
in 1870 and made a fortune in the Kimberley diamond mines.
Rhodes then went on to found the British South Africa Company
in 1889, occupying lands that were to become the nation of
Rhodesia (today, Zambia and Zimbabwe). [You can scroll
through the Hott Spotts archives for the full story on Zimbabwe.]
Rhodes is truly one of the great dirtballs of all time. Having
amassed a large fortune through his diamond investments, he
achieved a prominent role in the British Parliament. In an 1877
speech he commented on Africa:
"These are my politics on native affairs, and these are the politics
of South Africa. Treat the natives as subject people as long as
they continue in a state of barbarism and communal tenure; be
the lords over them, and let them be a subject race, and keep the
liquor from them."
And so Rhodes and DeBeers quickly monopolized the diamond
trade, knowing that the price was totally linked to the perceived
scarcity of the product (it''s not scarce at all) as well as the 4 C''s:
color, cut, clarity and carat size.
DeBeers has known that the only way they could control the
price was to control the supply. They were able to establish a
cartel by buying up every possible jewel. Implementing the
master plan, DeBeers bought up all of the mines and then the
inventory from mines they didn''t own. By hoarding all of the
stones, they controlled the price.
Over the years, DeBeers was able to match up supply with
demand, almost perfectly. The company is so efficient that they
track wedding announcements to gauge how many stones should
be released into the market.
But controlling the supply of diamonds meant going to the
source, and the source for many of these "jewels" was often
renegade African nations such as Sierra Leone, Angola and
Congo. Rebel leaders in these countries used their diamond
resources to finance civil wars which have ravaged their people.
Literally, hundreds of thousands have died in the cause of
extracting rocks from the ground. Millions of innocent natives
have been exploited.
The international tide of opinion began to change (ever so
slightly) as a result of the civil war that has been waged in
Angola over the past few decades. Over half a million, alone,
have died there as the rebel leader Jonas Savimbi turned to the
diamond trade as a source of funds when the U.S., realizing that
Savimbi was not the savior we initially thought him to be, cut off
aid. Savimbi has since extracted about $2.5 billion in diamonds
to finance his efforts. In 1998, the UN banned the purchase of
Savimbi''s diamonds.
But, as has been the case in embargoes of this kind, they were
ineffectual (i.e., Iraq today) and who should, in reality, be
financing Savimbi and other hideous leaders of his ilk, but none
other than DeBeers, the diamond king.
And while the international news coverage of the carnage in
Angola has been spotty at best, over the past year the television
cameras were trained on the hell-hole that is called Sierra Leone.
It was here that we all began to realize just how the diamond
trade was financing murder and barbarity on a scale of immense
proportions.
The rebel leader Foday Sankoh controlled the diamond
producing areas of Sierra Leone and, utilizing slave labor, was
able to finance his efforts to topple the freely elected
government. Sankoh also seemed to have a penchant for cutting
off the arms and legs of many of his subjects. In a word, he is a
butcher.
So the UN Security Council has now sought to ban all "blood
diamonds." DeBeers, scared to death that their investment was
about to go down the dumpster, had to find a way to protect the
value of the some $4 billion in unsold stones that they maintain
in their vaults. If the market was flooded with diamonds, the
price would, of course, plummet.
And the African nations that DeBeers counts on aren''t the only
source of diamonds in the world. For example, here are the top
six nations today.
Botswana $1.8 billion
Russia $1.6 billion
South Africa $800 million
Angola $600 million...until the embargo
Namibia $400 million
Canada $400 million
Russia, for its part, has sold most of its diamonds to DeBeers
since 1959. But the Russian concern, Alrosa, wants better terms
from DeBeers or they may stop selling to them. What DeBeers
fears most is head-to-head competition. Alrosa could
conceivably form a new cartel if they so desired. DeBeers
counts on them for 26% of their total supply and prices would
drop sharply if Alrosa went it alone.
Because of the UN and world pressure put on the industry, the
World Diamond Congress, which operates out of Antwerp,
Belgium, has issued a new set of guidelines in a last gasp effort
to protect their image...and their product.
In a recent statement, the Congress asserted that "Any trader that
has dealt with these illicit diamonds will be banned out of the
business."
Among the new measures announced by the industry are the
following:
--Importing nations will only accept rough diamonds in sealed
packages registered "in a universally standardized manner" by
authorities in exporting nations.
--Exporting nations must establish accredited export offices to
seal rough diamond packages and register them in an
international database.
--Nations importing polished diamonds will not accept them
from nations without the proper certification processes for rough
diamonds.
--All diamond-trading nations should enact legislation making it
a crime to knowingly trade in illegal rough diamonds.
And so on and so on. Frankly, it''s all a bunch of bull. And the
industry knows it. It is almost impossible to control this kind of
business and what controls there are will inevitably be lax.
Nevertheless, the industry says they will have a certification
process in place by Christmas.
DeBeers told their partners they had to guarantee diamonds
didn''t originate in war zones. But unless the governments
prosecute sanctions busters and solve the technical problems, like
forged certificates, reforms won''t work.
How DeBeers thus controls the supply is beyond most folks like
myself. Recognizing their dilemma, and not being able to
control the supply (and thus the price) in the manner to which
they were accustomed, DeBeers now wants to become the Nike
of the diamond industry, building its own brand through a
massive marketing campaign. DeBeers will try to convince us
that only they can possibly know diamonds and that they alone
can control quality. But unless they can create new demand, the
price will probably collapse. If, on the other hand, they are
masters at marketing and the gullible public still perceives real
value, DeBeers could succeed. In this business, only they have
the resources to pull off the marketing gambit.
And remember, as my friend Harry Koza suggested, why not
consider cubic zirconium? Women can''t tell the difference.
[Harry said that, not me!!!]
Sources:
Joannie Schrof Fischer / U.S. News
Paula Throckmorton Zakaria / Wall Street Journal
Jeanne Whalen and Robert Block / Wall Street Journal
DeBeers
Paul Arnes / Associated Press
"Africana" by Kwame Appiah and Henry Louis Gates Jr.
Harry Koza
Brian Trumbore
Note: As I was writing this, an article came to my attention by
the Associated Press''s Jim Fitzgerald. It seems that the two sons
of diamond king Harry Winston have finally settled their lawsuit
against each other, 22 years after the death of their father. Ron
Winston and his investment firm are paying Bruce Winston $54
million for his share of the fabled Harry Winston and Company.
Harry started it in the 1920s with $2,000 and an eye for precious
stones. He was so successful that he was able to buy the Hope
Diamond for $1 million, then donate it to the Smithsonian.
But Harry wanted Ronald to inherit the company. Bruce, a
college dropout, wasn''t deemed worthy. But, of course, Bruce
bitched and moaned (this is obviously not part of the AP story),
"I want my fair share...I want my share..." or something like
that.
Ronald insisted that the father wanted to keep the company in the
family. He offered Bruce first $5 million, then $17 million for
his stake. Bruce refused. Then the judge forced the settlement.
Reporter Fitzgerald describes the scene at the finale.
"(Judge) Emanuelli, who was thanked by both brothers for
pushing the settlement, urged them to shake hands, saying that
even if they do not leave as friends, they should think of their
children and grandchildren. ''One day you may want to call upon
each other,'' he said. ''It''s what your father would have
wanted.''"
The brothers shook on it. Absolutely pitiful.
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