The diamond cartel

‘A diamond is forever’ boasts the glamorous advertisement of De Beers. But diamonds are valued mainly because they are considered a sound investment, relatively immune from the vagaries of economic ups and downs. Diamonds are cheap to produce and would be lower in price but for the global cartel operated by De Beers.The cartel has protected its market monopoly by flattening out short-term fluctuations in supply, and to some extent demand, with the aid of a huge buffer-stock.

    The diamond cartel was set up by Sir Ernest Oppenheimer, a South African

mining magnate, in 1934. The cartel is the vehicle through which over 80 per

cent of world rough sales are marketed and administered.

    Unlike other commodity cartels, the diamond cartel both controls supply and influences demand, combining the roles of major distributor, marketing agency and buffer-stock manager. It has developed an expertise in matching supply to demand and the financial strength to hold diamonds temporarily off the market.

Structure of the diamond market

    Diamond mines are relatively few in number, are easily identified and cannot be

increased at will. The major producers are South Africa, Botswana, Namibia, the

former Soviet Union and Australia. Owing to the wide variation in diamond

quality, a country’s volume of output is not an accurate indicator of the value of

its production. For example, Australia is the world’s largest producer of diamonds

in volume terms but, because of the low average price of its output, it ranks much

lower in terms of value.

    The industry’s major producer is the De Beers corporation, which has direct

and indirect interests in mines throughout the world, as well as in South Africa. tradeable substitutes. At the micro-level, the diamond market is not a single

market, but embraces many sub-markets with different prices and distinctive

supply and demand characteristics. Price differentials exist for different product

grades in most commodity markets. The lack of homogeneity in diamonds is such

that there is no single price which acts as a reliable benchmark for the market as

a whole. The market is highly segmented and prices range from $1 to tens of

thousands of dollars. This has important implications for their marketing by the

cartel.

    Good stones are relatively scarce – around 10 per cent of the market by volume

accounts for 50 per cent of the market by value.

    Industrial diamonds refer to stones that are too small or flawed and too opaque

and imperfect to be saleable as polished stones. Historically, industrial diamonds

have formed about 80 per cent by volume and 20 per cent by value of all diamonds

found. This segment of the market is also served by synthetic diamonds.

Natural industrial diamonds nowadays probably account for less than half of all

diamonds sold by volume and for less than 5 per cent by value. De Beers and

General Electric dominate the world market for industrial diamonds.

    De Beers sorts diamonds into boxes and sells them to sightholders who represent

the main cutters. These cutters and polishers of diamonds are spread around

three main centres: Antwerp, Tel Aviv and Bombay. They sell the polished stones

to polished diamond buyers who in turn supply the retail trade. China is a recent

newcomer in this part of the business and could also be an important new source

of demand.