March 20, 2019

By Paul Zimnisky, CFA

De Beers market share stood at over 80% as recently as the late-1990’s 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 company’s control.





In the late 19th century a massive diamond discovery in South Africa prompted a diamond rush. Businessman Cecil Rhodes bought as many diamond-mining 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 world’s 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 1950’s the government agreed to sell its production through De Beers. However, the arrangement was first weakened in the 1960’s 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 1990’s, 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 industry’s 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.









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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.



