Competition in diamond market chips away at De Beers
Two shocks have occurred in the global diamond market, both reflecting the decreased market power of De Beers, since the cartel’s Central Selling Organisation (CSO) ended in 2000.
The first shock was in 2008 and the most recent was last year. Both were dealt with in the same way.
In the absence of the CSO Botswana, the “Saudi Arabia of diamonds” and, to a lesser degree, other producers in the De Beers zone such as Namibia were the new buffers in the market.
In fact, before the formal end of the diamond cartel, Botswana, which owns 15% of De Beers, had already become the buffer for dealing with too many diamonds. It would shut down Botswana’s mines for a while and the diamond market would eventually recover.
This approach contrasts with the Russian policy of not shutting its state diamond mining company, Alrosa. Instead, the government buys up excess stocks cheaply, as President Vladimir Putin did in 2009, and then sells them at a much higher price, as it did in 2011.
The 2008 price shock in the diamond market was largely external and a direct result of the 2007-2008 global economic crisis.
The reasons for last year’s shock are far more controversial. In 2015, De Beers’s profits declined from 2014 by a whopping 58% to $571-million.
Most of this profit was generated at the far end of the diamond value chain: its Forevermark jewellery and Element 6 industrial diamonds. Diamond mining, the traditional mainstay of the De Beers business, was making very little money.
In 2014, with Anglo American’s base metal operations making almost nothing, De Beers was the jewel in its crown. (Anglo, which owned 60% of De Beers, paid $5.1-billion in 2011 to buy the 40% stake in De Beers then owned by the Oppenheimers. Anglo American currently has a market value of $9.9-billion.)
Late last year, when De Beers officials addressed industry meetings in Windhoek and Gaborone, they blamed the collapse of the Chinese stock market, the crackdown on corruption and luxury spending, and the slowdown in economic growth.
Shortly after this, the consulting firm, Bain & Co, issued its annual report on the diamond market, echoing De Beers’s position.
Last month Xinhua news agency reported that China’s imports of polished diamonds fell 18.2% year on year to 1.3086-million carats in the first 11 months of 2015.
Repeated requests to Bain & Co for statistical evidence that a relatively small diamond market such as China, which was still growing at 6%-plus, could be responsible for the large decline in demand and prices in 2015 remained unanswered.
The China explanation is hotly contested by many parties in the diamond industry, who argue that 2015 has seen a fundamental shift in the power in the market, with De Beers sightholders abandoning their boxes in large numbers and refusing to buy what they see as increasingly unaffordable sights.
In the bad old days of the last century, sightholders took their allocations. If, as a buyer, you refused to buy De Beers’s sights, you were eventually forced out and then would have to buy diamonds on the much more expensive secondary market.
By and large, De Beers sightholders have flipped their boxes and made often considerable amounts of money. But with the prices that they and Anglo American were demanding for rough diamonds from late 2014 onwards, there was an unheard-of rebellion by the buyers who could no longer flip boxes for a profit.
As the guru of the diamond industry Chaim Even Zohar stated in a recent newsletter, this is unprecedented in the market, reflecting a fundamentally changed industry.
The rebellion is part of the industry’s long shift towards increasing competitiveness and the decreasing market power of De Beers.
Over the past 15 years, there has been increasing competition in the industry. This includes seemingly independent auctions, forward markets and an increased number of suppliers.
Information about sight prices is also more readily available and the industry looks more competitive.
But the apparent competition should not be exaggerated. The central artefact in the diamond market edifice is the De Beers price book, a secret commercial document, which is the basis on which the pricing of diamonds in the whole market still rests. All producers use the basic De Beers price to determine their price.
Few will lament the decline of De Beers because of its association with Cecil John Rhodes, the creator of De Beers, who used its great diamond wealth to plunder and colonise Zimbabwe.
But for Namibia and Botswana, De Beers has been a source of considerable wealth, which – in Botswana (at least under the benevolent rule of Sir Seretse Khama) and since the end of apartheid in Namibia – has been used to the benefit of its people.
But without De Beers, there would be no market for diamonds, which are produced by the tonne and, based on natural availability, should be considered as nothing more than a semi-precious stone.
Since World War II, De Beers has defied credulity and the world’s ballooning divorce statistics, convincing one generation after another of love-struck couples that their love, like diamonds, is really forever. Buyers have convinced themselves that giving a diamond ring to their intended betrothed is worth at least two months’ salary.
The recent spread of this North Atlantic folly to middle-class Chinese and Indian couples, who traditionally used gold, jade and pearls in marriage exchange, was driven by the very successful De Beers marketing campaign.
In the final analysis, the great prosperity that one sees from Gaborone to Walvis Bay, with schools and good roads and hospitals, would not have been possible without De Beers, its myths and monopoly power.
These are the views of Professor Roman Grynberg and not necessarily those of the University of Namibia, where he is employed.