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Beers Consolidated Mines, Ltd., whose mines up until recently
produced over 40 percent the world’s diamonds, reduced
its output of rough diamonds by about 90 percent in 2009.
Moreover, in accordance with the new anti-trust laws of
the European Union, it stopped buying diamonds from other
producers for its stockpile. By doing so, it effectively
relinquished control over the diamond prices to the Russia’s
state-controlled monopoly, Alrosa, which is now the largest
the world’s largest diamond producer.
For more than a century, De Beers had been the undisputed
overlord of a global diamond cartel. Indeed it masterfully
created and perpetuated the diamond invention, the idea
that diamonds are rare and forever valuable. To be sure,
until the late nineteenth century, diamonds were truly rare,
found mainly in a few riverbeds in India and South America,
and the entire world production of gem diamonds amounted
to a few pounds a year. Then in 1870, huge diamond mines
called “pipes” because of their circular shape
were discovered in South Africa, where diamonds were soon
being scooped out by the ton by steam shovels. As these
diamonds poured onto the market, the price dropped to loss
than $10 a carat, endangering the investments in these mines.
Realizing that the flood of diamonds from these pipes, if
not abated, would destroy the public’s perception
that diamonds were scarce, and that without the perception
of scarcity diamonds would become at best only semiprecious
gems, the mine owners moved to limit the surfeit of diamonds
by merging their properties in 1888 into a single entity,
De Beers. This diamond cartel, which then came under the
control of the Oppenheimer family, maintained the “price
security” crucial to the illusion by releasing onto
the market only the number of carats to satisfy demand at
the established price and stockpiling the excess diamonds
in its vaults in London and Johannesburg. When diamonds
were found in more and more countries, it worked through
an intricate system of bankers, shell corporations, and
buying agents to keep them in a single channel of distribution
called the “Central Selling Organization.” By
acting as the buyer of last resort, De Beers proved be the
most successful cartel arrangement in the annals of modern
commerce. Then, in the 1960s, it was confronted by a new
challenge: a huge pipe mine discovered outside in purview
in Siberia.
Even though the Russians had discovered it in 1955, the
incredibly harsh conditions in Siberia delayed its development
until 1962. Concerned that these small, mainly quarter to
half carat diamonds would disturb the precariously balanced
market, Sir Philip Oppenheimer, the head of the Central
Selling Organization, rushed to Moscow to negotiate a 5
year deal to buy virtually all the Siberian diamonds. De
Beers considered it a good investment, even if had to stockpile
all these diamonds, because, based on the data, it had it
could reasonably expect the production from that Siberian
mine to gradually diminish as similar mine had done in South
Africa. Instead, production accelerated at an incredible
pace, and by 1968, it was delivering nearly two million
carats a year to De Beers, most of which were added to its
bulging stockpile. In return, the diamond haul provided
the Soviet Union with so much hard currency that the head
of the Mirny Diamond Administration said, "We call
ourselves the country's foreign exchange department."
When Russia delivered some 2.5 million carats in 1976–
-almost one-quarter of the world's supply– Sir Philip
insisted on personally inspecting the mysterious Siberian
mine before he would renew the contract. He was accompanied
by Barry Hawthorne, who was then De Beers' chief geologist
in Kimberley. By the time they had completed the arduous
journey to Mirny– fog delayed the flight for nearly
a day– they had very little time to inspec the mine.
"We had about a twenty-minute tour of the mine,"
Hawthorne later told me, and what he saw at the open pit
site only deepened the mystery of how the Russians produced
vast quantities of gem diamonds from the depth of the excavation
he could calculate that less ore had actually been taken
from this mine since 1960 than would be able to produce
anywhere near the quantity of gem diamonds the Russians
were shipping to De Beers– at least by comparison
to their South African state-of-the art mines. Hawthorne
theorized that Russia must have “secret mines”
elsewhere. The Siberian diamonds also intrigued the CIA
since the hard currency they provided could fund KGB operations.
The CIA’s counterintelligence staff even looked into
the possibility that the Siberian diamonds were man-made,
or “grown”, in hydraulic presses– a process
which had been demonstrated experimentally by General Electric
but proved economically unfeasible (at least in the US)–
though it could not find any evidence to substantiate this
theory. In any case, for de Beers, the enigma became a moot
issue: wherever these diamonds came from– whether
the Mirny mine or some other secret sources– they
could not be allowed to inundate the market and destroy
the illusion of scarcity. Whatever their origin, De Beers
had to keep them in its “single channel” of
distribution. So though, the price was a matter of tough
negotiations, it continued to bear the burden of sustaining
the illusion of scarcity.
After the Soviet Union collapsed in 1990, De Beers still
bought about half of Russia’s diamonds (with the balance
consigned to local consumption or the Russian stockpile
that had been created by the Communists in 1917 to hold
gems taken from the Czar.)
Since acting as buyer of last resort put enormous financial
strains on the company, and mew antitrust laws in Europe
made it more difficult to stockpile diamonds, De Beers sought
a new strategy by moving to establish its brand in the retail
end of the diamond business. Then, facilitating this change,
the European Union in 2008 prohibited De Beers from stockpiling
Russian diamonds. Even though the Supreme Court of the European
Union later suspended that prohibition, De Beers agreed
to end its long-standing deal with the Russians by 2009.
As a result, the baton has been passed to the Russian diamond
monopoly Alrosa.
The Russians are aware of the requisites of running the
cartel. “If you don’t support the price,”
Andrei V. Polyakov, a spokesman for Alrosa told the New
York Times, “a diamond becomes a mere piece of carbon.”
The immediate problem confronting the Russians is the $5
to $7 billion worth of diamonds in the so-called pipeline,
which are the diamonds bought by cutters, dealers, and manufacturers,
mainly with bank financing, that because of the collapse
in retail sales, remain in their inventories. On top of
that, new pipe mines in Angola and Australia threaten to
further destabilize the market. So the new overlords of
the diamond cartel have their work cut out for them.
But while the Russians may share the motivation and even
logic of De Beers, the diamond invention is far more than
a monopoly for fixing diamond prices; it is a mechanism
for converting tiny crystals of carbon into universally
recognized tokens of wealth, power, and romance. De Beers
managed this feat through the intangible but crucial element
of good will. For three generations, the Oppenheimer family
built a network of relationships with diamond cutters in
Antwerp, brokers in Tel Aviv, intermediaries in Africa,
and bankers in London which was based on a long-standing
mutual trust. This network furnished, among other things,
much of the pricing intelligence, discipline and public
relations that allowed De Beers to control the diamond trade.
If the Russian monopoly lacks the necessary human capital
to run this delicate mechanism, the illusion at the heart
of the diamond invention , along with the diamond prices
it has for so long sustained, may be forever shattered.
PART II- The
Overhang
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