THE DE BEERS STORY

The De Beers Story: 1869: The Kimberly Pit and the De Beers Pendulum Before 1869, mankind only scratched the surface of diamond production. Literally. Until then, every diamond deposit was alluvial, miners had only to pick diamonds off the ground (usually of ancient river beds) or dig holes below the surface of these gravel or sand basins. True, some mining was done in jungles. But this, too, was alluvial. That year, near the Orange River in South Africa, expensive, organized underground diamond mining became the primary method of supply. In a matter of months, the diamond world went from scarcity to surplus. From Day One of the great South African finds, this country changed the economics of the diamond market as well as its mining methods. Faced with glut, miners and cutters had to start thinking of diamonds for the first time ever as a commodity in need of constant control so that supply would always be fine-tuned to demand. What’s more, demand would have to be stimulated in a way it had never been before. In time, that would mean transforming it, as much as possible, from a luxury into a necessity. From this moment on, the history of diamonds becomes the history of one very visionary mining company: De Beers Consolidated Mines Ltd. Here is that story.

The De Beers Story: Cecil Rhodes: Diamond Imperialist Extraordinaire The same year that the first of South Africa’s deep-hole diamond mines was discovered, a sickly 17-year-old English lad, Cecil John Rhodes, arrived in the country. He came with 2,000 pounds and a dream of making Great Britain a modern-day Roman Empire. How, you might ask, could a teenager expect to extend English rule from southern through eastern Africa? He would finance British imperialism with diamonds. Don’t laugh. Rhodes was basing his plan on history. The East India Company, an earlier British chartered trading company with the power to raise armies and wage war, had subsidized conquest of India in part with profits from Indian alluvial diamonds. Rhodes intended for English imperial history to repeat itself in Africa—using him and his diamond mines as its chief instruments. When Rhodes arrived in Kimberly, there were 50,000 diamond prospectors living in what he described as a giant ant hill. Until 1869, these immense diggings had been farmland owned by two Boer settlers, D.A. and J.N. De Beers, who became the namesake of the new diamond field. As the pit became a deep, dangerous warren of claims, mudslides and floods became frequent occurrences. Rhodes saw there was more immediate money to be made from flood control than mining. So he used all his money to buy Kimberly’s only steam pump to suck out seepage and keep diggings dry. Then he invested his considerable profits in more pumps and eventually created his first monopoly—in drainage rather than diamonds. Eventually, Rhodes turned water into wine by buying out miners who could no longer afford his services. Within a decade of his arrival at the De Beers Mine, he was its biggest claimholder. Shortly afterwards, he combined his holdings with those of two large mining syndicates to form the De Beers Mining Company. In 1880, he applied for a charter from the English government and was given bonus powers to annex territories, raise armies and install governments. No wonder Rhodesia was later named after him.

The De Beers Story: Rhodes vs. Barnato: A Clash of Titans The role of gems in building the English empire is rarely discussed—but cannot and should not be underestimated. In 1887, when Cecil Rhodes was consolidating his diamond holdings in South Africa, England was busy annexing upper Burma to prevent a French mining syndicate from working a concession at that country’s fabled Mogok ruby fields. Around the same time, British interests were establishing a thriving sapphire mine at Montana’s famed Yogo Gulch, then among the most highly prized sapphire in the world. Without a doubt, South Africa was the linchpin of British commodity capitalism—both in diamonds and gold. And it was Rhodes who was foremost among England mineral moguls. Of course, Rhodes had luck on his side. Bad luck. As South African diamond production mushroomed, the consequent glut clobbered prices and forced claimholders to sell to Rhodes at desperate prices. Only one man stood in his way of total diamond domination: Barney Barnato, an English promoter who began to amass claims after his arrival at Kimberly in 1873. In 1883, Barnato staked his fortune on sinking the world’s first underground diamond mine shaft at Kimberly. When he succeeded, he became Rhodes’ greatest rival for control of South Africa’s diamond riches. To stop Barnato, Rhodes paid an exorbitant price of 1.4 million pounds to the owners of the last remaining independent Kimberly mine holdings. In 1888, Barnato had no choice but to join Rhodes in forming the company that would become De Beers Consolidated Mines Ltd. Rhodes then laid the foundation for the modern diamond market by creating what he had long wanted: a single-channel of diamond distribution. Five years later, he took a giant step toward vertical integration when he contracted to sell his entire production to a London syndicate of brokers who then sold rough to cutters in Antwerp. Essentially, the same diamond distribution system survives today.

The De Beers Story: The Oppenheimer Dynasty As far back as 1727, the diamond market had shown itself vulnerable to sudden influxes of rough. That year the first flood of non-Indian diamonds—all from Brazil—hit Europe and roughed up prices. Of course, Cecil Rhodes didn’t have to go that far back in history to see the dangers of unregulated diamond supply. He just had to study his own time. By 1872, a flood of South African diamonds had precipitated a far worse crash in diamond prices. Rhodes told his backers and anyone else who would listen that the only solution to diamond price volatility was a single-channel distribution system that extended from mine to market. The first step in the creation of that system came in 1890 when Rhodes, who had created a central reserve for rough diamonds, contracted with a 10-firm London syndicate to act as intermediaries between De Beers and Antwerp’s cutters. At A. Dunkelsbuhler, one of the leaders of this consortium, there worked a young diamond sorter by the name of Ernest Oppenheimer—who would become Rhodes’ successor when, in 1917, he founded De Beers’ Central Selling Organization (CSO). Early on it was clear that Oppenheimer was as brilliant, cunning and ambitious a strategist as Rhodes. And like Rhodes he took an indirect way to power in the diamond world. Just as Rhodes used water to amass mine holdings, Oppenheimer used gold to amass shares in the De Beers diamond mining empire. Here’s how. All the while South Africa was becoming a diamond colossus, it was becoming a gold colossus, too. Oppenheimer arranged for London diamond brokers to buy interests in Transvaal gold mine—charging small fees and commissions for his role in doing so. Gradually, he gathered the capital for his move into diamonds. Then in the same way bad luck for South African diamond miners had helped Rhodes, bad luck for German gold miners proved a bonanza for Oppenheimer. When World War I broke out, South Africa came under great pressure to expropriate German gold mines. By forming a multinational company, Anglo-American Corporation, Oppenheimer allowed the Germans to keep their gold holdings. As a principal shareholder in this fledging gold giant, Oppenheimer had the capital at his command to make his move into diamonds. Here, again, World War I proved a lucky charm. Around 1900, German geologists had discovered a vast alluvial diamond field on the beaches of German Southwest Africa (later Namibia)—so vast it proved a grave threat to the De Beers’ monopoly. When South Africa was also pressured to expropriate these mines in 1914 (the government sent troops to occupy the fields), Oppenheimer offered to buy the Germans out, paying them in shares of Anglo-American. Next he set his sights on De Beers itself, offering them Namibia’s rich diamond fields in exchange for De Beers stock and a seat on the board. Little by little he became the company’s dominant shareholder. In 1929, he became chairman of the board. The diamond world was now the personal fiefdom of the Oppenheimer family.

The De Beers Story: Surviving the Great Depression When Ernest Oppenheimer became chairman of De Beers in 1929, he had to face his greatest challenge ever: The Great Depression. The London Syndicate that bought and distributed all of De Beers rough was on the verge of bankruptcy and Cecil Rhodes’ single-channel market system was facing oblivion. But Lady Luck (as always, a friend of diamonds) stood by Oppenheimer and helped him use his Midas touch to save the De Beers monopoly. How? He bought out the syndicate and made it the London arm of De Beers—newly named the Diamond Trading Company. Henceforth, De Beers would directly supply Europe’s cutters with their rough. The single channel system was now stronger than before. Of course, no one knew it then. Cutters weren’t exactly clamoring for rough and prices were in free fall. Oppenheimer was determined to prove the endurance power of the De Beers’ monopoly. So he closed all of De Beers’ mines. Actually, he had no choice. New mines in the Belgian Congo (later Zaire) were producing tons of low-grade, mostly industrial diamonds called bort. To preserve his cartel, Oppenheimer offered the Belgian government a deal it couldn’t refuse: blanket purchases of all Congo rough. Then he made a master move by forming a new subsidiary, the Industrial Diamond Corp., to stockpile all this industrial material until times improved. By 1933, De Beers was positioned to be as much a monopoly in industrial diamonds as it was gem diamonds. Indeed, De Beers was now a diamond cartel. Cecil Rhodes would have been proud.

The De Beers Story: At War with the US War Department Until recently, De Beers could not do business in the U.S. Instead, it sold its diamonds to customers (called sightholders) in London who sold them, cut and polished, in the world markets. So it didn’t need to be in the U.S. Nevertheless, De beers’ absence from America was part of a bitter, long-standing feud between De Beers and the U.S. Justice Department that started in 1939. Diamonds were an essential war material, needed to tool up for war. Only diamond was hard enough to cut the tool and part dyes for munitions and machinery. Only diamond was strong enough to draw wire and serve as drill bits. No wonder that German buyers were paying up to 100 times over market price for industrial rough from Antwerp dealers just before the Nazis invaded Belgium in May 1940. Fearing a successful German invasion of England, and German confiscation of De Beers’ London stockpiles, Washington requested (no, make that ordered) De Beers to sell it 6.5 million carats of industrial diamonds to see it through the war. Oppenheimer refused, saying that nowhere near that many diamonds would be needed. A battle of wills began. President Roosevelt asked Winston Churchill to strong arm De Beers into giving it the ‘required’ diamonds. Churchill tried but failed. It seems the diamond requisition department of the British government was staffed by former De Beers’ people. No action was taken. Roosevelt hit the ceiling and, according to Jay Edward Epstein’s lively book, “The Rise and Fall of Diamonds,” threatened London with an embargo on war parts if the diamonds were not sent. Oppenheimer brokered a compromise: 1 million carats—14% of the original request—would be forwarded to Washington with a backup stockpile held in Canada (a member of the British Commonwealth). In the mean time, U.S. government investigators discovered that De Beers had allowed millions of carats of Belgian Congo bort to reach Germany—at huge markups. That made for lasting bad blood between De Beers and the U.S. Justice Department. When Justice launched the first of four investigations of De Beers in 1945 (the others followed in 1957, 1974 and 1994), the company escaped jurisdiction by ceasing all operations in America. Only recently, when De Beers admitted guilt for price-fixing and paid a token fine for this offense, did the 60 years of animosity between the two parties officially end. De Beers is now free to operate in America.

The De Beers Story: 1970 to 1985: Crash-Testing the Market In many ways, the De Beers cartel was a central bank for diamonds—constantly regulating the flow of rough to cutting centers and always keeping supply balanced with demand. Although no one would say that De Beers operates out of altruism, the company seems to feel a genuine sense of noblesse oblige when it comes to maintaining both market stability and diamond value—even if they must step on toes. After two decades of relative stability, De Beers faced—and survived--calamitous threats to its control in the late 1970s. In both cases, however, it showed a ruthless determination to restore calm, if not order. The first threat came from inside the market; the second threat came from outside. Trauma in Tel Aviv: Diamonds are Israel’s Number One export in terms of value. During the 1970s, continual devaluations of Israel’s currency made it far cheaper to cut stones in Tel Aviv than Antwerp. Israeli cutters took advantage of the widening wage differential to move into larger-sized stones. To keep Tel Aviv from further expansion, De Beers announced a 20% cut in its quota of rough for Israel. Rather than trim the work force or production, Israeli cutters went to Belgium and paid up to 100% premiums on boxes of De Beers’ rough. To finance these purchases, Israeli banks accepted diamonds as collateral (loaning up to 80% of their purchase price) and charged no more than 6% on diamond loans. By the end of 1977, Israeli banks were sitting on a stockpile of 6 million carats. De Beers stepped in to curtail the speculation by imposing a temporary 40% surcharge on sight boxes—which it could eliminate at any time. The fear diamonds would be worth 40% less in a month or two forced banks to stop giving easy credit. This ended the speculation overnight. At the time, many saw this episode as a battle between De Beers and Israel. But it was really a battle with greed—a battle De Beers won decisively. The Hard Asset Investment Bubble: In the mean time, media coverage of these events focused on the rising value of diamonds in a time of high inflation rates and constant currency devaluations. Firms began to sell diamonds as a hard asset and a hedge against inflation, focusing their sales efforts on 1 carat stones. As so-called diamond investment companies proliferated, and concentrated on marketing a narrow ½ to 1 carat size range, prices for these stones accelerated and became wildly irrational in relationship to the prices for other sizes spared investment demand. The most widely publicized of these aberrant diamonds was the 1-carat D-Flawless round-brilliant which went from around $20,000 per carat in early 1979 to $60,000 per carat a year later. When the IRS ruled that diamonds were not an allowable asset in pension funds, and the Fed reined in on high interest rates, the market crashed hard. Investors were left with tens of thousands of diamonds which they had to liquidate for pennies on the dollar and De Beers had to spend the next couple of years repairing what many thought would be fatal damage to the diamond mystique. By 1990, however, the mystique was again as strong as ever. What did De Beers do to restore its magic?

The De Beers Story: The 1990s: Thinning the Line between Luxury & Necessity De Beers is often accused of creating a purely artificial market for diamonds—one based on vanity and illusion. It’s not that simple. Diamond isn’t simply the Coca Cola of gems. It’s more than a brand. As a desk clerk in Raymond Chandler’s novel, “Playback,” tells detective Philip Marlowe when he sees him looking at his wife’s tiny wedding ring, “A guy wants his love for his girl to show on her finger.” And there’s only one show of love for most people: diamonds. De Beers has succeeded in making the giving of a diamond a cultural imperative. And by so doing, the diamond comes closest of any luxury to being a necessity. When a gem has that much cultural significance, it’s hardly fraud. It’s sacrament. Until the 1930s, diamonds shared status as a love token with other gems like pearls. That’s when De Beers almost single-handedly invented the art of product placement by getting major Hollywood stars to wear spectacular diamonds on screen. In no time at all, the company elevated diamond to the sole symbol of love. Nevertheless, the company didn’t have to invent the attributes on which the diamond mystique rested … hardness, brilliance, fire, sparkle, among other virtues. Critics of De Beers love to use Japan as the prime example of the Diamond Fiction. In 1967, there was no tradition whatsoever of engagement rings. That year, De beers began a media blitz that would change custom and make diamond engagement rings as important as they were in the West. A decade later, nearly 60% of all newly weds received diamonds. Today it is well above 80%. Is this merely cultural engineering? A Boston marketer whom GCAL asked about this thinks De Beers did more than foist a new desire on the world. “It filled a vacuum,” he says, “by providing the perfect answer to a deep-seated need.” What critics of De Beers miss is the fact that the company built its monopoly as much on emotion as economics. Having made the diamond the preferred marital gem--whether engagement, wedding or anniversary—it sought to expand its monopoly to every special occasion that could be satisfied by jewelry. The Boston marketer put it this way, “The diamond isn’t a gem; it’s an archetype.” In the late 1990s, De Beers began a series of brilliant product campaigns to expand the repertoire of reasons for gifting diamonds. First, it introduced the three-stone ring to symbolize lifelong commitment—one diamond for the past, present and future of a relationship. Most recently, it began another multiple-stone initiative, the well-received “I Forever Do” ring. Curiously, it launched a right-hand ring campaign designed to make diamond the preferred impulse purchase for independent women. Guess what? It hasn’t done so well. You want to know why? It ignores the chief reasons for giving diamonds: relationships, shared life. The Boston marketer again, “The right-hand ring campaign speaks to self-love not true love. That’s cognitive dissonance for most diamond buyers.”

The De Beers Story: Since 2000: A Kinder, Gentler De Beers Since 2000, De Beers has been making a rapid, dramatic transition from mining-driven monopoly to market-driven corporation. The culmination of this repositioning came on July 9, 2004 when the company pleaded guilty to price-fixing—a charge stemming from anti-trust cases brought by the U.S. Justice Department in 1945, 1957, 1974 and 1994. De Beers agreed to pay an undisclosed fine of $10 million tops. That was a pretty puny sum to end more than 60 years of animosity with the American government. Since then, De Beers has opened a retail store in New York City and is expected to re-commence formal business dealings here for the first time since the eve of World War II. Why did De Beers suddenly take a rap it had stubbornly resisted for decades? It wasn’t just the token penalty. It was part of an extensive corporate makeover that is much more than cosmetic. In 1998, De Beers hired outside consultants to perform what is best called a “marketing audit.” This is an A-to-Z analysis of a company’s operations, procedures and structure with an ultimate goal of comprehensive revamping. One reason for the sudden soul-searching: De Beers had come under heavy fire from human rights groups for turning a blind eye to heavy traffic in contraband diamonds by African rebel groups to raise money for arms and anarchy. According to some estimates, “conflict diamonds” accounted for as much as 15% of all diamonds coming on the market. By 2000, De Beers formally pledged to stop buying illicit diamonds and to cooperate with all international efforts to halt the flow of illicit diamonds. But De Beers wasn’t just out to show it had a conscience. Facing formidable competition from other mining giants such as Rio Tinto, De Beers had decided to become a market-, rather than mining-, driven company. Henceforth it would establish a brand identity for its diamonds—with all the extra value brands could bring. Toward this end, it announced a “Supplier of Choice” program in 2003. Working with fewer customers, De Beers would require each to submit formal, detailed marketing plans which the company would pass or fail. Firms whose plans flunked the critique would be dropped as De Beers’ customers (known as sightholders). That year, De Beers cut 20 firms from its client roster. The diamond trade went into shell shock. Today De Beers’ annual release of its sightholder list is the jewelry industry equivalent of the NBA draft.

The De Beers’ Story: From Single to Multi-Channel Market De Beers’ greatest success has been in transforming a plentiful commodity into a high-value asset. Many writers have dealt dismissively with this triumph. Indeed, every ten years or so a highly-acclaimed book about De Beers appears that attempts to demote the diamond mystique to myth and persuade the public that the company is guilty of an elaborate hoax—each time unsuccessfully. The latest of these exposes is Tom Zoellner’s “The Heartless Stone: A Journey Through the World of Diamonds, Deceit and Desire,” published in 2006. Zoellner became disenchanted with diamonds after his fiancée broke up with him and returned her engagement ring. In an interview on NPR’s “Radio Times” in late June 2006, the author revealed that he had sold his engagement ring to a Philadelphia jeweler for 80% of its purchase price. This disclosure was evidently meant to undermine faith in a diamond as an investment. But to any seasoned insider, this anecdote was just the opposite: proof that diamonds are a very liquid tangible that retain an extremely high portion of their current value. What’s most ironic about this high retention of value is that it no longer needs a De Beers cartel—or even a monopoly—to ensure this. Although De Beers still controls at least 50% of the world’s diamond production, and is pledged to maintain that level of control, it is taking a new tack to diamond defense. For one, De Beers now operates in a post-colonial world where governments are more willing to allow private enterprise to develop their countries’ diamond resources. So De Beers must vie with other mining giants, some with deeper pockets than its own. In addition, De Beers has been prevented from pursuing some of its past cozy alliances with great diamond powers like Russia because they are perceived as anti-competitive. These radically altered circumstances have forced the company to become more market and demand driven rather than mine and supply driven. And this change in perspective has forced the company to become more transparent, more socially aware—a good global corporate citizen. It has vowed not to buy or traffic in diamonds whose sources could use the money to finance terrorism. And it has required its customers to take the same pledge. Don’t get the wrong idea. De Beers is still actively prospecting for diamonds. And no doubt it will stand by ready to mop up any excess that threatens market stability. But the emphasis is now clearly on demand. And judging from the high liquidity value of diamonds at the present time, De Beers is proving masterful in this realm, too.