May 5, 2008

DeBeers? Cuddly as a Teddy Bear? Or Not.

This is Part 4 of an ongoing series. Other posts in this series - Preview, Part 1, Part 2, and Part 3.

Ten times each year, approximately 80 men in the world meet in London. Each one is led to a room. An attendant gives them a box containing diamonds of varying types and sizes. They are expected to pay the price offered. There are no negotiations. The diamonds released at these sessions, represent just under half of the total carats released every month. Only 80 men are invited to these sessions, the companies they represent have been deemed worthy by DeBeers to distribute the stones. “To be a “sightholder” also means you have convinced De Beers you will not make waves by selling too much of the box at wholesale, or by protesting the quality of your allotment. In exchange for docility, you are virtually guaranteed to make a healthy profit from your box.” A former high-ranking De Beers official told Tom Zoellner, the author of an incredible book I am highlighting, that every box was calculated to release exactly the right amount of stones into the market. Enough to meet consumer demand, but not enough to cause the price to fall. (p. 118). Three floors below this exchange, is the world’s largest stockpile of unpolished diamonds, which are doled out at a controlled rate, but to De Beers, they remain much more valuable right where they are. “The continued stability of the diamond industry depends on an artificial scarcity created by De Beers. . . . De Beers has managed the remarkable feat of operating a 17th century economic model in a 21st century world, thus ensuring that a mineral not so rare in nature fetches a price far beyond what its value would be in a truly free market.” (p. 119).

DeBeers started out as a crooked company. In 1880, Cecil Rhodes created the DeBeers Mining Company. Barney Barnato was the chairman of the Kimberley Central. These 2 companies fought each other in their attempts to buy up more claims to the South African diamond mines that had been found to date. Rhodes, cunningly, offered Barnato a deal where Rhodes would buy the company owned by Barnato, in order to avoid a bidding war, selling it back to Barnato for 300,000 pounds. Rhodes asked only for a fifth of the outstanding stock in Kimberley Central. Barnato, unable to see any detriment, agreed. Rhodes then instructed his brokers to buy up all outstanding shares in Kimberley Central at any cost. As a result, Barnato conceded defeat. DeBeers became the sole cartel. In 1888, Rhodes told his shareholders, that DeBeers aimed for nothing less than to become, “The richest, the greatest, and the most powerful company the world has ever seen.” (p. 127). De Beers then created 2 defining policies, 1- mining production was cut by half, creating an artificial scarcity, and 2 - a single channel for distribution of the stones was created, the forerunner of the sightholder system outlined above that continues today in London.

DeBeers claims it is not a monopoly, of course. “If this is a monopoly, it is a monopoly based on the popular support of its consumers” said an internal memo. “De Beers has no actual power to coerce these producers to sell their diamonds through De Beers.” In 1981, this “freedom” was extremely evident in Zaire. Zaire, one of the most poverty stricken countries in the world, it became unhappy with its relationship with De Beers. It sought an agreement with independent European countries to distance itself from De Beers. De Beers, kindly struck back, releasing a flood of diamonds, driving down prices and forcing Zaire’s industry into near collapse. When in business with the cartel, Zaire received about $3 per carat. PER CARAT! When it struck away from De Beers, it received less than half that. Two years after its attempt at striking away from the cartel, Zaire went back under its wing. One executive was reported to say, “Anyone want to follow Zaire?” (p. 155) Sure doesn’t sound like a monopoly to me. But then again, maybe I am deaf, dumb and incredibly stupid.

One of my great skills, despite my deafness, dumbness and stupidity, is Google-ing. This site shows that in order to get a 1 carat diamond, I would have to pay $7,500-$10,000. The same 1 carat that the finder was paid $3.00 for.

Let’s go back to World War II. Diamond tipped tools became crucial for cutting parts for tank engines and airplanes. As the war progressed, the German invasion of North Africa caused fears that the U.S. was in danger of losing its source of industrial diamonds in the Congo. De Beers, of course, had control over these diamonds. Through the Depression, DeBeers hoarded surplus diamonds in order to keep prices high. It entered the war era with direct control of 95% of the world’s diamond supply. Those gems were now critical to the Allied forces in fighting the Nazis, but the cartel refused to sell them to American arms factories. Its “logic”? If the U.S. was allowed to build up a reserve of these industrial diamonds and the war suddenly ended, all the diamonds could be sold off and would crash the market. Let that settle in a bit. I can wait. This is the company that right now, is holding the diamond you want on your finger.

The ads DeBeers used at this time? “To the chagrin of our enemy, our side controls almost the entire supply of another kind of diamond to do the countless jobs of speed and skill in pouring out armaments… Your lovely gemstone has helped put them to work!” Let me put this together for you. DeBeers refused to release diamonds for the U.S. to use in creation of weapons to fight the Nazis, yet they advertised that by putting a diamond on your pretty little finger, you are helping to bring down Hitler himself. (p. 137-140)

I personally call that talking out of both sides of your mouth. Or being a dickwad. Whatever.


Librarian Girl said...

You're listing out all the reasons why I am not a diamond wearer. Awesome posts!!!!

Kaytabug said...

With each post I am becoming more and more thankful that I never got one!

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