For years, jewelers wondered what would happen if De Beers no longer controlled the diamond market. Would prices fall? Would promotions dry up?
We’re beginning to see the answer, and it’s looking … pretty good. In fact, the diamond market is stronger today than it’s been in years. From the low end to the high, prices are rising, and instead of the market being flooded with desirable stones, they’re harder to find. The market is even tighter today than during the 1990s, when De Beers still spread the gospel of “single-channel marketing.” The only stones whose prices have fluctuated lately are certain “cape” (light yellow) diamonds once popular in the Far East—and that’s mostly because of the collapse of the Far East economies.
Diamond dealers say it’s particularly hard to find stones popular with American jewelers. Amir Goldfinger of Rahaminov Diamonds in Los Angeles says there’s a scarcity of stones of 1.25 cts. and above, in D to G color and VVS to SI clarity. “The market is still tight, and De Beers is in control,” agrees New York dealer David Abraham.
Yet, the fact remains that De Beers isn’t the power it was—mostly because of problems with outside suppliers (see box below). Russia, which used to sell all its production to De Beers, now sells only half its diamonds to the company. The new Canadian Ekati mine sells only one-third of its output to De Beers. And Australia’s Argyle mine left the cartel altogether in 1996. In the future, De Beers’ share may shrink even more. Under a new contract, Angola’s entire production will be sold to Israeli manufacturer Lev Leviev, who some think is forming an “alternative Central Selling Organisation.”
Right now, none of this matters. “The market has been so firm that it has absorbed all of the excess rough,” says Hilton Ashton, an analyst with BOE Securities in South Africa. He notes that retail diamond sales worldwide are up 10%. In addition, prices of both Russian and Canadian goods are said to be on the high side. The only mine completely outside De Beers’ ambit—Argyle—has curtailed production, and Angola’s production is still minimal because of its ongoing civil war. And, like De Beers, dealers are wary about buying “outside” goods in the wake of the furor over “combat diamonds.”
De Beers doesn’t seem like a company on the wane. In the last year, it reduced its famed diamond stockpile—the frequent target of investor ire—by one-fifth. It’s also raised prices on certain items, leading some observers to comment that the company is attempting to do the impossible—raise prices and increase supplies. Yet, remarkably, it’s doing exactly that. De Beers’ sales this year already are running about 50% ahead of last year’s—which itself was a record year.
If there’s any nervousness about De Beers’ losing control, it’s not in regard to what’s happening now, but what may happen in the future. Analysts say De Beers’ drop in market share hasn’t hurt the overall market because demand remains healthy. But what would happen if demand falls? Not even De Beers seems to know.
The biggest concern is about diamond prices. De Beers executives have said it’s no longer possible for them to “support” the price of every single stone. So far, the only market this has affected is for “capes”—and their prices were headed down, anyway. But a serious downturn could hurt prices across the board. “Right now, with the market booming, it’s easy to maintain prices,” notes Ashton. “But with the general competitive environment, you could have greater volatility, especially with the items that are not in favor.” Yet Ashton also says, “Clearly, it’s not in De Beers’ interest to let prices decline too dramatically, because it will hurt consumer confidence. This is something De Beers is working out in their own minds.” Stay tuned.
De Beers’ Monopoly Game
The time: 1992. The New York Times runs a story that proclaims, “De Beers Might Be Losing Control of the Diamond Market.” De Beers spokespersons deny it, as they routinely deny suggestions that their control is on the wane.
Fast-forward to today. There’s still talk that De Beers has lost control of the diamond market. But it’s coming from De Beers itself. Whereas the company used to claim it supplied 80% to 90% of the market, now it regularly claims it controls only 60% to 66% (40% from its own mines, and the remaining 20% or so from its stockpile and outside producers—mostly Russia). Chairman Nicky Oppenheimer even said recently that market “guardianship”—which the company touted for more than a century—“was never a satisfactory position.”
Most companies would never brag about such a plunge in market share, but analysts think De Beers has a good reason to do so: It wants to escape the “monopoly” label. (Under U.S. law, a monopoly is a company that has more than 70% market share.) Analysts think that, in the wake of the Microsoft antitrust verdict, monopolies are less accepted than they used to be. “They clearly want to get away from that perception that they are a monopolistic cartel,” says South African analyst Hilton Ashton.
Perception may become even more important as De Beers pursues its branding campaign. The company has never been sure whether advertising its own diamonds—rather than generic ones—would violate antitrust laws. Some analysts think antitrust fears are deterring De Beers from a full-scale pursuit of branding.
Whether or not that’s true, it’s clear that antitrust issues are on De Beers’ mind—Oppenheimer recently asked Microsoft’s tormenters at the antitrust division of the Justice Department to take a fresh look at De Beers’ situation. The Justice Department declined, but De Beers says it plans to keep trying.