Diamond Industry

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Diamond Industry

The modern economic origin of the diamond industry is the outgrowth of the two depressions in 1893 and in 1929. In the aftermath of the 1893 market collapse, Cecil Rhodes succeeded in consolidating the majority of the South African diamond mines within DeBeers Mines and formed the London Diamond Syndicate.

The present-day successor to the original syndicate and the Central Selling Organization (CSO), which was reorganized by Ernest Oppenheimer in 1929, is the Diamond Trading Company (DTC). The DTC still has a substantial position in the distribution of the rough, controlling about 50 percent of the world output, down from 80 percent in the 1980s, through the exploitation of its own mines (these account for over 40 percent of world output) or through purchasing contracts with independent diamond producers. As new discoveries of diamond deposits and sales independent of CSO are expected, the monopoly power of DTC will continue to decline.

Stabilization of the supply of rough and thus of prices by the CSO is accomplished in three ways: allocation of production quotas for the mines with a guaranteed minimum quota sufficient to secure continuity of production, regardless of the state of the world market; 10 yearly offerings of rough, known as “sights” to about 150 cutters and dealers in the various diamond centers; and accumulation of stocks when demand cannot sustain the prices until the market improves. The sorted and graded diamonds are placed in boxes marked with the name of the purchaser and the price. For diamonds under 14.8 carats, prices set are not negotiable. Irregular purchases may lead to exclusion from the list.

To obtain 1 carat (200 milligrams) of rough, 20 tons of rock and gravel need to be mined. Industrial diamonds, used in cutting and grinding tools, which until General Electric’s (GE) 1951 synthesis were mined as a by-product of gemstones, are no longer tied to the production of the latter. In the early twenty-first century GE and DeBeers each produced about 40 percent of industrial synthetic diamonds. Still, in some industrial cases, a preference exists for use of natural diamonds. Furthermore GE succeeded in developing synthetic gem diamonds, produced in the early twenty-first century by two companies, Gemesis and Apollo, in the United States. The industry insists that synthetic diamonds used in jewelry be promoted as such.

Diamonds show an enormous variety of shape, size, quality, and color; thus there are no set prices for diamonds, in contrast to precious metals. The industry operates then in an uninformed market in that buyers lack the knowledge of the nature of the goods they wish to purchase and therefore rely mainly on advertising as a guide, despite the existence of gemological associations that certify diamonds. DeBeers’s advertising strategy with its “a diamond is forever” ad, romanticizing and glorifying the diamond as a cultural imperative, is considered the most successful marketing campaign in history to date.

In 2000 DeBeers decided to loosen its supply control model and increase retail demand by pressuring its sight holders to engage in creative marketing. Companies began branding and patenting designer diamonds. Also vertical integration of the diamond pipeline spread in that DeBeers and independent mines sold directly to polishers and partnered with luxury retail establishments, thereby excluding middlemen.

In 2004 over 50, 25, and 15 percent of rough of 162 million carats were mined in sub-Saharan Africa, Russia, and Canada, respectively. Twenty countries produced diamonds whose value reached over $12 billion, of which Africa’s share was 60 percent. About 20 percent of the total volume was gems, and 45 percent were near gem quality. In terms of retail activity, the United States, Japan, and Europe accounted for 53, 13, and 12 percent, respectively.

The polishing of diamonds, which involves a 50 percent weight loss, constitutes an appreciable industry in several countries, of which India, with its 700,000 workers, dominates, followed by Russia, Israel, Belgium, China, and Thailand, each with thousands of employees only. The structure of the industry is highly competitive at both the polishing and the distribution levels. Concentration is much lower at the polishing end due to the prevalence of subcontracting and the absence of substantial economics of scale.

Maintenance of a distributive outlet for diamonds represents a substantial investment and requires the ability to offer a wide line of processed diamonds to potential customers. In general the greater the variety and range offered, the greater the chance of securing high margins, since the seller is able to follow changes in demand. Such higher profits can be accomplished only by large fabricators or large wholesalers who have the financial resources to stock gems whenever market conditions warrant. There is also a tendency to dispatch the polished diamonds on consignment—a practice requiring a substantial amount of working capital.

For the solely polishing centers, the volume of diamond exports should not, however, be taken as the measure of the industry’s role in the earning of foreign exchange. The value of imported rough amounts to nearly 80 percent of the value of exports, and the industry in such countries is completely dependent upon imports for its rough. The foreign currency earning rate, defined as

(Export Value – Value Import Content)/Export Value ranges between 12.1 and 24.1 percent.

Ironically, while officials of DeBeers inveighed against the brutality of the South African apartheid system and even supported the emergence of black labor unions in the 1970s, the miners, separated from their families, were housed in crowded compounds with little privacy. Following legislation enacted in 2004 of the “Broad Based Black Economic Empowerment Act” passed by the South African parliament, DeBeers is to transfer for “fair market value” 26 percent of its South African diamond interests to enhance black ownership within five to ten years. Also, the company must sell a portion of its rough to a government agency, which will help expand the polishing centers in the country.

The ease with which diamonds can be transported and laundered has fueled the most vicious civil wars in Africa and has heightened Al-Qaeda’s terrorist strategies. As a result in 1998 the United Nations Security Council, governments, and the industry enacted, with a modicum of success, anti-laundering legislation and the Kimberly Process certification system, which certifies the legitimate shipment of rough. The 2006 movie Blood Diamond is generally a correct manifestation of the cruelty pervading the diamond trade in several African countries. It illustrates the factional greed of the leaders who usurp the wealth of resources of African countries.

Of special concern to human rights groups is the employment in some countries, such as the Republic of Congo and India, of children in the mining and polishing plants despite legislation prohibiting it. Of special concern to environmental groups is the impact that open pits diamond mining has on the environment because the population is displaced to facilitate mining exploration and chemicals leach into ground water.

SEE ALSO Apartheid; Child Labor; Corruption; Industry; Mining Industry