The Diamonds of South Africa. De Beers’ success story
The discovery of a transparent small pebble in 1866 on the bank of the Orange River near today’s city of Kimberley made South Africa one of the richest countries on the African continent. A 15-year-old son of the De Beers livestock farmer picked up the pebble from the ground. The curious find was given to a local collector of stones, but he could not determine what it was. Only after some time, it was found out it was a rough diamond.
For this reason, this event is considered the first commercial diamond production. Although most likely, people found diamonds before, just no one knew what kind of pebbles they picked up and what their value was.
Not everyone knows that the name of the stone comes from the Greek word “adamas”, which means “indestructible”. It is the hardest substance on earth. Paradoxically, real rough diamonds were seen by a few of those who give them as a gift or wear them. In fact, everyone knows polished diamonds that are obtained after cutting and polishing rough diamonds. An uncut diamond is a rather plain gem. But skillful cutting and polishing create a dazzling jewel being the standard of wealth and luxury.
After the discovery that was a milestone, rough diamonds in this place were found more often, they were larger and in bigger quantities. In the 1870s, South Africa mined most of the world’s diamonds. All this gave an impetus to the development of the mining industry, and Africa’s first stock exchange was set up in 1881.
At first, fortune seekers who rushed to this place from all over the world divided the area into hundreds of plots. However, the development of the diamond mining industry in South Africa almost immediately resulted in the concentration of numerous diamond mines in several hands. After all, most of the claim holders just did not have enough money, equipment, and skills to continue diamond mining as the pits became deeper. Moreover, the concentration of ownership meant more effective control over diamond production.
Among the most successful buyers of diamond-bearing grounds was the Englishman Cecil John Rhodes who set up De Beers Mining Company. The final monopolization of the diamond mining market took place after De Beers bought two companies - Kimberley Central Diamond Mining Company and Compagnie Française des Mines de Diamant du Cap. The deal was financed by Alphonse de Rothschild who granted a loan of £1.4 mn. As a result, De Beers Consolidated Mines Ltd was founded in 1888, which controlled 90% of the global diamond production as early as 1891.
Later, diamond deposits were discovered in other countries of the world (Canada, Australia), as well as in neighboring countries (Botswana and Namibia). However, the largest gem-quality diamond in the world, Cullinan, weighing 3,106.45 carats (621.29 grams) was discovered in South Africa.
The discovery of diamonds in various countries around the world threatened the De Beers’ monopoly. Cecile Rhodes soon realized that uncontrolled diamond mining could lead to lower prices and smashup of his business. Therefore, Rhodes also took control of the global diamond distribution in order to maintain high prices and strong demand. By the mid-1890s, he set up Diamond Syndicate, the forerunner of the Central Selling Organization (CSO), in order to control most of the global diamond trade. It is now known as the Diamond Trading Company (DTC).
This is one of the diamond industry’s features that, as a rule, remain in the shadow but plays a very significant role in regulating the global diamond market. The business was arranged in such a way that practically all major diamond miners were forced to sell their stones not on the free market, but specifically to CSO, because only CSO could provide decent prices for rough diamonds, regardless of the price fluctuations in the world markets.
As a result of this strategy, by 1902 - the year of Cecil Rhodes’ death - De Beers controlled 95% of the world’s diamond production. At the same time, there was an opinion that a huge volume of rough diamonds was stored in the De Beers’ vaults, which were not put on the market to create artificial scarcity.
Another fundamental feature of the diamond industry is the fact that the diamond mining countries, as a rule, do not engage in the subsequent diamond cutting and polishing. In South Africa, the jewelry industry was established in 1928, which made the country the fifth largest manufacturing center in the world. However, it turned out that the South African industry did not withstand the competition with the countries such as Belgium, Israel in terms of costs, as well as with India in terms of cheap labor, and the main diamond cutting and polishing capacities are now concentrated in India. All of this fits in well with De Beers’ strategy of controlling the global rough diamond market.
At its peak (before the 2008 crisis), there were about 3,000 diamond cutters working in South Africa, cutting and polishing approximately 140,000 carats a year. Currently, South Africa accounts for only about 1% of the global consumer diamond jewelry market.
The South African diamond production showed relatively steady growth in its history (excluding the war years), from an average of 1.26 mn carats in the 1870s (from 1870 to 1879) to an average of 13.0 mn carats in the first 6 years of the 21st century.
In 2005, the diamond production reached 15.6 mn carats, after which its decline began. In 2020, South Africa’s diamond production was 8.5 mn carats, up 18.1% over the previous year. Today, the country ranks sixth in terms of diamond production in the world. For comparison, about 31.2 mn carats of diamonds were mined in Russia in 2020. Botswana and Canada ranked second and third with their diamond production of 16.9 and 13.1 mn carats, respectively.
It is important to keep in mind that any monopoly ultimately leads to the emergence of a “grey” market. For example, the Minerals Council estimated in 2017 that illegal mining and trading cost about $1.5 bn a year in lost sales, taxes, and royalties. The South African government is trying to fight this, but so far, it cannot boast of much success.
In 2011, the Oppenheimer family sold their 40% stake to Anglo American plc, and De Beers is now represented by Anglo American with its 85% and the government of Botswana with its 15%.
In this regard, many people talk about the De Beers empire’s decline. However, in my opinion, this is not the case. Mergers and acquisitions are a special feature of multinational corporations, especially in the mining industry. Moreover, during the entire period of their activity, both companies - De Beers and Anglo American - were closely related. The very fact of the establishment of the Anglo American Corporation in 1917 was linked with the purchase of the diamond-bearing grounds in Namibia and the De Beers’ shares by E. Oppenheimer who used the money of the British company J. P. Morgan. By 1920, Oppenheimer received complete control over the diamond fields in South-West Africa (Namibia), and in 1929, in addition to being the head of Anglo American, he also became the De Beers CEO. The global business very quickly adapted to the changing conditions in order to maintain profits. That was the case in the last century. So it is now.
Global diamond market. De Beers’ co-operation with the USSR
The global diamond market is, perhaps, one of the most specific ones. It certainly needs to be tightly controlled, as the unlimited supply will bring down the rough diamond market, making diamond mining unprofitable. As mentioned above, De Beers established its monopoly over this market from the very beginning using the principle “divide and conquer”. The idea was that the diamond mining countries (Australia, South Africa, Russia, Botswana, Namibia) were not to cut and polish diamonds. The diamond cutting and polishing were to be carried out by the countries that did not mine diamonds at all (Belgium, Israel) or mine very little volumes of diamonds (India).
It is noteworthy that even the USSR, which was a direct competitor of South Africa in diamond production and also a tough political enemy of South Africa that supported the armed struggle of the black population against the apartheid regime was forced to maintain secret relations with the Central Selling Organization.
Little is known about the fact that the Soviet Union collaborated with Centenary AG, the Swiss-based subsidiary of De Beers. This public Swiss company was established in 1990 by De Beers Consolidated Mines Ltd. to operate the De Beers’ “non-South African business” controlled by the Oppenheimer family.
De Beers Centenary reached an agreement with Glavalmazzoloto (General Directorate for Precious Metals and Diamonds of the USSR) on the right to export rough diamonds mined in the Soviet Union and concluded an exclusive five-year contract to sell Soviet rough diamonds, the total amount of which could exceed $5 bn. The Soviet Union being one of the world’s largest producers of high-end rough diamonds and experiencing financial difficulties, received a $1 bn advance payment through Glavalmazzoloto for future rough diamond supplies. The repayment was to be made within five years. At the same time, the rough diamonds coming from the USSR were stored in the De Beers’ marketing division as advanced payment security.
It is clear that the co-operation of the Soviet Union with De Beers in selling the rough diamonds was aт extremely desperate measure. In general, the USSR’s international activities, contrary to the popular opinion that the Soviet Union “maintained Africa”, were justified by pragmatism and concern for its own citizens. That was the case with the rough diamonds. As putting large quantities of the USSR rough diamonds to the global market threatened to bring down the world prices, the Soviet government made such a difficult decision.
Meanwhile, Russia made attempts in the 1990s to bring in changes by creating something similar to OPEC (not for the oil industry, but for a diamond one) with the participation of the largest diamond-mining countries. The idea was to create a major diamond producers’ alliance as an alternative to De Beers. In this case, it would be possible to drive out the De Beers’ monopoly and jointly regulate the supplies and prices. According to E. Bychkov, the former head of the Russian Roskomdragmet (Russian Committee on Precious Stones), the respective settlements were made in the mid-1990s with the presidents of Namibia, Botswana, and the vice president of South Africa. But the matter, unfortunately, did not go beyond the settlements.
It should be borne in mind that the potential for developing the relations between Russia and South Africa is enormous. Unfortunately, it is mostly unused. Although, in addition to the diamond industry, there are other areas of co-operation, probably, even more profitable. The combined resources of both states can result in driving out the traditional players’ monopoly from the world mineral and raw material markets.
However, it should be borne in mind that the redistribution of spheres of influence in the world markets is a very complex process that will inevitably cause resistance from today’s beneficiary countries. In this case, the interests of the global players are affected that have established connections and influence.
Therefore, the success of any undertaking in this matter will depend, first of all, on the interest of the state and its full support. Indeed, all the diplomatic, political, and economic mechanisms available to the state should be used in this case to achieve a result.
In the meantime, unfortunately, there is not very much interest at the highest level in strengthening the relations with Africa, in particular, with South Africa, although Western sanctions force the Russian authorities to turn more and more towards their former friends from the Black Continent. However, it is clear that this is an inevitable process. And one of the areas of mutually beneficial bilateral co-operation could be the co-operation in the mining industry.
Margarita Obraztsova, Rough&Polished
