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| De Beers and the Diamond Monopoly
De Beers and the Diamond Monopoly
De Beers and the Diamond
Monopoly
Report - Guide
Thomas Schieder
I.-No.: 648792
SS00 –
Wirtschaftsrecht
SuK - Economic Policy
- History
- De Beers and the Diamond Cartel
- Cecil Rhodes and the discovery of Diamonds in South
Africa
- Evolution of the Cartel
- The Cartel in action
- Stockpiling
- U. S. Antitrust Law
- History and Motivation
- The Sherman Act
- The Clayton Act
- Extraterritoriality
- De Beers in
2000
Sources: - Harvard Business Review: N9 – 700
– 082; Case Study on De Beers
-
http://www.dse.de/za/lis/botswana/botswana.htm
Thanks to Mark Irvine, Investor Relations Manager, De
Beers Consolidated Mines Ltd., Johannesburg, South Africa
- History
- De Beers and the Diamond
Cartel
For centuries, Diamonds have been regarded as one of the
most valuable commodities (Waren) in the world. They have been the stuff of
legend and the privilege of royalty, the symbol of romance and of greed (Gier).
They have been treasured (geschätzt) of their beauty, their hardness and
their unique ability to capture (erobern) and transform light. Most of all,
however, diamonds have been treasured because they are rare. In ancient times
this scarcity (Knappheit) was real.
Known to exist only in the riverbeds of India and
jungles of Brazil, diamonds were the most exclusive of stones and only a tiny
portion of the world´s people had ever seen one, much less worn one.
Then, by the end of the 19th century the
South African mines have been discovered and they brought an avalanche (Lawine)
of stones into the market. Suddenly the privilege was transformed into a
commodity for the mass. At this time the vast change of supply of Diamonds had
little effect on their price because there was a deeply ingrained perception
(tief verwurzelte Auffassung) around the stones even they were cascading into
the markets of Europe.
Realising that Diamonds would be virtually worthless
once they appeared commonplace, a young Englishman named Cecil Rhodes worked to
consolidate the entire Industry and keep the supply of gemstones (Edelsteine)
sharp limited.
Under his guidance the international Diamond Cartel was
born. Following his philosophy it became one of the most successful cartels of
all time.
Since then this cartel has regulated the market for
Diamond gemstones and maintained the fragile illusion of their
scarcity.
The cartels reach is legendary. It controls a
significant number of the world´s diamond mines; it sorts and classifies a
large percentage of the world´s rough stones; and through its Central
Selling Organisation (CSO) in London it determines (bestimmt) who can buy which
stones and how much each buyer must pay.
Its strategy is as simple now as it was in
Rhodes’s time: To balance the number of diamonds released (freigegeben)
into the market in any given year and thus to perpetuate the illusion of
diamonds as a scarce and valuable commodity.
- Cecil Rhodes and the discovery of Diamonds in South
Africa
In 1866 the accidental discovery of Diamonds in South
Africa changed the Diamond Industry. The first stone, picked up on the Banks of
the “Gariep River” by a 13-year-old boy, was generally dismissed as
a geological fluke.
The 2nd find, a stone of 83 ½ carats,
was too tempting (verführerisch) to ignore.
In 1869 the Diamond Fever hit South
Africa
10.000 Miners had rushed to the plains of the Cape
Province to stake their claims and make their fortune.
Then, in 1872, five separate Mines had been established These Mines produced an
avalanche of gem-quality stones. As the diggers delved deeper and deeper into
the Kimberlite the miners tapped into underground water tables, flooding the
claims and rendering (hinterlassen) them virtually unworkable.
In 1874 the Steam-Powered Pump was introduced by Cecil
Rhodes, a young sick Englishman. He rented out his pump to several Miners, and
within a year Rhodes was serving all of the mines in the area. With this new
found wealth he started to buy small claims in the 1880 newly formed
“De Beers Mining Company” to control his growing stake in the
mine. In 1887 he had bought out all the other Claimholders.
From the start he realized that success in the Diamond
Trade was contingent on (abhängig von) the resolution of two serious
problems:
First: The very productivity posed a threat to the
long-term profitability of the Diamond Industry – and –
Secondly there was a conflict between buyers and
sellers. The Sellers (Diggers) have little control over the types and Qualities
of stones they produce, thus, they need to secure a buyer to purchase (erwerben)
the smaller and less attractive stones as well as the large and best ones. The
buyers meanwhile know that profitability rests with the ability to obtain a
constant stream of stones and sell them at consistently high
prices.
The only relationship that serves both sides interests
is an ongoing arrangement between a single producer and a single distributor in
which both benefit - keeping supplies low and prices high.
The solution Rhodes devised was ingenious. After having
achieved full control over production at the De Beers Mine, he formed a
coalition of merchants in Kimberley to whom he sold the whole output of the
Mine.
In 1890 this Merchants Association was formed as the
„Diamond Syndicate“ with all members pledged to buy Diamonds from
Rhodes’s Mines and sell them in specific quantities and at set
prices.
In 1902 Rhodes dies after he has completed his
consolidation of the Diamond Industry by purchasing all the major South African
Mines.
- Evolution of the
Cartel
After Rhodes death his vision of a diamond empire was
taken up by Ernest Oppenheimer, a German Diamond buyer who had maneuvered
himself into a position of power within the industry.
He formed an Idea of a „New Syndicate“
because he realized that control over the diamond trade entailed a monopoly of
distribution as well as of supply.
It followed the Buying out of the old De Beers Syndicate
1925 and it was intimately linked to Oppenheimers Company which had also
Corporate Links to Anglo-American.
This from now on built „New Syndicate“ was
made to exert (ausüben) unbearable pressure on the existing group of
Distributors
- The Cartel in
action
In the 1950ies De Beers was no longer alone on the
market. The yields (Erträge) from the once miraculous South African Mines
began to decline (abnehmen) while discoveries in Siberia and different other
parts of the African continent opened up rich new fields for
exploration.
By 1960 South African diamonds accounted for only 19
percent of the total world gemstone production.
To maintain its grip on the market De Beers was obliged
to reach out the other major producers of rough diamonds, urging
(bedrängen) them to sell their production to De Beers.
Realizing the benefits of cooperation and the dangers of
oversupply, most diamond-producing states signed contracts with De Beers,
agreeing to sell their rough diamonds solely to the De Beers and its agents. The
arrangement was that the countries sell its rough diamonds only to De Beers and
at a price that De Beers set.
The countries generally also agreed to accept lower
prices in times of less demand and to refrain (absehen) from polishing any of
their own diamonds.
In exchange for this rather rigid restrictions, the
other producers would earn the returns of a cartel: stable prices, guaranteed
purchases, and a buffer against competition.
The power of the Cartel did not rest simply with its
control of diamond supplies, it extended throughout the length of the
“Diamond Pipeline” and into the distribution and marketing of rough
diamonds.
After De Beers had obtained (erhalten) its diamonds it
sent them to its Central Selling Organisation (CSO) located in
London
The CSO acted as the central distribution point for the
worlds diamond trade.
- Stockpiling
Whenever the Market for luxury goods gave the
possibility De Beers and the CSO would buy up the best stones and add them to
their stockpiles. Whenever Diamonds from outside found their way to market, De
Beers would buy again, always ensuring that the basic balance between supply and
demand was compensated.
Stockpiling was thus the final tool in De Beers´s
box. It was a way to keep prices high by not permitting the Demand to falter
(schwanken) and by convince (überzeugen) the public that diamonds were
indeed special and scarce.
It was very much a family company, run by the
Oppenheimers, their relatives and long-time associates. Even the shareholders
were tightly interlocked (verzahnt), linked by a complex web to a series of
firms that together composed the “Oppenheimer
empire”
De Beers was to be sure a publicly-owned corporation,
but a half of it’s shares had historically been held by Anglo American,
Ernest Oppenheimer and Son, and other friendly members of South Africans
commercial elite.
For over a century De Beers had presided over one of the
world´s most amazing commercial structures. It enjoyed absolute dominance
in its market and an unparalleled reputation for quality.
- U. S. Antitrust
Law
There was only one small downside: It was illegal in its
largest markets. Almost every single aspect of De Beers violated U. S. Antitrust
Laws, from its lion-sized market share to its price-fixing
scheme.
- History and
Motivation
- The Sherman Act
The original legislation regulating the establishment of
commercial monopolies was passed at the end of the 19th century,
when the power of big business seemed to threaten American ideals of free
enterprise and the small stakeholder.
In 1890 The Sherman Act laid out fundamental principles
that would underpin Antitrust Law through the next century.
Later the
- The Clayton Act
Strengthened the Antitrust Laws even further, broadening
the definition of unacceptable behaviour that is able to create a monopoly in
any line of commerce.
- Extraterritoriality
De Beers retained no U. S. Presence. It was completely
run by South Africans. Nevertheless, the U. S. Antitrust Laws reached the De
Beers. It is a tricky element of the U. S. Law that they are apply to foreign
conducts as soon as a foreign conduct produce some substantial effect in the
United States. So De Beers stopped selling Diamonds in the U. S.
Instead, it sold all of its diamonds in London and then
let its sightholders export them, perfectly legally, in the
U.S.
Although, by the time De Beers´s Diamonds reached
U.S. Market they were no longer de Beers Diamonds.
3. De Beers in 2000
1998 De Beers and Anglo American had ended their
attachment, separating in two distinct firms. Shareholders in both companies had
grown dissatisfied with the arrangement during the 90ies because of the fatal
legal situation, which is banned now.
Meanwhile De Beers moves into the world as a
cosmopolitan, world-class firm with a new strategy.
In 1999, a series of spectacular advertises adorned the
bus-sides and billboards of major American cities. Set against a lush black
background, the Ads displayed a perfect Set of diamond earrings, or a single
sparkling solitaire. The lettering, in white, was sparse and to the point:
“What better time to celebrate the timelessness of love?” they
asked. Another Ad states: “This wouldn’t exactly be the Year to give
her a toaster oven.”
“What are you waiting for, the year
3000?”
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