Dispelling the Diamond Myth

To the average man diamonds are an expensive luxury which are also a bit of a mystery. Before we look at actual diamond characteristics it would help if you have a true picture of what the diamond industry is. This will hopefully help to clear up a lot of the mystery surrounding diamonds themselves.

Prior to the late 1800s diamonds were actually a rarity and only Royalty and the very wealthy could afford to adorn themselves in them. Diamonds were not mined, and tended to be stumbled upon in their rough form in the desert or in river beds. India was the main source of diamonds.

In the 1870s very large diamond deposits were found in mines in South Africa. The discovery sparked a massive diamond rush, and since prospectors could partake and prosper, there was soon a glut of diamonds on the market. Diamond prices dropped from USD $500/carat to USD $0.10/carat and the diamond industry was in chaos.

A man called Cecil Rhodes (founder of Rhodesia and Rhodes Scholarships) helped the major investors in these mines realise that the only chance for survival of the diamond industry was to merge all of their interests into a cartel. This cartel would then have a monopoly over the industry and be able to dictate the supply of diamonds and thus diamond prices. And so De Beers Consolidated Mines Limited was formed, and the company was incorporated in South Africa.

De Beers took control of many parts of the diamond supply chain both at the mine and in the sales and distribution function.

Part of the De Beers empire is an organisation called the Central Selling Organisation (CSO). The CSO handles the purchasing and sorting of stones from its worldwide field offices. Rough diamonds are then sorted and valued in readiness for sale.

The rough diamonds then move from the CSO to the Diamond Trading Company (DTC), another De Beers organisation, based in London. The DTC is a critical part of the control stranglehold. The DTC sells the rough diamonds from the mines to specially selected suppliers called “Sightholders”.

A Sightholder is the term given to 125 carefully selected diamond traders who, every 5 weeks, are given the option to purchase whole boxes of rough diamonds of various quality from De Beers’ rough diamond stocks. Sightholders meet at the DTC office in London's Hatton Garden amidst high secrecy and security.

The Sightholders must sell any rough diamonds they purchase directly to gem-cutting firms (rather than directly to wholesalers, manufacturers or the public) else they face possible exemption from being able to purchase rough diamonds from De Beers in the future.

Typically, a rough diamond will get cut and polished in India (80% of all rough diamonds are cut and polished there), shipped to Antwerp in Belgium where they are traded with wholesalers (80% of polished
diamonds are traded there) and then sold to a jewellery manufacturer where the diamond ring is manufactured and sold to a retailing company for retail selling, where it is finally sold on to you, the end customer. That is a lot of different hands it passes through and each adds their profit margin to the price of the diamond before handing it to the next stage in the supply chain.

Have a look at this presentation to get a grittier perspective of the diamond supply chain, including the strategic marketing undertaken by De Beers in the first half of the 20th century. There are also some
nice photos.

http://americanradioworks.publicradio.org/features/diamonds/

In reality there are actually enough rough diamonds that have been mined in the world to fill a cup for every man, woman, and child but De Beers holds most of this supply back so it can control the prices of the diamonds.

In recent years there have been a few developments which have impacted the diamond industry and specifically De Beers.

• Anti-trust charges were initiated against De Beers by the US Justice Department in 1945. It was actually charged in 1994 and as a result it cannot sell directly into the US, its largest market. There is opinion that the same may soon happen in the EEC.

• Before Soviet Communism collapsed, De Beers had arrangements with the USSR to handle the marketing of its large production of rough diamonds. After the collapse late in the 20th century these arrangements were not renewed and now Russian mines can sell directly to rough diamond
  cutters, bypassing De Beers. Large diamond deposits have also been found in Canada that have not been secured by De Beers. The Russian and Canadian rough diamonds are often sold at a high price to De Beers itself so that it can continue to control the diamond supply.

• The Argyle mine in Australia is the biggest diamond mine by volume in the world that, until recently, had purchasing agreements with De Beers. This agreement has now come to an end. Even though the quality of Argyle diamonds is at the lower end of the market, it has still resulted in De Beers losing control of a significant part of the market.

• The internet has started to make inroads into traditional bricks-n-mortar retail diamond sales. Forrester Research predicts that online diamond sales could account for 10% of all retail diamond jewellery sales by 2007.

For you the diamond buyer, the internet now means you have real leverage over diamond sellers, as you are extremely well educated about diamonds and have access to a wealth of diamond pricing information. Combine this with some strong negotiating and you have the makings of a great deal on a beautiful diamond.