Dei'ah veDibur - Information & Insight

A Window into the Chareidi World

12 Adar II 5765 - March 23, 2005 | Mordecai Plaut, director Published Weekly







The Glittering Diamond Industry

By T. Katz

The first surprise, a small and almost hackneyed surprise, was the police.

In November 2000, four burglars broke into the Millennium Dome in East London. They threw five smoke grenades and then broke in using a ten-ton bulldozer. The band raced toward the safes where, inside an armored glass case, the De Beers diamond syndicate kept its collection on display. A dozen pale blue diamonds surrounded the crown jewel, the Millennium Star diamond, a huge pear-shaped diamond weighing 203 carats. The burglars had a modest goal: they were willing to suffice with a mere haul of 350 million sterling in diamonds.

The sophisticated band had planned everything: an escape boat on the Thames River, a truck waiting at a designated point— they had even worked out the complicated logistics required to sell the precious loot. Sophisticated listening devices were tuned into the police radio frequency by a technician trained in telecommunications. They only failed to take one thing into account: the stool pigeon who sent the police real- time reports on all of the plans down to the smallest detail. What would have become the biggest heist in history turned into an ambush.

One hundred policemen were lying in wait at the Millennium Dome. Some of them were disguised as cleaning workers whose pistols were hidden in their garbage bags while others were disguised as humdrum, lackluster Londoners. The band of thieves managed to cut through the armored glass and lay their eyes on the striking display, but then one hundred policemen closed in on the four astonished, would-be jewel thieves.

And there was another surprise. The glittering, breathtaking diamonds that dazzled all of the diamond traders had taken in even top experts. None of the visitors at the exhibit would have imagined they were gazing at cheap imitations made of glass. Where were the real gems? De Beers had transferred them to the company safe before the burglary attempt.

How did De Beers Chairman Nicky Oppenheimer react? Rather than condemning the foiled heist he saw the safe as half full. "If this happened twice a year we could do away with our advertising department entirely."

A Glittering Cartel

They glitter light blue and lavender, and today's sweeping trend is black diamonds. Sometimes they are the color of ice, which increases their value. In other cases they are a dirty grey, which lowers their value. No matter what color they may be—reddish, greenish, yellowish, brown, grey—both in their natural, unfinished state and after polishing, no matter what size or weight, they have the properties exclusive to diamonds.

They are so hard (10 on the Moss scale) that they can only be scratched by another diamond. They are so dense that light travels through them at only two-thirds its normal speed and they are always cold because they draw heat from the fingertips. And above all, diamonds (in Europe since the Middle Ages and in India for thousands of years) have fired the imagination with their air of mystery.

Trade secrets and personal connections keep the diamond industry sealed off in a vacuum of silence and hints. A complex international network known to few conveys the diamonds from one end of the world to the other.

In most cases diamonds remain anonymous. One will never know whether the diamond comes from the Kalahari Desert, or from Angola, Namibia or Russia. Perhaps from an enormous quarry north of the Arctic Circle or floating mining ships in the Atlantic Ocean.

Diamonds roam for at least two years, and sometimes much longer, on a twisted, foggy route from the mine to the trader and the polishing factory, the various diamond exchanges and the dealers before finally reaching the jeweler and the piece of jewelry.

Until a few years ago it was reasonable to assume that diamond giant De Beers was keeping track of almost every diamond in the world and guiding it toward its destination. De Beers, to which many attached the unflattering word "cartel," worked hard to gain control over the worldwide trade in crude diamonds. For many years De Beers dominated nearly 90 percent of the unfinished diamonds circulating in world markets.

De Beers' story began in the middle of the 19th century when the first gold mines and later diamond mines were discovered in South Africa. In 1871, Johannes Nicolaas De Beer sold his mine, located north of Capetown, to a group of investors from Port Isabel for 6,000 guineas.

The discovery of the mines led to a diamond fever in many parts of the world. Thousands of Africans, Europeans and Americans rushed to the mining area in the hopes of getting rich quickly. Realizing the enormous potential lying in the crude diamond trade, the group of investors made efforts to improve the miners' living conditions, providing them with tents, bungalows, stores, food, supplies, railroad tracks and roadways. Ever since then, the mine has been called De Beers and it neighbors another large mine in the town of Kimberley.

In April 1880, Cecil John Rhodes and his partner C. D. Rudd launched the De Beers Mining Company after the amalgamation of a number of individual diamond claims. The company, valued at 4 million pounds sterling, was a merger of the De Beers and Kimberley mines. One year later the government-controlled British South Africa Company was founded. The company was worth one million pounds and divided into one million shares, of which the De Beers Consolidation held 210,000.

Rhodes also controlled a second company, a cartel called the London Diamond Syndicate. This was the largest diamond merchants, and their activities provided Rhodes with critical information about the diamond market. Such inside information allowed Rhodes to create an artificially controlled supply of diamonds, matching supply with demand. Thus he could fully control the cost of diamonds to the consumer. Other diamond merchants were guaranteed a certain amount of diamonds from the many mines Rhodes controlled.

Rhodes went into public service, while maintaining his mining interests. He became a member of the Cape Assembly. In 1890 Rhodes became prime minister of the Cape Colony, though he had to resign a few years later.

All along, diamond mining in Africa has been mixed with blood, particularly the blood of black Africans. In 1918 a total of 2,564 black workers died of hunger and disease in the Kimberley mines.

Ernest Oppenheimer, a British Jew, arrived at Kimberley in 1902, sent by a diamond brokerage in London to be their agent in South Africa.

Oppenheimer went to work in the diamond industry of South Africa and also was active in public life. He rose through the ranks. He also wanted to create a marketing cartel for diamonds to control the price, and formed the Central Selling Organization (CSO), effectively incorporating other major sellers and producers into the De Beers syndicate. Oppenheimer also had interests in gold mining, but that is not our interest here.

In 1929 he was made company chairman. Around this time he converted to Christianity (his wife was not Jewish anyway) and all of his relatives followed suit. Within one year, diamond mines were discovered in African countries — in the Ivory Coast, Sierra Leone, Liberia and the Central African Republic. Other mines were also discovered in South Africa and Oppenheimer managed to buy shares in the majority of large mines for De Beers and its subsidiary Schitzer.

When he died in 1956 he left his entire fortune to his only son, Harry Oppenheimer. The son received franchises for diamond mines from the South African and other African governments. By the time of his death in 2000, he was considered the wealthiest man in South Africa and one of the 20 richest men in the world. He owned 54 percent of shares of South African companies and ownership remained in the hands of his family and Nicky Oppenheimer, his son and the current president of the company, which is the parent company of the Anglo-African Corporation.

The De Beers empire boasts companies and corporations, including investment companies dealing in steel, iron, chemicals, construction equipment and gold, uranium and coal mining companies. The character of these companies attests to the fact the Oppenheimer family, throughout its generations, conducted numerous secret deals with governments and rulers in African and other Third World countries. Compared to the translucency of diamonds, the Oppenheimer empire is notable for remaining obscure by disclosing relatively little about its dealings.

Stick to the Rules — Or Else!

De Beers knew how to impose its monopoly rigidly in other areas besides diamonds. Many people insist that the high price of diamonds is entirely artificial and is not subject to the laws of supply and demand.

The price level and the quantity of unpolished diamonds in the world market are preserved through carefully controlled quotas for each country. The Syndicate makes sure to release a controlled amount to the market and to buy up excess supplies.

Major diamond dealers belong to the prestigious Sightholder club, giving them the right to a regular allotment of diamonds. According to a decades-old tradition, 125 select De Beers customers are invited to ten annual gatherings, known as sights, in London, Lucerne and Johannesburg to purchase crude diamonds. Every customer is presented with a quota of stones in a zippered plastic bag held inside a yellow plastic sack. The customers, as a package deal in every respect, must buy all of the gems offered at the price De Beers sets. The price and the amounts are non-negotiable. They can either take it or leave it.

The commercial guidelines set by De Beers leave no room for compromise. Sightholders regularly receive a fixed quantity of crude diamonds. A dealer who tries to defy or circumvent the syndicate receives harsh, immediate punishment. Reserves are kept in safes hidden in basements under the company offices in London.

If the Syndicate determines that one of those who attend the sights violated the rules, his supply of diamonds gets cut off, which could lead to the collapse of his business. If a dealer is caught buying from another source, for instance, De Beers considers this a serious violation and the perpetrator loses his status permanently.

Israeli diamond dealer Moshe Schnitzer lost his membership after five decades of close work with De Beers. "I was at the sights for 50 years," says Schnitzer, "and then they decided to have as few at the sightings as possible. Eventually they will have only 10 or 12 in the whole world. In my opinion this is one of De Beers' gravest errors."

Why did Schnitzer lose his attendance at the sightings? The exact reasons are shrouded in mystery. The atmosphere of secrecy surrounded the industry makes it impossible to know the syndicate's motive.

"Many people lost their Sight this way," a well-known diamond dealer from Antwerp says gloomily. "People held onto the Sight with De Beers. The moment the syndicate sensed they were purchasing raw stones from other sources the Sightholder was discontinued without any sentimentality. This is one of the reasons many Jewish diamond dealers in Belgium have left the industry."

The purchase of crude gems from other sources is just one reason for getting removed from the sightings. Another reason, revealing De Beers' almost desperate hold on the monopoly, is its attempt to shorten the distance the diamond travels from the supplier to the jeweler. This allows the syndicate to oversee prices from start to finish. According to Schnitzer, "De Beers is striving to reach a state in which the industrialists sell directly to the jewelers. Essentially they want to remove all of the wholesalers from the profession. The entire business is turning into a monopoly of ten people."

"This is the way the system of pressure works," explains a diamond dealer from Antwerp who still holds his membership in the sightings. (The diamond dealer is required to buy at least $1 million worth of merchandise every month, otherwise he will lose his place at the sightings.) "De Beers demands that we, the Sightholders and the factory owners, follow an orderly work plan. Its policy is perfectly clear. It claims that a factory that does not sell directly to the jewelers but transfers the goods to a middleman, who then transfers them to another middleman and the merchandise roams through the market from one hand to the next, raises the cost of the diamonds significantly. I have to prove that the diamonds I receive pass through a definitive route rather than getting rubbed by various hands. And if not? They threatened several times to take the Sightholding away from me."

In many cases losing the Sight is a death blow to diamond dealers. Many Jewish dealers who worked in Antwerp or Israel lost their livelihood because of this policy. Many of them were middlemen who used their honed senses to regularly identify dramatic opportunities. They invariably knew which gems a certain dealer was looking for and exactly where to locate them. The De Beers system of pressure and threats regarding the number of sets of hands the diamonds could pass through limited and shortened their route and neutralized numerous figures who in the past made their profits by knowing where to stand at critical junctures.

The diamond market has changed dramatically in recent years. Much of the De Beers monopoly has eroded. From 80 percent and more of the control over crude stones, today it barely commands 60 percent.

De Beers has a grudge against Israeli "Diamond King" Lev Levayev. Levayev bought diamonds in Russia and South Africa, tried to circumvent the cartel and succeeded in selling diamonds independently. Recognizing an adversary, De Beers declared all-out war. It rescinded his Sightholder status and offered the Russian government an enormous advance to stop Levayev from receiving his supply of Russian diamonds.

The gigantic concern took a major blow when Levayev made a deal with Angola to secure an exclusive franchise over the diamonds extracted from local mines. The giant cartel placed an attachment on a $4-million shipment of diamonds destined for Levayev. Refusing to surrender he took on the cartel, one man waging battle against a monstrous octopus with innumerable tentacles. Levayev won the battle, which secured him more and more franchises around the world.

He landed franchises in Namibia, in Botswana and in other places around the globe. Meanwhile he purchased laboratories in Canada and many other countries.

"Africa is full of mining sites waiting for Israeli entrepreneurs to come and invest in them," Levayev added. "I am flooded with contacts from entrepreneurs in the Congo, South Africa and across the continent telling me, `Come and invest in us.' If you lack the cash, organize a group of 50 or 60 people and come to Africa. If you start there in mining you will make it to polishing as well. And then jewelry companies like Bulgari will be chasing after you."

Israeli diamond dealers have dramatically reduced the dependence on De Beers. "Crude diamond imports from the Syndicate totaled $932 million in 2004," Shmuel Mordechai, the Trade and Commerce Ministry's diamond inspector, told Yated Ne'eman. "Only 18 percent of the crude [stones] that arrived in Israel, compared to 22 percent last year, came from De Beers."

End of Part I

Are Diamonds Really Valuable?

Diamonds are beautiful and have many unique properties, but their value is certainly in large part due to the careful efforts of the Syndicate over the years.

Experts say that without the efforts of the Central Selling Organization (CSO) even the gem diamonds would be worth only between $2 and $30 based on their true scarcity and the cost of producing them. Even Nick Oppenheimer once said, "A gemstone is the ultimate luxury product. It has no material use. Men and women desire to have diamonds not for what they [diamonds] can do but for what they desire."

For many years the Syndicate made sure that the price never went down, giving the stones a great reputation as a store of value. If people could always be sure that the investment in a diamond would never be worth less than it was worth initially, that gave diamonds a big advantage over many other traditional investments. Even by buying land one could never be sure that the price would never fall.

One of De Beers' main efforts is to maintain the notion that diamonds are a scarce commodity. They do this by advertising about the virtues of diamonds, but also by purchasing excess supplies when that is needed to avoid price decreases. As a matter of principle, De Beers tries never to lower prices. By standing at the key stages in production and marketing, it has been able, for the most part, to succeed.

This organization has proven beneficial for most in different ways: producers, often state-run diamond mines in developing countries, are provided with a stable inflow of foreign currency. Dealers enjoy stable price increases which can easily be passed on to consumers. De Beers, however, seems to be benefiting the most from the agreement, asking for what producers often perceive as inappropriately large fees and in turn charging prices to merchants at their own discretion. The temptation for both producers and dealers to bypass the CSO is therefore quite significant.

The Israeli Threat to the CSO

In the 1970s and 1980s, Israel went through a difficult period characterized by very high inflation. Prices went up all the time. The shekel dropped by hundreds of percent in one year. Diamonds were then seen as a stable currency. People felt that they could use them to store the value of their assets in a world that seemed increasingly unstable.

This induced merchants to hoard a significant amount of the diamonds that they had, with a view at reselling them later at higher prices. As a result, the supply of diamonds in Israel and even in the world (since Israel was one of the major centers) was reduced, driving up prices.

De Beers began to worry about what might happen if there was a crash. Up to that time, diamonds were not to be resold by people in the industry. This allowed De Beers to control the supply. If diamonds were held for investment purposes, however, the quantity in the market at a given time would be beyond De Beers' control. If a significant number of people decided to sell their holdings at the same time, prices could fall rapidly, thus hurting the image of diamonds as a rare, and dependable, product.

De Beers tried to limit the speculation. It created a temporary surcharge levied on diamonds sold through the CSO. The surcharge could be withdrawn at any time without prior notice. This was designed to dampen the incentives for speculative transactions since a speculator could suffer a large loss if the surcharge were suddenly withdrawn and the price dropped.

A De Beers representative was sent to the Israeli dealers to warn them that if they continued disobeying De Beers' orders and hoarding diamonds, the number of diamonds allocated to them would be cut by 20 per cent. The response was the opposite of what they expected: the merchants hoarded even more, further driving up the prices. Finally, Israeli sightholders were dismissed from the Syndicate's diamond sightings—the highest penalty they could have suffered.

Eventually, these measures proved an effective way of disciplining the cartel: diamond prices stabilized. Israeli dealers disposed of their stock and conceded their price and quantity-setting autonomy to De Beers again.

Israel paid a considerable price for the incident. In the late 1970s, one in every four employees in the Israeli diamond industry lost his job. Moreover, many Israeli dealers lost their cherished position in the CSO's circle of sightholders.

De Beers also suffered from the events in the late 1970s for some years to come. Contrary to their previous policy of controlled price increases and demand regulation, De Beers was also enticed to take advantage of the bear market for diamonds, and prices at the CSO's sightings went up rapidly, soon reaching levels unimaginable only five years before.

Eventually the speculative bubble burst, as diamond hoarders decided to dump their holding in the market to realize their capital gains.

De Beers frantically bought the excess supply from the market to limit the price decline. This proved to be very costly: De Beers' stocks in diamonds soared to almost $2 billion in 1984.


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