Beers and the Diamond Monopoly referat

Beers and the Diamond Monopoly

  1. History

  1. De Beers and the Diamond Cartel
  2. Cecil Rhodes and the discovery of Diamonds in South Africa
  3. Evolution of the Cartel
  4. The Cartel in action
  5. Stockpiling

  1. U. S. Antitrust Law

  1. History and Motivation
  2. The Sherman Act
  3. The Clayton Act
  4. Extraterritoriality

  1. De Beers in 2000

Sources: - Harvard Business Review: N9 - 700 - 082; Case Study on De Beers


Thanks to Mark Irvine, Investor Relations Manager, De Beers Consolidated Mines Ltd., Johannesburg, South Africa

  1. History

  1. 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.

  1. 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.

  1. 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

  1. 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.

  1. 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.

  1. 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.

  1. History and Motivation

  1. 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

  1. 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.

  1. 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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