Diamond Business Loses Some Sparkle
A stone's throw from the smelly Smithfield meat market is an office building complex with no sign or anything to attract the attention of Londoners hurrying by. Mounted cameras, jumpy guards and heavy doors keep out the uninvited. The gold-colored interior is hushed and luxuriously decorated. This is the Central Selling Organization, London-based marketing arm of the De Beers diamond empire, controlled by the wealthy Oppenheimer family of South Africa. Its experts sort mounds of rough diamonds constituting 80 percent of the world's annual production. But scratch the surface of this secretive world, and the diamond business loses some sparkle. Sales have declined sharply, and the 56-year-old cartel is facing pressure to give producers better terms and allow them to sell more of their own gems. Although its prosperity and control of the world diamond industry looks unchallengeable, the pressures could loosen its grip and crimp its profits. ``This year is going to be a critical one for De Beers,'' says Diamond Intelligence Briefs, a trade publication. De Beers' South African interests face an uncertain future, largely because of a newly energized political will by the black majority in that country, an important diamond producer. The African National Congress has pledged to nationalize South Africa's major sources of wealth if it takes power. Apparently attempting to limit risk, De Beers recently announced it would split South African and foreign interests into two publicly held companies, one based in Switzerland. After growth spurts of 19 percent in 1987 and 35 percent in 1988, rough diamond sales fell 2 percent to $4.09 billion last year because of slowing economies, high interest rates and the organization's two double-digit price increases in 1988 and 1989. The decline was sharpest in the second half of the year, when sales fell 24 percent from the first six months. ``There was a very definite, noticeable slack in demand,'' said analyst Peter Miller of Yorkton Securities Inc. in London. The decline has limited De Beers' scope for raising prices. This past week, De Beers announced it was increasing prices 5.5 percent, compared to a 15.5 percent increase a year earlier. The organization must this year renegotiate five-year contracts with Botswana, the second biggest diamond producer in terms of value, and Argyle Diamonds of Western Australia, the biggest producer in terms of quantity. The government of newly independent Namibia, meanwhile, is expected to demand a one-fifth stake in Consolidated Diamond Mines, De Beers' Namibian subsidiary. The organization sells most of the Soviet Union's West-bound diamonds, but the Soviets, the biggest value producer, have been acting more independently and squeezing the cartel's margins, the experts say. Jack Lunzer, managing director of IDC Ltd., an independent diamond distributor in London, said De Beers undoubtedly will continue to control the major part of world production, but its marketing arm's profits will fall. The effect hasn't been felt yet; De Beers' profit rose 37 percent to $1.1 billion in 1989. Few diamond-producing countries dare sell their output outside the organization, and some bold enough to leave have returned because of the difficulty in peddling diamonds alone. Zaire returned in 1983 after a two-year split. Angola, which broke in 1985, has been negotiating its re-entry. ``We are as strongly in control of the diamond market as we have been for many years,'' said Tim Capon, the cartel's director. The organization buys rough diamonds from De Beers' own mines, which represent 30 percent of world production, and from producers in Tanzania, South Africa, Zaire, Botswana, Namibia, Australia and the Soviet Union. It reveals few details about security. It was robbed once, in the early 1980s, when some diamonds were snatched as couriers carried them from one building to another. De Beers picks its 160 or so buying customers from thousands of hopefuls. Ten times a year, at sales called ``sights,'' the clients are offered a selection of diamonds chosen by the organization and placed in a simple cardboard box. The buyer basically can take it or leave it. The gems then go to cutters in the world's major diamond-cutting centers: Bombay, India; Tel Aviv, Israel; Antwerp, Belgium; and New York. Of all diamonds mined, only 15 percent will end up in jewelry, but these represent 80 percent of the value of the world's diamond production. The rest are put to industrial use. The organization is fighting the lackluster sales trend by trying to create new demand. Last year, it spent $160 million on advertising and promotion, trying, for example, to boost purchases of men's diamond jewelry. De Beers's achievement over the decades has been to mass-market what was once an aristocratic luxury without greatly diminishing its value. Today, diamonds remain ``the gem of gems,'' although millions of people own them. De Beers insists it seeks long-term stability and prosperity for the industry, saying price fluctuations would undermine confidence in the value of diamonds. So far, it has succeeded. While other commodities markets have suffered repeated convulsions, rough diamond prices haven't fallen since the organization started announcing price changes in 1964. Even its fiercest competitors laud De Beers for putting up considerable amounts of money and assuming the risks to develop mines and support the market. During the early 1980s, when high interest rates caused the worst diamond slump since the 1930s, the organization prevented the market's collapse by doubling its diamond stockpile to nearly $2 billion worth. But producers criticize the organization's secretiveness and what they call its arbitrary valuation system. Some want more of the industry's millions of jobs relocated in their own countries. Said Lunzer: ``It's not unnatural for people in the producing countries to say, `Are we getting a proper share of the value of our national resource?''' After reviewing a complaint filed by the British mining company Consolidated Gold Fields PLC alleging anti-competitive practices, Britain's Office of Fair Trading decided in August against formally investigating whether the organization abuses its monopoly. Gold Fields acknowledged the complaint was a defensive maneuver against a hostile, and ultimately unsuccessful, takeover bid from Oppenheimer-controlled Minorco SA last year. Formally known as De Beers Consolidated Mines Ltd., and based in Kimberley, South Africa, the company was formed in 1888 by the British industrial colonialist Cecil Rhodes. Sir Ernest Oppenheimer, a diamond merchant, became chairman of De Beers in 1929 and five years later formed Diamond Trading Co., the precursor of today's cartel. Oppenheimer, who linked the diamond business with his extensive Anglo American Corp. gold-mining interests, is credited with steering De Beers through the Depression. He died in 1957 and was succeeded by his son, Harry Oppenheimer, who has made the company more internationally minded and therefore less vulnerable. Now 81, Oppenheimer still serves on De Beers' board of directors, of which he previously was chairman. His 44-year-old son and heir apparent, Nicholas, is deputy to Chairman Julian Ogilvie Thompson.
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