The International Diamond Cartel OverviewFew FactsThe Main Diamonds SuppliersHistory of the CartelHistory - ContinuedHistory - ContinuedThe Success of the CartelMarket Characteristics Favorable to CartelizationHow does the Diamond Cartel Work?Key Characteristics of the Diamond Cartel Why don’t Other Mining Companies Sell Diamonds Directly in the Market?Problems of the CartelFuture of the Cartel… thereforeQuestions?The International Diamond The International Diamond CartelCartelEEP 142 EEP 142 ––Spring 2005Spring 2005Ivona VogelsangIvona VogelsangOverviewOverviewFew facts about diamondsFew facts about diamondsHistory of the cartelHistory of the cartelHow does the cartel work?How does the cartel work?The cartel’s key characteristicsThe cartel’s key characteristicsTechniques by which the cartel is enforcedTechniques by which the cartel is enforcedProblems the cartel facesProblems the cartel facesThe cartel’s future The cartel’s futureFew FactsFew FactsDiamonds are in fact very Diamonds are in fact very abundantabundantand and cheap to producecheap to produceand in the absence of and in the absence of the diamond cartel would be low in pricethe diamond cartel would be low in priceIn order to be able to control the supply of In order to be able to control the supply of diamonds and to keep the artificially high diamonds and to keep the artificially high prices, the diamond cartel aims to prices, the diamond cartel aims to maintain maintain strong monopoly positionstrong monopoly positionThe Main Diamonds SuppliersThe Main Diamonds SuppliersHistory of the CartelHistory of the CartelUntil the late 19Until the late 19ththcenturycentury--diamonds were diamonds were extremely rare (found only in extremely rare (found only in India and India and BrazilBrazil))In 1870In 1870––huge diamond mines were huge diamond mines were discovered near the Orange River in discovered near the Orange River in South South AfricaAfrica. This however meant a threat to the . This however meant a threat to the few diamond producers who felt that due to few diamond producers who felt that due to the large supply, diamonds will become a the large supply, diamonds will become a commodity instead of a luxury item commodity instead of a luxury itemHistory History --ContinuedContinuedIn 1888In 1888––De Beers Consolidated MinesDe Beers Consolidated Mineswas incorporated in South Africa by the was incorporated in South Africa by the suppliers in order to secure high market suppliers in order to secure high market prices of diamonds. At its beginnings, the prices of diamonds. At its beginnings, the diamond cartel successfully controlled the diamond cartel successfully controlled the worldwide supply of diamonds by regulating worldwide supply of diamonds by regulating mine output and by buying exclusive mining mine output and by buying exclusive mining rights from African nations rights from African nations By the beginning of the 20By the beginning of the 20ththcenturycentury--De De Beers controlled Beers controlled 90 percent90 percentof the of the international diamond tradeinternational diamond tradeHistory History --ContinuedContinuedIn 1930’sIn 1930’s––however, demand for however, demand for diamonds was steadily declining and as a diamonds was steadily declining and as a result, the 29result, the 29--yearyear--old son of the founder old son of the founder of De Beers of De Beers Harry OppenheimerHarry Oppenheimerand his and his advertising agency N W Ayer came up advertising agency N W Ayer came up with an advertising strategy that would with an advertising strategy that would target young men buying engagement target young men buying engagement rings and instill in them the idea that a rings and instill in them the idea that a diamond ring was diamond ring was the only acceptable the only acceptable declaration of courtship. declaration of courtship.The Success of the CartelThe Success of the CartelBy 1981By 1981––De Beers had proved to be De Beers had proved to be the most the most successful cartel arrangementsuccessful cartel arrangementin the sphere of in the sphere of modern commerce. For more than a half modern commerce. For more than a half century, while other commodities, such as gold, century, while other commodities, such as gold, silver, copper, rubber and grains, fluctuated silver, copper, rubber and grains, fluctuated wildly in response to economic conditions, wildly in response to economic conditions, diamonds continued to advance upward in price diamonds continued to advance upward in price each yeareach yearCurrently, Currently, DeDe--Beers controls Beers controls twotwo--thirds of the thirds of the $7 billion$7 billionyearly tradeyearly tradein uncut diamonds and in uncut diamonds and owns owns half the producing mineshalf the producing minesMarket Characteristics Market Characteristics Favorable to CartelizationFavorable to CartelizationSmall number of significant suppliersSmall number of significant suppliersRigorous barriers to entryRigorous barriers to entryAvailability of few substitutesAvailability of few substitutesDurable, easy to store productDurable, easy to store productDemand for diamonds is relatively price Demand for diamonds is relatively price inelasticinelasticHow does the Diamond Cartel How does the Diamond Cartel Work?Work?The corporation DeBeers mines majority of the The corporation DeBeers mines majority of the world’s diamonds and persuades other diamond world’s diamonds and persuades other diamond miners to market their diamonds through miners to market their diamonds through DeBeers LondonDeBeers London--based based Central Selling Central Selling Organization (CSO)Organization (CSO), which then grades and , which then grades and sells rough diamonds to cutters and dealers for sells rough diamonds to cutters and dealers for further distributionfurther distributionAs a result, the CSO processes over As a result, the CSO processes over 80 percent80 percentof the world’s diamonds. of the world’s diamonds. It regulates the supply It regulates the supply of diamondsof diamondsin the market to achieve price in the market to achieve price stability, earning DeBeers a high pricestability, earning DeBeers a high price--cost cost marginmarginKey Characteristics of the Key Characteristics of the