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The evolution of the rough diamond market: from single to multi-channel - 30.10.13

There are few absolutes in business, but there used to be one in the rough diamond trade and that was De Beers, or more specifically its sales arm – which was once contained in a division known simply as the Central Selling Organization, or CSO, and later was managed directly by the Diamond Trading Company, or DTC.


For almost 100 years, more than 90 percent of the world’s rough diamond output was channeled through De Beers, providing the company with the ability to regulate supply, and so dictate prices. About half its goods came from mines owned by De Beers itself, with the remainder made up of rough merchandise obtained through long-term contracts with other producers and via buying offices in number of African countries.


It was a monopoly, but in the opinion of many – if not most – a “benevolent” monopoly, because all parties essentially benefitted. Prices never dipped; indeed they normally stayed ahead of inflation.  De Beers controlled supply, and through generic advertising that it financed – to the tune of many millions of dollars per year – it also drove consumer demand.


But the monopoly began unraveling during the 1990s. The collapse of the Soviet Union was a critical factor, as it set in motion a series of events that first undermined De Beers’ distribution agreement with the Russian diamond authorities, and eventually led to the establishment of Alrosa in 1998, which instituted a rough sales operation that was independent of De Beers.


In 1996 Rio Tinto, which operated the giant Argyle diamond mine in Western Australia, terminated its distribution agreement with De Beers and set up its own sales operation in Antwerp. That move was significant because it became the first major natural resource corporation other than De Beers-Anglo American to be selling diamonds.


The discovery of large and viable deposits of diamonds in Canada in the early 1990s was also a factor. Not only did it add a second  major mine to the Rio Tinto stable, when the Diavik mine came on line in 2003, but it brought another top-flight mining corporation into the sales mix, when BHP Billiton began producing diamonds at the Ekati mine in 1998, and selling them through its own newly opened office in Antwerp.


The conflict diamond crisis, which began in 1999, led to De Beers closing its independent buying offices in Africa, meaning that it supply almost exclusively now came from established and fixed mining operations.


Following an independent strategic review, in 2000 De Beers announced that it was restructuring its business. The task of managing generic advertising on behalf of the industry was too burdensome, as was the maintenance of a buffer stockpile, necessary for regulating the flow of rough diamonds into the pipeline. De Beers no longer would act of the patron of the industry, but rather as the “Supplier of Choice.”


De Beers’ changing fortunes was evident in its market share. By the end of the 1980s this was already slipping toward the 80 percent mark, but by 2000 it was down to 65 percent. In 2005 had fallen to 43 percent and in 2012 it stood at about 37 percent.


What also changed was the way in which rough diamonds were sold. De Beers many decades earlier had developed what was known as the sightholder system, by which it would supply goods to a select number of companies. This took place 10 times a year  during sight weeks at De Beers in London, where the sightholders were presented with boxes. De Beers dictated what merchandise was placed in each box, and at what prices.


In the diamond business, to be accepted as a sightholder was a tantamount to joining the aristocracy. Purchases were made in cash, and goods were rarely refused. For while sightholders theoretically could decline to accept what was offered, they almost never did so, because it may compromise their being invited to the next sight.


When it restructured in 2000, De Beers began reducing the size of its sightholder pool. Whereas about 170 companies received a regular direct supply at the end of the 1990s, that number fell to 120 by 2003.


In 2004 the company began signing two-year agreements with sightholders (which later were increased to three-year agreements) and at the same time reduced the number of sightholders even further.  There currently are 82 sightholders, signed to contracts running from 2012 through 2015.


De Beers still supplies the bulk of its rough through long-term contracts, and the same is true of Alrosa, although the Russian company relies more heavily on shorter term contracts and tender sales. Rio Tinto also sells most of goods through long terms contracts, while BHP Billiton shifted about half of its sales to a tender-based system.


In 2013, BHP Billiton exited the diamond business, selling its share in the Ekati mine to its junior shareholder in the project, the Harry Winston Diamond Corporation, which consequently changed its name to Dominion Diamonds.


According to Bain & Co., long-term contracts account for about 65 percent of the rough diamond business, and is managed through not much more than 100 companies worldwide. Auctions or tenders make up about 30 percent of rough diamond sales, and about 5 percent are sold through short-term contracts.


Auctions and tenders is the mode of sale favored by smaller diamond producers. This is a higher risk approach which provides the promise of higher prices, but also the possibility of making a loss. For the major producers, the auction or tender system is useful means of gauging market demand.


The 20-year shift from a predominantly single-channel system of distribution to a multi-channel system was to a degree characterized by increased volatility in rough diamond prices, but compared to other commodities they have remained remarkably steady. Volatility certainly rose after De Beers liquidated its stockpile, but with the exception of a moderate although prolonged dip during the height of the global financial recession in 2008 and 2009, prices have remained buoyant.


In part this is because, even in a multi-channel system, rough diamond supply remains concentrated in only a few hands. According Bain & Co., in 2012 the five largest companies – namely De Beers, Alrosa, Rio Tinto, BHP Billiton and the Harry Winston Diamond Corporation – generated 78 percent of the sector’s revenues.