A hole in the ground with a buyer on top

Mark Twain is credited with having defined a mine as a “hole in the ground with a liar on top.” But when it comes to the diamond business, it’s a “hole in the ground with a buyer on top.”

Diamonds travel the distance from a mine to the jewelry store via a circuitous global journey — a journey known in the biz as the “diamond pipeline,” and which is largely controlled by the world’s most powerful and successful monopoly: De Beers.

Of course, De Beers would beg to differ, notwithstanding the fact that its upper management risk arrest upon travelling to the U.S. because of that country’s anti-trust laws — under which De Beers has been previously indicted. According to De Beers, they are merely providing stability and security of prices and supply in what would otherwise be a chaotic and volatile marketplace. Right (sadly, these laws are not applied with equal vigor to the OPEC cartel — which only goes to confirm Cecil Rhodes’ famous maxim “Every man has his price”).

De Beers has recently changed the name of its rough diamond purchasing and sales group from the Central Selling Organization to the more free-market-sounding Diamond Trading Company (DTC). Its headquarters remain where they have always been, at 17 Charterhouse Street in London. Basically, it is a clearing house where rough diamonds from De Beers operations across Africa, along with those acquired through partnership agreements with other companies in Russia, Canada and elsewhere, are sold to a select group of rough diamond buyers called “sightholders.”

What’s unique about the DTC is that it is the only clearing house, controlling between 70 and 80% of the global rough diamond supply, about half of which comes from De Beers’ mines in South Africa, Namibia, Botswana and Tanzania.

Upon shipment of rough diamonds to one of several DTC sorting facilities across Europe and Africa, they are sorted into more than 16,000 categories by De Beers’ personnel. Once sorted, diamonds are blended into what De Beers refers to as “selling mixtures” in preparation for sale to the DTC’s 120 exclusive clients (that is, sightholders), each of which has the distinguished privilege of purchasing diamonds from De Beers.

These are the only groups De Beers will sell to. Until 25 or so years ago, when diamonds from sources other than De Beers became more available, this meant that if you weren’t a sightholder, then you were out of luck. Becoming a sightholder entails a process of demonstrating that the quantity of sales of polished diamonds and/or jewelry — along with other factors, such as their quality, the composition of company management, the location and length and stability of operations, and so on — is to De Beers’ satisfaction (kind of like trying to get a membership in that chic and exclusive golf club up the road).

Once approved, a sightholder has the privilege of visiting one of the locations where rough diamonds are sold by the DTC. These “sights” include London, Lucerne and Johannesburg. During these sales, which take place every five weeks (or 10 times a year), each sightholder is presented with his specific parcel (sorry gals, this is a “guys only” affair), handpicked by De Beers.

A sightholder may examine the parcel allotted him, but there are no substitutions, deletions or additions, and certainly no discussion about price (take it or leave it). Of course, a sighthholder is under no obligation to take the parcel if he so chooses, but De Beers does “encourage” the sightholder to take the “longer view” (and every sightholder knows that sights are by invitation only). Or, as De Beers puts it on its web site, “sightholders have the advantage of knowing that the DTC will attempt to provide diamonds of the right size, quality and quantity to match specific requirements.” Right.

Internally governed

From here, diamonds fan out across the world in a more-or-less free-market fashion, along with those from non-De Beers producers not sold through the DTC (some Russian, Australian, and other lode production, and probably most of Africa’s artisanal placer production). They may be directly purchased by any one of the thousands of independent rough diamond re-sellers, diamond-cutters, jewelry store chains, or others. Or they may be sold through one of the more than 20 diamond exchanges, or “bourses,” and several more diamond dealers clubs, around the world (including four in Antwerp, two in Tel Aviv, and two in Johannesburg, among many other locations). All are affiliated with the World Federation of Diamond Bourses, and all are internally governed private commercial enterprises with a restricted list of members, just like a stock exchange.

These exchanges represent what would likely be the primary venues for the sales of rough diamonds straight from the mines, were it not for De Beers’ global monopoly. Buying, selling, making connections and contacts is what this aspect of the diamond business is all about. It is premised on knowing where to find the right goods, from the right seller, for the right buyer, at the right time and, of course, at the right price. It can be a very profitable business but, at the same time, is financially unforgiving of mistakes. And the same saying that is applied to bush pilots — “there are old pilots and there are bold pilots, but there are no old bold pilots” — can be applied to independent diamond buyers. More often than not, it is a family business, with literally decades of experience transmitted from father to son.

Zealots

The subject of “conflict diamonds” was mentioned in the previous article in this series (T.N.M., Aug. 26/02) and has been in the news quite a lot. Until recently, nobody seemed to care much about where diamonds came from, yet now their origin is a major issue. Conflict diamonds have been brought to us by the same ex-communist neo-environmentalist anti-global zealots who would have us believe poverty is the cause of crime (and now terrorism, as well), that an insufficient supply of condoms and sterile needles cause AIDS, and that methane generated by flatulent cows causes global warming.

Now, we are also to believe that the vicious civil (dare I say tribal?) wars that have plagued many countries across Africa, including the diamond-rich countries of Angola, Sierra Leone and the Congo, are the fault of the international diamond industry. This is because some of the more successful warlords behind these various conflicts have allegedly financed the better part of their arms purchases and subsequent military campaigns through the sale of rough diamonds (apparently, now even Al Qaeda is in on the act, sheltering their funds from scrutiny by converting them into diamonds).

Therefore, the diamond industry is to blame for purchasing them! If only those wicked capitalists and awful rich folks would stop purchasing those superfluous diamonds — the ultimate symbol of bourgeois decadence, then the bells of peace would peal ’round the world. Can you believe anybody takes this nonsense seriously?

The notion that these bandits and thugs would simply find some other way to finance their campaigns in the absence of diamonds, as has ever been the way throughout history, seems lost on the folks from Global Witness and the other non-governmental organizations that have thrown themselves into this latest politically correct crusade.

As a result, millions of dollars have been wasted at international conferences rife with emotional and absurd speeches, flying invective and finger pointing, all accompanied by the usual hand-wringing and solemn proclamations. Lengthy, boring reports have inevitably followed, pre-eminent of which is the Kimberly Process Working document, which followed the Kimberly Conference (which in turn followed the publication of a report titled Conflict Diamonds, by Global Witness, which got the whole thing rolling).

Forbidden from purchase

Designed to restructure and tightly regulate (if not ruin) the diamond industry, it seeks a means by which all diamonds can be identified as to their point of origin. Forbidden from purchase are those coming from locations where they have been known to be sold in order to finance conflicts (hence the term “conflict diamonds”). This is to apply to the DTC, and all other rough diamond sellers around the world. The United Nations, along with a host of governments, has since rushed to pass resolutions denouncing the sale of conflict diamonds and to endorse efforts to prohibit their sale (without actually committing to anything, of course). Fortunately, like the Kyoto protocols (another stupid proposal), its implementation remains in limbo.

Silver lining

However, every cloud has a silver lining, and concern about conflict diamonds has already proved beneficial for the Canadian diamond industry. With its strict auditing of all diamonds produced, paucity of independent rough diamond dealers, and great geographic distance from the various scenes of conflict, Canadian diamonds can truly claim to be kinder, gentler, and one-hundred per cent conflict-free! Meanwhile, the situations in Angola, Sierra Leone and the Congo seem to be settling down on their own, thank you very much, notwithstanding the bountiful supply of rough (fancy that!). Hopefully, this will enable the entire issue of conflict diamonds to sink in its own sanctimonious silliness.

Finally, for those of you still interested in learning more about the diamond industry, I strongly recommend a superb book titled The Last Empire: De Beers, Diamonds and the World, by Stefan Kanfer. It’s not easy to find in the bookstores, so check the Advanced Book Exchange at www.abe.com, an excellent global source for used books.

— The author is a geologist and gemologist, as well as vice-president of a junior mining company based in Toronto. He may be reached at hygrader2@yahoo.com