EDITORIAL — Cartels may give way to cooperatives — New players in the sandlot

Milk producers do it, along with egg farmers. Wheat farmers do it (though some would rather not), while oil producers tried to do it, but weren’t disciplined enough to suceeed. Microsoft’s Bill Gates is keen to do it, but his government won’t let him. Some say zinc producers do it, though not terribly well, at least if prices are any indication. De Beers’ Oppenheimer family has done it for decades, but now faces new challenges to its authority.

While single-channel marketing mechanisms are the cornerstone of the agriculture industry in many parts of the world, governments are loath to let them encroach into most other sectors. American authorities, in particular, are deeply suspicious of any marketing strategy that looks like a cartel, and have armies of investigators out to nip the would-be monopolists in the bud.

Governments tend to allow single-channel marketing in the agricultural sector — even though it usually means higher prices for consumers — because they believe it is a matter of national interest to protect domestic suppliers and reduce imports of basic foodstuffs. Often this policy is abused, particularly in places such as Indonesia, where cronyism is entrenched and enterprise is anything but free. Before Suharto was deposed, the dictator’s greedy children and cronies had monopolies in the marketing of basic products such as soybeans, wheat and cloves. One of the more bizarre manifestations of this unbridled, keep-it-in-the-family approach to business involved son Tommy, who tried to ban automobile imports in order to bolster production of a domestic car, ostensibly for the national interest, but really to benefit his own auto manufacturing venture. As it turned out, Daddy’s love (and strong arm) couldn’t keep out Honda and Hyundai.

The resource sector has many stories of failed cartels (tin being one example) that were undone by foreign competitors. Without doubt, the most enduring and successful cartel is De Beers’ marketing arm, the Central Selling Organisation (CSO), which was founded in the 1930s, when the diamond market was in tatters and confidence had to be restored.

Ernest Oppenheimer masterminded the creation of the CSO, designing it to act as a conduit through which all diamonds produced in the world would be bought and sold in a regulated manner according to market conditions. It was a strategy that worked well, at least from a business perspective, and the CSO’s survival into modern times has amazed even De Beers’ critics.

With the new millenium approaching, analysts wonder whether the CSO will survive in the face of new production from Canada and the end of much of the Cold-War-induced instability in Africa. BHP Diamonds, which will operate the Ekati diamond mine in the Northwest Territories, has already stated that it will market some of its own diamonds, in part to avoid potential problems related to American anti-trust policies. The Russians have been less than eager to sign a long-term sales contract with the CSO, and analysts predict that Angola will increase its sale of high-quality stones on the open market.

While some analysts believe that De Beers remains “excessively wedded” to the old single-channel system, they understand its merits and are loath to underestimate its ability to survive.

De Beers has shown that it will fight hard to protect its status (particularly in its own backyard), but it faces many new challenges to its authority, including one from downstream buyers (not to mention new producers and U.S. regulators) opposed to its “branding” initiative. And more challenges will come when rival majors the size of BHP and Rio Tinto enter the market. Already, some speculate that in order to survive the CSO will have to evolve from a cartel into a producers’ cooperative, with board representation extended to Russian, Canadian and African producers.

In any event, how the big boys play on the same sandlot will be interesting to watch.