Kimberley pipes fuelled De Beers’ growth

The first reading of a De Beers (LSE) annual report by anyone unfamiliar with the business would be puzzling if not downright frustrating. How can a company that produces less than 8% of the world’s natural diamonds control the sale of more than 80% of the world’s total production?

(Estimated 1991 world production was 104.7 million carats, and De Beers’ actual production was 7.9 million carats. In more comprehensible units these figures are 20.94 tonnes and 1.58 tonnes, respectively — one carat equals 0.2 grams.)

The immediate answer to this question of control is De Beers’ formidable cartel, the Central Selling Organization (CSO). The formation of De Beers and the vision that created the CSO is as unique and as brilliant as the diamonds it trades. It is also the story of the founding of a nation. First of all, the finding of four Kimberlite pipes with commercial quantities of diamonds in close proximity to one another is practically unheard of. Even today, after the discovery of 5,000 pipes worldwide, few are minable. Yet all four pipes are within the boundaries of the city of Kimberley in South Africa. They were discovered about the same time in 1871. They also set the stage for a titanic struggle between two of the most unlikely people. First, there was Cecil Rhodes, the son of an English clergyman advised to go to South Africa for the fresh, clean air of the veldt. His health was balanced on a knife edge and he wasn’t expected to live long. Then there was the exuberant Barney Barnato, a street-smart Cockney who arrived in the tent-town of Kimberley peddling cigars and shortly afterwards setting up a wrestling booth to make himself a living.

In time, Rhodes gained control of the De Beers mine. Barnato came to own a large part of the Kimberley mine. The struggle between the two entrepreneurs for control of the rich Kimberley mine is the stuff of legend. Outright sabotage in the Kimberley mine. (It was a literal honeycomb of open-cut workings created by the several owners of the pipe. Barnato was one of the largest but far from the only operator.)

There was a trail of trashed agreements and intimidation. inevitably a great deal of money changed hands. Finally, with the backing of one of Kimberley’s wealthy diamond brokers, Rhodes got the financing he needed and the battle was over. He bought out Barnato, the other independents, and merged Kimberley with his De Beers mine.

Barnato became a director of the new company and he received the biggest cheque ever written to that time (about US$22 million in the exchange rates of the day). The clincher was membership in the very Victorian, very exclusive Kimberley Club.

Barnato had arrived in Kimberley as a threadbare, rough-and-ready, Jewish pedlar. Rhodes knew what Barnato really wanted. Rhodes was a founding member of the club and he was able to offer recognition and prestige. The amalgamation of the two mines was brought about in 1888 under the name, De Beers Consolidated Mines. It continues today as the parent of Anglo American (LSE), and, through an intricate web of cross-holdings, it is at the heart of industrial South Africa.

Rhodes’s expectation of controlling the diamond market through De Beers was frustrated. That wouldn’t come about until 28 years after his death in 1930 when the CSO was established.

One after another, new diamond mines came into production. The market was flooded with stones and their price varied between mediocre and impossible. None of the marketing agreements worked for any length of time. In the meantime, Rhodes became premier of Cape Colony, he founded Consolidated Goldfields on the recently discovered Witwatersrand and created the two new colonies of Northern and Southern Rhodesia (today, Zambia and Zimbabwe). He was instigator of the Jameson Raid, an aborted insurrection against the Afrikaaner government of the Transvaal. He was spared the death penalty that many of the participants received (the sentences were later rescinded). With his wealth, Rhodes established the Oxford University scholarship that bears his name.

The irreconcilable differences between Rhodes and Paul Kruger, president of the Transvaal, led in no small way to the Boer war of 1899, which ended in 1902. The most positive result of the war was the creation of a new nation. During this eventful period, Barnato became one of the world’s richest men. He outlived Rhodes by only half a dozen years, dying aboard a liner bound for England. A few say his death was suicide, others say murder. His body fell overboard and was never recovered. But his death was far more likely due to natural causes. His driving ambition at that time was to become the Lord Mayor of London.

Ernest Oppenheimer came on the scene in the early 1900s. His story lacks the buccaneering drama of his two predecessors. But with his talent for negotiation, he was able to finish the job that Rhodes began — domination of the diamond market.

Initially a diamond dealer in Kimberley, Oppenheimer was about to acquire beach-sand leases on the coast of the German colony of South West Africa. The First World War intervened, his plan fell apart and he wasn’t able to go ahead until 1919-21. The ex-colony was mandated to the Union of South Africa after the war and to all intents and purposes became a part of the union, which became the Republic of South Africa in 1960.

The beach sands yielded high-quality diamonds, initially right on surface. All that had to be done was pick them up. Ironically, the man who made the first discovery made a meagre living from the sale of ostrich feathers. He had known for years there were often diamonds in the ostriches’ stomachs but it was a long time before he found where they got them from. With ownership of this abundance of easily mined gems, Oppenheimer brokered a deal with De Beers. He later got control and formed the exclusive and all powerful marketing agency, the CSO, in 1930. All producers of gem diamonds sell through the CSO and the organization has proved to be impregnable. Without the CSO, the mining of 5.2 tonnes of gemstones per year would not be economic (about 25% of the total world production is gem quality). With the CSO, there is a thriving mining and cutting industry employing hundreds of thousands.

What is more, if the demand for the gems continues at its historic growth rate of 2% per annum, De Beers projects that the known deposits of high-quality stones will be exhausted by the end of the century.