Polishing the myth

With the settlement of charges under anti-trust laws in the United States, the De Beers group believes it has put its disputes with the U.S. government behind it. And it is plain that the U.S. Department of Justice expects to see a very different De Beers from the one it charged with price-fixing back in 1994.

It is a curious little irony that the U.S. government finally “got” De Beers on a price-fixing charge in the industrial diamond business. The natural-diamond grit trade is now not much more than a historical footnote; and at least in the popular imagination, De Beers is pleading out in order to return to the United States as a high-end diamond retailer.

A decade has made a big difference in the diamond market. Ten years ago we had the Central Selling Organization and a monolithic supplier; now some expect the market to fragment completely. Whether that is true or not, the days when an independent producer could virtually count on being trampled unless he sold to the CSO are clearly long gone.

So what is happening in the diamond market? Is it about to become a price battleground, or will De Beers’ “Plan B” — its Supplier of Choice strategy, an attempt to brand its diamonds as the right ones to own — sustain the diamond market through the next century in the way the storied Pipeline sustained it through the last one?

We doubt there will be a free-for-all, just because it is in no producer’s interest to do that. Even the richest diamond mines live on too narrow an operating margin to survive a genuine price collapse. Instead, this latest milestone in the history of the diamond market shows how the future will be governed by how badly the consumer wants diamonds. And that will turn on how well the diamond industry — which is now no longer just De Beers — can preserve and strengthen the product’s image as a luxury good.

In a recent edition of the South African newspaper Business Report, reporter Terry Bell recounts how a somewhat refreshed De Beers director had once told him, “when that little lady in Tokyo looks at that $20,000 rock on her finger and realizes it isn’t worth a damn, we’re in trouble.”

If Bell isn’t pulling the long bow here, at least one director was in need of a shoe in the soft parts; but what he said is true, in the same sense that if people begin to look at stainless steel sinks and decide they’re not worth a damn, Inco is in trouble too. Goods are only ever worth what the market will pay for them.

But De Beers, whatever its transgressions in making that market pay De Beers’s price, made the diamond market what it is today. And the whole diamond industry relies on demand that the diamond myth created.

It is an absolute that high-end retail jewelry businesses depend heavily on diamonds. The Tiffanies, Cartiers, and Winstons count on big jewels in big settings to be not only their high-margin stock, but also their calling card in the luxury-goods trade. For their customers, the diamond substitute is not synthetics but minks and Mercedes. They can’t let diamonds be seen as cheap. That truth will apply equally to the De Beers-branded stores now being opened by LVMH Moet Hennessy Louis Vuitton.

(Thus the accusation from W.B. David & Co., the midstream diamantaire, that De Beers is pursuing vertical integration and dominance in the retail field through the LVMH connection has some big holes in it. The retailer will be one of many retailers, without a preferential supply from De Beers.)

The dependence on the De Beers marketing culture is even stronger farther upstream. Much has been made of how Russian producer Alrosa and Rio Tinto’s Argyle and Diavik mines have taken themselves outside the De Beers fold; now the rise of Israeli diamond trader Lev Leviev in the diamond mining business is provoking the same kinds of comments. But the fact remains that all the diamond producers are necessarily price-takers, and they all realize it is better to take higher prices than lower ones. They may rock the boat, but they know there’s no sense in swamping it.

“A Diamond is Forever” was merely an advertising slogan. But there are plenty of people in the mining and mineral exploration industries who badly need that mere advertising slogan to be true.