If you are not inside the diamond business, De Beers’ recent moves are
puzzling. We refer to two recent articles on De Beers’ change in strategy: One
in Kiplinger’s, titled "The Cartel Cracks, But Will Prices?"
and the other in Forbes, titled "Diamonds Aren’t Forever."
The obvious implications of both these articles is that De Beers has given up
control of the market, and that diamond prices will fall. It’s easy to see
where people get this impression, but we haven’t noticed in the diamond
business. Prices of goods across the board — from melee to big stones —are
tight. There is a severe shortage of diamonds—almost a buying frenzy—in the
1 1/2 to two carat range. We haven’t seen things this tight in nearly 20
years. (Whether all this is healthy is another question.)
We recently asked Harvard Professor, Debora L.Spar, author of The
Cooperative Edge, a book on cartels, what she thought of De Beers’ moves.
She noted that De Beers is not giving up its leadership position, simply the way
it’s controlling the market. It may no longer buy on the open market anymore,
or bring every new mine that comes on stream into the CSO. But it did recently
bid for two mining companies — Winspear, in Canada, and Ashton, which owns
part of Argyle. They are going for the world’s biggest buyer of diamonds to
the world’s biggest sellers.
The question is what would happen if there is a dramatic decrease in demand
or a substantial increase in supply. Spar feels that De Beers, as much as it is
indicating it is no longer a monopoly, would probably react like it did in years
past and stockpile the diamonds, or do something else to support the price. What’s
the point in spending millions in developing diamond mines if the price is just
going to fall?
