To Empire-Building De Beers, A Diamond Cartel Is Forever

KIMBERLEY, South Africa - In a modest, two-story brick building is the headquarters of an empire that doles out diamonds to the world the way the National Football League hands out franchises to American cities - with absolute authority.

De Beers is the name on the highly polished brass plaques outside the well-worn wooden doors, the name of a poor dirt farmer now associated with the world's most sought-after gem.

Johannes Nicholaas De Beers, an Afrikaner who came to this dusty plain for the privacy and solitude so precious to the Boer, sold his farm in the 1870s for about $10,000 when it was overrun by thousands of people digging up the world's richest diamond find.

The name might have been forgotten forever if Cecil Rhodes, the 19th-century adventurer and entrepreneur, had not chosen it a few years later for the corporation that finally gained control of the mines in Kimberley.

Rhodes used his riches as a springboard to empire-building, getting a country - Rhodesia, now Zimbabwe and Zambia - named after him.

Ernest Oppenheimer, who was sent out from England by a London diamond brokerage house around the turn of the century, eventually went on his own and consolidated gold mining enterprises under the Anglo-American Corp. and took over De Beers Consolidated Mines Ltd.

Today, De Beers is a complex and lucrative worldwide web that controls 80 percent of the diamond market.

The Oppenheimers are still deeply involved in running the cartel.

De Beers' control of the world's uncut diamonds depends on a concept called "single-channel marketing," which means that if you are going to buy diamonds, you have to buy them from De Beers.

Cooperation brings control

Control of the sort De Beers wields is possible only with the cooperation of diamond-producing countries such as Russia.

When diamonds are found anywhere in the world, if De Beers didn't make the find, it is soon on the scene, welcoming a new producer country to the diamond club.

The producer trades freedom for security, discarding the possibilities and volatility of an open market for a reliable return, assured of help from De Beers when the market becomes glutted or depressed.

Despite the potential of short-term gain from selling independently, members of the club have rarely broken out.

The official De Beers line is that tight control is needed for a commodity like diamonds.

"Diamonds aren't like wheat or coal," said Brian Roodt, a company spokesman at the Kimberley headquarters. "People have no real need for them. If the economy goes bad, the demand for diamonds plummets. Control is needed to keep price stable."

Critics seek true market value

Those against the cartel's monopoly argue that, as with any other intrinsically worthless, aesthetically appealing product - a bottle of first-growth Bordeaux wine, for example, or an Impressionist painting - diamonds would find a true market value if free enterprise were allowed to flourish.

But in defense of the unusual monopoly, Roodt borrows an oft-quoted remark by Harry Oppenheimer, former De Beers chairman and son of the founder.

If the cartel amounts to a monopoly, Oppenheimer asserted, "There is no one concerned with diamonds, whether as producer, dealer, cutter, jeweler or customer, who does not benefit from it."

In most monopoly situations, the customer loses, but with diamonds the buyer wants the gem to be rare, the price to be high and get higher.

"If diamonds did not cost a certain amount, it is not clear that the ladies of the world would want to put them on their fingers," said Hilton Ashton, who analyzes the diamond industry for the Johannesburg financial company of Senekal, Mouton and Kitshoff.

"What is a diamond worth?" he asked. "No one really knows. But if there were a free market, I think the price would be lower than it is now."