Focus on

THE DIAMOND PIPELINE

Giant trucks moving ore at the Jwaneng mine in Botswana. Owned and operated by Debswana, which is jointly owned by De Beers and the government of Botswana, it is the world’s most valuable producing mine.

ROUGHLY SPEAKING, TRAVELING FROM THE DEPTHS OF THE EARTH

PART 2 OF A 4-PART SERIES

The anchor of the diamond trade is its rough diamond sector, which on an ongoing basis generates a steady flow of merchandise from mine to market. It is a segment of the business that has undergone massive change over the past 20 years.

For almost a century, more than 90 percent of the world’s rough diamond output was channeled through one company, De Beers, which consequently had the ability to regulate supply, and so dictate prices. About half its goods came from mines that it owned itself, with the remainder made up of rough merchandise obtained through long-term contracts with other producers, and via buying offices in number of African countries.

But the monopoly began unraveling during the 1990s. In 1996, Rio Tinto, which operated the giant Argyle diamond mine in Western Australia, terminated its distribution agreement with De Beers, setting up its own sales operation in Antwerp. That move was significant because it became the first major natural resource corporation other than De Beers to be selling rough diamonds independently.

The collapse of the Soviet Union was a particularly important factor, for it set in motion a series of events that undermined De Beers’ distribution agreement with the Russian diamond authorities, eventually leading to the establishment of Alrosa in 1998, which created it own a rough sales operation, headquartered in Moscow. Alrosa today is world’s largest single rough diamond producer.

The conflict diamond crisis was also a factor. Beginning in 1999, it led to De Beers closing its independent buying offices in Africa, meaning that the company’s supply now came almost exclusively from established and fixed mining operations.

The discovery of large and viable deposits of diamonds in Canada in the early 1990s also played important role in the transformation of the market. Not only did it add a second major mine to the Rio Tinto stable, when the Diavik mine came on line in 2003, but it brought another top-flight mining corporation into the sales mix, when BHP Billiton began producing diamonds at the Ekati mine in 1998, and selling them through its own newly opened office in Antwerp.

Mining for alluvial diamonds on the Atlantic coast of Namibia by Namdeb, a company owned jointly by De Beers and the government of Namibia.

Sorting rough diamonds at the Diamond Trading Company’s giant facility in Gabarone, Botswana.

BHP Billiton would remain the diamond business for 15 years, selling its share in the Ekati mine in 2013 to its junior shareholder in the project, the Harry Winston Diamond Corporation, which consequently changed its name to Dominion Diamonds.

Acutely aware of the changing landscape, in 2000 De Beers announced that it was restructuring its business. The cost of managing generic advertising on its behalf of the industry was too burdensome, it stated, as was the expense of maintaining a buffer stockpile, which was necessary for a monopoly to regulate the flow of rough diamonds into the pipeline. It was no longer prepared to be the patron of the industry, De Beers said, but rather would be the “Supplier of Choice.”

The company’s changing fortunes was evident in its market share. By the end of the 1980s De Beers’ stake was already slipping toward the 80 percent mark, by 2000 it was down to 65 percent, and by 2005 it had fallen to 43 percent. By 2016, it has stabilized around 38 percent.

What also changed was the way in which rough diamonds were sold. De Beers many decades earlier had developed what was known as the sightholder system, by which it would supply goods to a select number of companies.

De Beers still supplies the bulk of its rough through long-term contracts, and the same is true of Alrosa, although the Russian company relies more heavily on shorter term contracts and tender sales. De Beers sells about 10 percent its production by tender.

Diamond tenders are a relatively new phenomenon in the trade. Before 2000, the only company to consider selling rough diamonds through a bidding process was Rio Tinto, which in 1985 began selling its highly sought-after fancy pink and red stones from Argyle at an annual sale in Geneva.

Other companies began getting onto the bandwagon following the shakeup of the rough diamond sector in 2000.  It was smaller mining companies that first saw promise in the tender sales model. Petra Diamonds and Gem Diamonds, both of which were mining former De Beers claims in Southern Africa, were among the more prominent firms to use the method.

A parcel of rough diamonds, ready for sale.

BHP Diamonds, before it exited the diamond industry, was the first major producer to make a significant shift to tender sales. Beginning trials in 2006, the company that owned and operated the Ekati mine in Canada’s Northwest Territories started phasing in regular tender auction sales in July 2008. It moved to an all tender process in February 2009.

According to Bain & Co., long-term contracts account for about 65 percent of the rough diamond business, and is managed through not much more than 100 companies worldwide. Auctions or tenders make up about 30 percent of rough diamond sales, and about 5 percent are sold through short-term contracts.

The 20-year shift from a predominantly single-channel system of distribution to a multi-channel system was to a degree characterized by increased volatility in rough diamond prices, but compared to other commodities they have remained remarkably steady.

In part this is because, even in a multi-channel system, rough diamond supply remains concentrated in only a few hands. The four largest companies – namely De Beers, Alrosa, Rio Tinto, and Dominion – still generate upward of 80 percent of the rough sector’s revenues.