"Diamonds are extremely rare."
Let's examine some of the most common perceptions about diamonds—and debunk them.
This is the most widely used argument to justify the outrageously high cost of diamonds, and it's about 150 years outdated. For most of history, all diamonds came from certain riverbeds in India and the jungles of Brazil. The total annual worldwide output of diamonds was lust a few pounds per year. That changed in 1867, with the discovery of massive diamond mines in South Africa. Soon, diamonds were being dug up by the ton. The British businessmen who financed the diamond mining realized that the huge supply of diamonds endangered their operations. Diamonds are valued for their rarity, and they had just become exceedingly common.
To counter the suddenly high volume of diamonds, a British businessman, and future statesman Cecil Rhodes organized competing mine owners into De Beers Consolidated Mines in 1888. De Beers controlled all diamond mining operations in South Africa. At the same time, he took control of the distribution by negotiating a deal with the Diamond Syndicate, a group of dealers in Kimberley, South Africa, who represented investors in London. They agreed to fix the quantity and price of diamonds.
Now, when demand slowed, De Beers released fewer diamonds and the market price remained stable. Rhodes died in 1902, leaving behind a corporation that held tight control over 90% of the world's diamond production and distribution. Meanwhile, more large mines were discovered in South Africa, creating new and powerful competition.
One leading competitor was Ernest Oppenheimer, a businessman who also understood the importance of controlling the industry. His diamond mines rivaled the combined output of all the De Beers mines and he threatened to flood the market if he didn't become chairman of De Beers. He got his way. (He and his descendants stood at the helm of De Beers for 80 years, until grandson Nicky Oppenheimer retired in 2011.) Oppenheimer negotiated exclusive contracts with suppliers and dealers that barred them from trading with outsiders.
Soon. Virtually all diamond trade took place under the auspices of De Beers.
Each year, De Beers decided how many diamonds could be released to the market that year. It then sold bulk quantities of raw diamonds to exclusive distributors in London a set number of times each year. Buyers, called –‘sight-holders,’ had no say in the matter. They couldn't negotiate the price: it was a take-it-or-leave-it deal. And rarely if ever did a sight-holder leave it, since insulting De Beers could mean never receiving an offer again. These sight-holders then sold the diamonds to be cut, polished and resold to jewelers at the diamond clearing centers. Traditionally, these were in Antwerp, New York, Frankfurt or Tel Aviv, but today 92% of diamonds pass through Surat, India, instead.
Throughout the 1900s, De Beers controlled upward of 80% of diamond mining in the southern portion of the African continent, as well as the trading companies in England, Portugal, Belgium, Holland, Switzerland, and Israel. By maintaining strict control of the diamond market, De Beers could limit the flow of diamond, reaching the world market to a trickle. And the control De Beers maintained was savage.
When a competitor appeared, they were invariably approached by De Beers and offered to join the conglomerate. When the competitor refused to cooperate. De Beers responded by releasing large volumes of diamonds similar in character to the competitors. This drove down prices and put the opposition out of business. When that failed, De Beers bought up the competitor's output to prevent it from reaching the market.
The De Beers monopoly was threatened by the discovery of vast diamond mines in Siberia in 1957. De Beers acted quickly, quietly offering the Soviets to get in on their "single channel" that supplied the world market. The Soviets recognized that the partnership would benefit them as well, by maintaining the high retail price of diamonds, and so they agreed. De Beers purchased 95% of Siberian diamond output rather than allow Russia to become a competitor.
The situation changed in the 21st century when Russia, Canada, and Australia all major producers of raw diamonds—refused to cooperate with the cartel. Dc Beers' market share dropped from over 90% to just 34% in 2013. In terms of production, De Beers accounts for 25% of the world's annual production while Russia's Alrosa company accounts for 28%. Furthermore, the world was growing increasingly aware of the role diamonds played in funding bloody civil wars in Africa, and De Beers stood to lose public confidence and support. It shifted its efforts to focus on sales from its own milling and on developing high end, brand-name retail stores to market its stones.
In recent years, the traditional diamond industry began facing competition from a new direction. Advanced techniques allow companies such as Apollo and Gemesis to grow diamonds in laboratories. These stones are harder than natural ones and can even be grown larger and purer than mined diamonds. Synthetics are extremely difficult to tell apart from their natural cousins and can be manufactured for a fraction of the retail cost of natural diamonds.
Naturally, De Beers didn't take this development passively and has campaigned both at the regulatory and consumer levels for laboratory-grown diamonds to be treated as impostors. Nevertheless, they continue to grow in acceptance and popularity. One very strong point in their favor is that synthetic diamonds avoid the extensive human rights violations involved in traditional mining operations.
Despite the disappearance of the century-long De Beers monopoly on diamond production, old habits die hard. The public perception of diamonds as a rare commodity lives on. So does strict adherence by producers to the De Beers creed of creating value by limiting supply. The combination continues to fuel the artificially high cost of diamonds even though it's no longer justified.
Today, 130 million carats of diamonds nearly 20 tons!—are mined each year, of Which 20% is converted into gems. There are enough gemstones for every man, woman and child in the United States to own an entire cupful. Diamonds are not rare. They are hoarded by suppliers to create artificial rarity.