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Monopoly in the Diamond Industry

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disillusionist Posted: Mon, Jan 3 2011 6:18 PM

Diamonds are considered a unique resource because the price level is always on the increase (without any big swings) unlike other commodities such as gold whose prices fluctuate (sometimes violently) in the market. The constant increase in the price of diamond is usually attributed to the monopolistic behaviors of the infamous De Beers Company. But the details of the monopoly is concealed to the public knowledge because it includes not only private institutions but also various governments around the world including the UN.
 

The initial attempts of a cartel was done through the Central Selling Organization (CSO) which was owned by the De Beers Company with the aid of South African government (the primary diamond producing nation) which let the De Beers as the defacto sole license receiver for operating the mines. But this was not a complete control over the global supply because the rest of the diamond producing nations were not part of it such as Angola, Botswana etc. So the demise of the CSO was envisioned around 1992 due to increasing competition for the cartel. Even Murray Rothbard praised the potential demise of the detrimental cartel.1
 
But the events took a turn for the worst. The De Beers and other companies returned stronger than ever with even more control over the diamond supply market. 
 
What the public ignored was the rise of a subtle tool used by the De Beers known as the Diamond Trading Company. The DTC was incorporated as a joint venture between the De Beers, South African government, Government of Botswana and the Government of Namibia. This lucrative venture effectively allowed them to control 75% of the world's diamonds by value.  This allowed the price of diamonds to stay relatively high and therefore create an artificial price level for the commodity. However, this was not the end of the deal. The governments around the world(and De Beers) were on an even bigger mission to control all the supply in the world—this time through the UN.
 
The late 1990's saw the outrage over Blood Diamonds with numerous NGO's asking for an immediate regulatory action from the UN. Blood Diamonds are diamonds that are mined through slavery and sold for weapons that fuel a militia's (usually a rebel group) battles. The DTC took advantage of this outrage—in spite of accusations that they too were involved.
 
The Kimberly Process Certification Scheme was the proposed solution to stem the flow of Blood Diamonds. The Process set forth the rules that all diamonds sold and mined must be certified as "conflict free". It set up the World Diamond Council (WDC) to look after the Certification Process. The WDC consisted of the major diamond producing companies and gave them regulatory authority through UN. WDC is nothing but a cartel in disguise.
 
There are 6 committees in the WDC which is currently dominated by representatives from the De Beers Group, diamond companies based in Belgium and the World Federation of Bourses (WFB). WFB is another small sized cartel in Antwerp consisting of 29 diamond bourses.
 
Any diamond that enters the market must be certified by WDC and if not, it will be considered a conflict diamond and the individuals involved will be prosecuted.
 
But this is just a smoke screen for a bigger motive held by the institutions of WDC. The regulatory authority is used to stop large amounts of diamonds from entering the market and thereby controlling the supply and price.
 
In fact, WDC constantly criticizes mining companies that are not part of the cartel and subjects them to criminal prosecution. The latest victim is the Marange rough diamonds from Zimbabwe that is demonized by WDC and DTC as sponsoring war when in fact it is a threat to the global diamond supply. 
 
All in all, the monopoly supported by certain African Governments and the UN ensures the price of diamond stays relatively high and in turn raking in undeserved profits to governments and corporations. The day there will be a free market system, that will be the day diamonds stop being forever.
  

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1 See Murray Rothbard “Making Economic Sense” Chp.91

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We discussed "blood diamonds" here. Plus, there really isn't too much proof blood diamonds exist, especially not in the magnificent abundance people tended to think after Blood Diamond came out on screens.

All in all, the monopoly supported by certain African Governments and the UN ensures the price of diamond stays relatively high and in turn raking in undeserved profits to governments and corporations. The day there will be a free market system, that will be the day diamonds stop being forever.

If anything, people will stop buying diamonds. They aren't a necessary product for life. If anything, it will spur the artificial diamond business, which will, in turn, lower the costs of real diamonds.

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If anything, people will stop buying diamonds. They aren't a necessary product for life. If anything, it will spur the artificial diamond business, which will, in turn, lower the costs of real diamonds

true but in the process of running the cartel, it creates corruption on all levels which is a threat (both in the short and long term)

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true but in the process of running the cartel, it creates corruption on all levels which is a threat (both in the short and long term)

On all levels of what, and a threat to whom? I don't mean to be picky with words, but I want to make sure I understand what you're saying.

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well since the cartel has to make sure the governemnts around the world cooperate, it has to constatnly pay off from politicians to dealers. And the threat is for the people who not only have to pay high prices but are also being robbed of new business opportunities due to draconian regualtions.

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well since the cartel has to make sure the governemnts around the world cooperate, it has to constatnly pay off from politicians to dealers.

Make sure the governments cooperate how? I'm still confused about what you're trying to assert.

And the threat is for the people who not only have to pay high prices but are also being robbed of new business opportunities due to draconian regualtions.

Who are these draconian regulations being set by? This would be a "threat" if diamonds were necessary. If food were the case, it would be called a "threat" because of how many people may be dying from lack of food, but it would also be the same circumstance. People don't have to buy diamonds, so it isn't exactly a threat to them. If a husband wants to get his wife a diamond ring but can't afford it due to the monopoly, I'm sure she wouldn't care if he got something else. And, as for the people being robbed of new business opportunities: sure, they may not be able to work in the diamond industry. But since people will stop buying expensive diamonds, they'll have that much money left over to buy other things, which will stimulate the demand for workers in other fields; whether it be related to the original use of wedding engagements (i.e. artificial diamonds, tattoo rings, etc.), or completely unrelated, as in people may use that money to buy new clothes - no one knows that answer because it's dependent about human action and desires.

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Kakugo replied on Tue, Jan 4 2011 9:55 AM

If I remember correctly some sites in Equatorial Africa are so rich in diamonds that they could seriously affect the price of the commodity itself if properly mined. So you are absolutely right when you say:

But this is just a smoke screen for a bigger motive held by the institutions of WDC. The regulatory authority is used to stop large amounts of diamonds from entering the market and thereby controlling the supply and price.

The output of the legendary South African mines (owned lock, stock and barrel by DeBeers) is not only declining but it's dwarfed by other countries on which DeBeers has little leverage, like Canada and Russia: put together these two countries mine about a third (in carats) of all the diamonds in the world. After the collapse of the Australian diamond mining industry other African suppliers have stepped into the market: Congo is now the largest producer of industrial-grade diamonds, while Boswana is the largest supplier of gemstones. Countries like Guinea and Angola have increased their output dramatically. It's not hard to see why the governments of Botswana and South Africa joined forces with DeBeers to put a brake on other African countries (since accusing Canada and Russia of selling "blood diamonds" would be laughed off even by the UN).

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James replied on Tue, Jan 4 2011 9:58 AM

(since accusing Canada and Russia of selling "blood diamonds" would be laughed off even by the UN)

Don't worry, that's pegged as an unethical exploitation of the environment by the developed world.  They have it all figured out.

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The diamond industry has been surrounded by contraversy, and De Beers is no exception to the rule. Due to the issues De Beers has faced in the past (as you mentioned above), De Beers has taken measures to correct the injustices of the past, like creating programs that share profits with the various cities in South Africa where the mining takes place.

http://debeersrings.com/de-beers-south-africa.htm

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Jackie replied on Tue, Jun 5 2012 4:43 PM

Does this mean that these beauties will get cheaper some time soon? If so, I should start saving now :-)

http://www.darasdiamonds.com/diamond-engagement-rings-with-a-lifetime-exchange-policy/solitaire-rings

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We discussed "blood diamonds" here. Plus, there really isn't too much proof blood diamonds exist, especially not in the magnificent abundance people tended to think after Blood Diamond came out on screens.

Are you serious?  First, I'd like to point out that Blood Diamond (the movie) was about past events.  Those wars ended...  Just think about that...

Lots of ignorance in the thread to which you linked.

These figures mostly refer to the trade between various African nations and Belgium due to the fact that,

"more than 80% of the world's rough diamonds trade pass through Antwerp in a year.  But the main reason that Belgium has until recently kept and published very good statistics on its diamond trade.  Most other countries have not.  Diamond statistics are either kept under lock and key - as in Russia where diamonds are treated as a "strategic mineral" - or they are simply not published out of neglect or lack of interest."

"The CEO of the Angolan Selling Corporation (ASCorp)has said that between 350-420 million in smuggled goods [blood diamonds] left Angola [just one country] in 2000, representing about 5% of the world supply."

Sierra Leone - The majority of diamonds exported from here are illicit
Cote d'Ivorie
Liberia
Guinea
Gambia
---------- 5 year (94-99) total of smuggled diamonds "$3,981,000,000"

"...these figures...suggest that an estimate of 20 percent of the world trade as illicit is more than possible, and that it may actually be conservative. 

Why is the level so high?  The reasons are simple enough: the value, portability, and accessibility of diamonds; the inherent secrecy of the trade, lack of government controls [or if you ask me, the initial government regulations, even though I doubt conditions would get any better], an absence of data for checking even the most rudimentary movement of diamonds within and between countries; little detection; and few penalties.  These "reasons"represent the opportunity.  The motivation in the past was predominantly tax evasion and money laundering...where money laundering is concerned, diamonds offer an attractive alternative to hard currency, often in short supply in Africa.  More recently, however, there have also been links to drug money and organized crime."

Many a wars and "struggles" have been funded by the sale of conflict diamonds. Portugal, Lebanon, Brazil, England, and virtually every African nation have financed wars through the sale of under the table diamonds.  It is absurd to just say "Oh, they don't exist.  There's little evidence..."  and red herring the topic by saying that it doesn't matter if companies withhold supply to keep prices up (which is true about the company's actions, but the higher prices thing is not entirely true.  I've heard some pretty ridiculous stories about De Beers).  What should be noted is the tribal struggles for power that are the consequent of these things.

Other African warlords have financed war through the salve of metals and timber so it is not just diamonds that causes this behavior.

The Kimberley Process did nothing. "...many of the countries that were accepted into the system without demur had been laundering illicit and conflict diamonds for years.  The addition of some new paperwork into the system was unlikely in the end to make a great deal of difference."

If anything, it will spur the artificial diamond business, which will, in turn, lower the costs of real diamonds.

Oh!  Just like artificial money, right?  Gold just shot right down when artifical money started floating around.  (See: Gresham's Law, or Rothbard's interpretation of it.)

The main reference for my information has very interesting information on how the diamonds go from hands to pans, to Antwerp, to a company called Diagem, which transfers payments to an account in the Isle of Man then to the Cayman Islands owned by Freedom Air, registered in the Central African Republic, but based in Dubai.  [This is from an anthropologt team (probably several) by the way.

Freedom Air, owned by Vikto Crout (who has Russian and Israeli passports), buys used weapons on the open market in Bulgaria and Ukraine and flies them to Monrovia [Liberia; yes, names after James Monroe], via Sudan.  He uses false flight plans and false Togolese or Nigerian end-user certificates to avoid detection by UN sanctions "experts" [my quotations].  Meanwhile Diagem sends Khali's [name of a person; an anthropoligcal study subject] diamonds to Israel and India for cutting and polishing, and within a few weeks they are in Vales windows in American shopping malls or in the showrooms of Tiffany and Cartier in Paris, London, and New York.

Christian Dietrich, "Have African-based Diamond Monopolies Been Effective?" Central African Minerals and Arms Research Bulletin 2 (June 2001)

Ian Smillie, "Criminality and the Global Diamond Trade: A Methodological Case Study."  Illicit Flows and Criminal Things: States, Borders, and the Other Side of Globalization. (Bloomington: IU Press, 2005) 177-200.

Ian Smillie, L. Gberie, and R. Hazleeton, The Heart of the Matter, 44-47; United Nations, Report S/2000/1195 (New York: United Nations, 2000), 32-40.

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Since it looks like this thread has been resurrected (at least temporarily), I figure I'll add this relevant link to a later thread:

De Beers: A Free-Market Cartel?

 

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I just found these, figured they should be added...

Coincidently this was published just a couple weeks after this thread was started...

How the Cartels Ensure Diamonds Last Forever

 

This one I believe is what is referenced in the OP from Making Economic Sense, as that work is a compilation of Rothbard's writings from The Free Market...

Are Diamonds Really Forever?

 

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