Aside from cutting and polishing, the sale of rough diamonds is another important juncture in the global diamond value chain. According to the Global Diamond Industry Report (2011), there are three classes of rough-diamond sales: long-term contracts, spot sales and tenders. In the succeeding years, the sales were called as "sights." As the diamond market opened up after its monopoly, each major diamond producer has established its own kind of a sight holder system. Long-term contracts are more advantageous than the other types of rough diamond sales. These are very much the same as the industry leader's De Beers' system.
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A traditional sight holder system established long-standing relationships between the producers and the buyers. This relationship is founded on trust. With long-term contracts, diamond producers get more comfortable with their customers' business practices, financial resources and reputations. There is an overwhelming transparency in this type and this is highly beneficial. Being a sight holder is a highly coveted position. There are just fewer than 100 independent sight holders who work with the largest producers and buy more than 70 percent of the total diamonds produced worldwide. Out of this 100, only 10 to 15 sight holders can afford to purchase a very significant amount of diamonds, let us say, $50 million to $100 million worth at one sighting.
In spot sales, producers sell a range of rough diamonds based on a one period contract. Under the system originally established by De Beers, sight holders were a small group of buyers who came to a location called a "sight" to inspect the diamonds for sale. (The Global Diamond Industry Report, 2011) Normally, "sights" vary according to a range of frequency from each month to each six weeks. Individual producers determine its individual diamond prices which were changed at regular intervals.
Diamond producers determine the quantity and quality of diamonds to be sold in each box. They also set the prices of the box in advance. Producers attempt to match their customers with the diamond assortment they put in each box. They intend to give a box to suit a customer's needs. There are diamond experts or the diamantaires who serve as diamond dealers. They are allowed to accept or reject the whole box. However, they cannot determine the assortment for each box. In some instances, some producers allow the diamantaires to deal for just one part of a box.
The last type of rough diamond sales is by auctions. It is getting to be a popular way of buying rough diamonds at present. It accounts for about 30% of all rough diamond sales. In the past, only large diamonds were auctioned. In a diamond auction, the stones are usually sold in boxes with a specific assortment similar to spot sales. The customers are allowed to buy diamonds without a long-term commitment. They can decide to buy from another producer under different market circumstances. Auctions also allow producers to extend their gains in periods when diamond prices are high. However, auctions are also very susceptible to high price drops. Normally, auctions guide the players to identify the highest price the market will take for diamonds at a given time. A diamond auction may be an exclusive or a public affair.
Diamond companies either stage their own auctions or they hold it through specialists who take some commissions. Since this is cost effective than implementing a long-term contract scheme, small and middle sized diamond producers often use this selling method. However, an exception is the large rough diamond producers BHP Billiton which sells half of its rough diamonds by auctions.
Each type of sale has distinct advantages. Long-term contracts assure diamond supply and it promotes a spirit of stability. Yet, auctions are more or less cheap to administer. In certain market conditions, auctions also allow sellers to increase the prices of their rough diamonds. Spot sales are often held with non-exclusive buyers and it allows for testing the prices of specific types of stones. In long-term contracts and the spot sales system, producers sell rough diamonds on a regular basis to their long time partners or sight holders.
The history of diamonds is often associated with the history of De Beers. This history started with first diamond rush at Klipdrift, along the Orange and Vaal Rivers between 1869 and 1871. (Lee, et. al., n.d.) Two brothers namely, Johannes Nicholas de Beer and Diederik Arnoldus de Beer, found most diamonds inlands. They also discovered diamonds on their Vooruitzigt farm.
As the rush for diamonds publicly erupted in 1871, the De Beer brothers sold their farm to Dunell Ebden & Co. The latter retained the name De Beers as the company started its kimberlite mining. Other shareholders in the De Beers Mining Company were other diamond rush key personnel such as Cecil John Rhodes, his brother Herbert Rhodes, and Charles Rudd. De Beers was formally founded in 1888 in Southern Africa. De Beers monopolized the diamond industry until the 1990's. It established the structure of the diamond market and controlled its greater part.
During the late 1920s, Ernest Oppenheimer took hold of De Beers and created The Diamond Corporation as its central sales agency. (Cramton, Dinkin, & Wilson, 2010) This company sold rough diamonds, which were placed inside a box. Each box contains a special assortment of rough diamonds for each individual De Beers customer. This box was bought as a package. It could likewise be rejected as a package. However, those customers who rejected a De Beers box were not invited to purchase rough diamonds for some time.
De Beers priced each box with a 25 percent discount from its actual market value. It varied its prices and quantities in order to amend the changes in the market prices of the diamonds. Customers who were found out buying rough diamonds outside De Beers' outlets were penalized. De Beers supplied them with poor quality rough diamonds at even high prices. This was to send a strong message to its diamond buyers that cheating was not allowed for their diamond buyers. De Beers' market structure discouraged the supply of polished diamonds. Its main preoccupation was to assure the customers that they have an ample supply of rough diamonds and its demand continued to soar. Customers tried to plea with De Beers to improve its diamond quality and increase their supplies.
As the demand for diamonds grew, De Beers had to contend with the other diamond supplies being discovered outside South Africa, where it got most of its supplies. Diamond explorations were already started in Russia, Zaire and Angola. De Beers tried to suppress the supply market by enjoining these new players into their diamond cartel. However, some mines in Australia and Zaire chose to directly sell to buyers during the 1980's and the 1990's.
Hence, the advent of the open competition in the rough diamonds sales began. De Beers lost its monopoly and thus, the prices of rough diamonds became lower. Some mines like those at Zaire were recruited back to the cartel but some companies chose to operate on their own. Other prominent industry players opted not to join De Beers and these companies like Rio Tinto stood out as today's long lasting players in the global diamond market.
During the 1980's and the 1990's, De Beers slowly decreased in market shares. It held 80 percent of the rough diamonds market in the 1980's but after twenty years, this was reduced to 65 percent. In 2005, it had a mere 43 percent. Much of this loss can be attributed to increased production in localities where De Beers did not have a stronghold, specifically in Australia, Canada, and Russia.
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The company has 20 mines distributed among South Africa, Namibia, Botswana, and Tanzania. It engages in joint ventures with local governments and other companies such as Louis Vuitton for diamond jewelry. It also manages its South African mines, Consolidated Mines, Ltd. and The Diamond Trading Company, which retails rough diamonds for De Beers and its partner companies. At present, The Diamond Trading Company constitutes more than 40 percent of the world's diamond production. (Rudnicka, 2010)
With its hand in many aspects of the global value chain, De Beers has proven itself in the global diamond market with revenues of $7,958 million in 2005. In 2010, it had a total of rough diamond sales of $5.1 billion. (The Global Diamond Industry Report, 2011) This consists of almost 60 percent increase in its rough diamond sales compared to 2009, when it had a devastating 40 percent sales drop due to the global economic recession. De Beers' competitive advantages rest on its historical leadership and well established diamond explorations and mining operations all over the world. It is trying to carve out another competitive edge since the diamond industry has altered its monopolistic model into a more open and competitive one (Chang, 2002).
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