Research Proposal on "De Beer's International Diamond Monopoly"

Research Proposal 5 pages (1744 words) Sources: 8

[EXCERPT] . . . .

De Beer's International Diamond Monopoly

Company overview

De Beers Consolidated mines was formed in 1888 in South Africa from the merger between the companies of Barney Banato and Cecil Rhodes. The new entity was the only one to have diamond mining operations in the country. One year later, Rhodes signed an agreement with the London-based diamong syndicate in which the former agreed to buy a fixed amount of diamonds per year at an agreed price, thus, keeping under control both the output of diamonds and their price (Wikipedia, Accessed March 09).

The Diamond Trading Company, De Beers Group's distribution arm is sorting, valuing and selling approximately 40% of the world's rough diamonds from the value point-of-view. The De Beers Group has either joint-ventures or wholly-owned interests in South Africa, Bostwana, Namibia and United Kingdom and has shops in many other countries, except in United States. This last market, despite being the second largest in the world as size (Associated Press, 2004), is one in which De Beers sells its diamonds through intermediaries since the World War II, which corresponds to the moment the company it was charged for the first time with price fixing. In 2004, the diamond seller was fined $10 million in Columbus, Ohio as part of an agreement that resumed the company's selling activity directly in the U.S. market. However, this wasn't the first charge the company was brought in the U.S. In 1994, De Beers was charged along with GE for keeping diamond prices artificially high at a worldwide level. The charges were dismissed as the U.S. courts didn't have the jurisdiction outside the U.S. And De Beers is headquartered in South Africa.

The monopoly model the company adopted ended in the early 2000, when producers from different countries, such as Russia and Canada started distributing their diamonds outside the De Beers channel. Today, the business model includes social responsibility. The diamond giant has business interests in Bostwana, where its activities account for approximately 1/3 of the country's GDP (Nocera, 2008). Corporate social responsibility include activities, such as building infrastructure or increasing awareness regarding HIV. The new business approach is also meant to detach the company's image from the armed conflicts generated by this industry.

Monopoly status

In 1990, De Beers' diamond inventory was evaluated at $5bn and at that point in time the company was distributing roughly 80% of the world output of diamonds, being the undeniable market leader of the industy and also an "unapologetic monopolist" (Nocera, 2008), whose purpose was to maintain the price of diamonds high by controlling the supply. The company had offices in a large number of African countries, which generate most of the diamond output, thus enabling the monolopy to collect almost all the stones as they were mines. Some of these stones were later sold to diamond retailers just enough to meet a small part of the demand. According to Porter et. al. (2007), the world demand for diamond was in excess 1.2bn carats in 2000, which corresponds to more than 10 times the production of natural diamonds (Olson, 2002). The practice of buying inventory and selling only a small part of it had a major effect on world supply, this later one being kept to a very small level. The strong, intense marketing activity meant to associate diamonds with something small and precious stimulated an artificial demand for these stones. In 1947, the company lauched one of the most famous advertising slogans ever "A diamond is forever." The slogan was meant to revive the declining American market.

The overall effect of stockpilling $5bn worth of diamonds and of manipulating the laws of supply and demand was an artificially high price, created by a manipulated perception that diamonds are rare products that should be expensive.

De Beers' monopolisting power caused civil wars in the producing countries, as the company was continually buying diamonds as they were mined and all the money cashed for the rocks was used to finance arms for rebels. The company's involvement in armed conflicts happened as it was trying to control the supply of diamonds, thus buying them from any group that was selling them, including here RU, UNITA or any other rebel group that was fighting with the Democratic Republic of Congo (Smith, 2003). According to Smith (2003), in 1996 and 1997, about one fifth of De Beers diamonds were Angolan and UNITA, the rebel group whom the company was dealing with, was controlling roughly 70% of the country's production. The Democratic Republic of Congo and Angola are among the most well-known African countries in which the diamonds industry financed and provoked major armed conflicts.

The report called "A Rough Trade: The Role of Companies in the Angolan Conflict," issued in 1998 by the British human rights organization Global Witness, accused De Beers to have bought diamonds from the rebel group UNITA in order to maintain market stability or better said to maintain the prices hig by controlling the supply. The company's immediate reaction was to deny any allegations. However, one year later four other human rights organizations joined Global Witness efforts and together they launched the "Fatal Transactions Campaign," whose goal was to raise awareness on how diamonds affect the life in Africa. As short as two days after the campaign was launched, De Beers publicly announced an embargo on Angolan diamonds and soon after it declared the end trade with outside markets. Thus, the company was able to guarantee that their diamonds are conflict-free.

In the 1990, companies that were part of the De Beers cartel and exploring maintly outside Africa slowly renounced collaboring with this group and sold the diamonds outside of this, thus breaking the cartel. Additionally, in the early 2000, the diamond industry was lagging behind the luxury goods industry, which determined the company to change its strategy. The strategy included highlithing social challenges and a focus on innovation.

Relation to Christianity

In 2000, a document called the Fowler Report was issued by a body of UN experts, implicating "two current African presidents as well as the government of Bulgaria and the world's largest diamond exchange, in Antwerp, Belgium, in the methods that rebels have used to smuggle Angolan diamonds out for sale, enabling them to buy weapons to sustain decades of civil war" (Crossette, 2000). Two months later, South Africa's Ministry of Minerals opened the so called Kimberley Process, whose name comes from one of De Beers' first mines. During this process, governments of various countries agreed upon an international certification scheme that would guarantee that diamonds imported with this certification would be conflict-free. The reasoning behind this approach was that the prohibition of uncertified diamonds would cut-off the major finance source for arms for the rebels in the producing countries.

Nowadays, De Beers' business conduct follows the so called best practice principles. These principles implies that both De Beers and the companies they work with comply with a number of standards regarding three main areas: business, social and environmental responsabilities (De Beers corporate website, Accessed March 09). The business responsabilities refer to all operations, which have to act responsably and according to the law. The social responsabilities suggest that the company should generate real social value for the communities they work in. Finally, the environment responsabilities ensure that the company's operations are in accordance with environmental standards.

Christianity, or any religion for that matter, can be seen as a monopoly. A church can be seen as a firm that markets the trust in God. Consumers' acceptance of the church's products or services depends on its reliability, which means that the church has to protect its brand name and avoid any activity that might serve as evidence of its dishonesty or insincerity. if, hipothetically speaking, one church (say the Christian one) would achieve monopoly, the potential entrants would be subject to harsh penalties, plus the church would behave like a typical monopolist and equate marginal revenue to marginal cost to reap of monopoly profits (e.g. pay money for the salvation of your soul). Finally, consumers are forbidden from choosing the least cost option, which should damage the individual welfare.

Conclusion

The case of De Beers, probably the largest diamond marketer ever shows the world how the monopolies can use their power to generate conflicts in undemocratic coutries if it's within their reach to do so. It also shows the world that once awareness is raised regarding the gravity of such actions, monopoly power can be restriction or even eliminated.

Diamonds are still perceived as luxury products and they still serve as a means to finance arms for rebel forces in many poor countries because nowadays the diamond industry is not dominated by one company, but by many and not all of them comply with the certification rules that ensure that diamonds come from conflict-free areas. Many diamond merchants are either ignorant or careless regarding the origin of the diamonds they sell and with or without knowledge they finance and thus perpetuate conflicts in poor countries.

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