Can De Beers Hold On To Its Hammerlock?

Russians have seen a lot of latter-day business prospectors from the West. But few have more at stake than De Beers Consolidated Mines Ltd., the South African diamond colossus that controls some 80% of world sales. In early September, all of De Beers' top brass, led by its octogenarian patriarch, Harry F. Oppenheimer, fanned out across the republic, wooing officials. At ceremonies in Moscow to mark the opening of the company's first Russian office, Harry's son and De Beers Deputy Chairman Nicholas F. Oppenheimer toasted "the momentous event for De Beers."

Indeed it is. De Beers' efforts to strengthen its ties with the Russians come at a critical juncture. As the company faces the most dire business climate in a decade, its hammerlock on output and prices is loosening. Some suppliers are already bypassing the Central Selling Organization (CSO), the powerful De Beers-led cartel, and selling directly to dealers in Antwerp and Tokyo. De Beers executives admit they will spend $350 million this year just to buy up rogue supplies from thousands of miners in Angola. Beyond that, Russia's post-coup restructuring and its hunger for hard currency could lead to a breakup of its diamond industry, leaving the world awash in lustrous stones. The value of Russia's output is second only to that of De Beers' mines.

Russian producers are already dumping some diamonds in violation of a 1990 agreement with De Beers. The deal provides the Russians with $5 billion over five years in return for giving the CSO exclusive marketing rights for 95% of their uncut diamonds for export. But analyst John Taylor of James Capel & Co. in London figures Russia may be dumping up to 25% of its $1.5 billion annual output. The stones are leaking out while Moscow and leaders of the autonomous republic of Yakutia, home to 99% of Russia's output, are locked in a power struggle for control of the lucrative business.

SLOWER GOING. To win friends, De Beers is going all out. Harry Oppenheimer, the former chairman whose family controls the business, toured the Yakutia fields and sat down with Yakutia President Mikhail Nikolayev. Backing up the talk, De Beers is promising at least $300,000 worth of equipment to set up a new Russian diamond-polishing venture. In the end, Nicholas Oppenheimer believes the Russians recognize that their own interests will be best served by maintaining "the well-being and stability of the industry" by relying on the CSO's marketing clout.

De Beers is anything but stable these days. The first jolt came in late August, when De Beers Chairman Julian Ogilvie Thompson stunned investors with news that first-half profits dropped 26% and a dividend cut was looming. He admitted that De Beers had underestimated the severity of the U.S. recession, the slowdown in Japanese jewelry buying, and the seepage of diamonds from Russia and Angola. He also revealed that the CSO was ordering suppliers to cut output by 25% or to stockpile that amount of production. It's an effort to mop up a diamond surplus this year that's likely to exceed De Beers' estimated sales of $3.2 billion--which would be down 18% from last year. Investors, who had been been led to believe in a second-half upturn, have spurned the stock, knocking 30% off its value.

The pressures appear unrelenting. There's no sign of a turn in the world economy and no shortage of production coming on stream from South Africa to Canada and Australia. Analysts think De Beers may spend up to $1 billion this year to soak up excess supplies and maintain prices--an expenditure that would wipe out its cash balances.In the 104-year history of De Beers, there have been plenty of upsets. Harry Oppenheimer recently predicted the company would emerge successfully from the "grave immediate dangers." But it could emerge much smaller. In the 1990s, "the priorities are different," says London jeweler Theo Fennell. "The market is not as big as it was." That's a sobering thought as De Beers seeks to convince the Russians that their diamond interests are forever.

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