Backgrounder: Covering the Diamond Industry. by Lauren Weber. Introduction

1 of 8 6/28/2010 12:23 PM Backgrounder: Covering the Diamond Industry by Lauren Weber Introduction Diamonds don t let the sparkle fool you. Behind the glittery jewels shown off at celebrity gatherings and royal coronations is a decidedly unglamorous and secretive business. It s a business that revolves around a substance whose portability and untraceability has lent itself over the last century to arms dealing, drug trafficking and other illicit activities. The diamond industry has received a great deal of negative attention over the past two decades for its product s role in fueling and financing civil wars in Africa, particularly in Sierra Leone, Liberia and Angola. In 2000, the governments of major diamond importing and exporting nations, along with industry leaders such as mining giant De Beers and the jeweler Tiffany, initiated the Kimberley Process, a system for certifying that diamonds are mined and traded legitimately. However, conflict diamonds haven t been entirely eliminated from the market. (More on this below.) In their campaigns defending and promoting the industry, diamond companies emphasize the positive effects of diamond mining, particularly the millions of jobs created and the revenues produced for the governments of developing nations. This promotional rhetoric is worth paying attention to it provides useful benchmarks to which the industry and relevant governments can be held accountable by journalists and public officials, among others. Diamonds The Basics Diamonds are composed of carbon that has been compressed and transformed through the application of intense heat and pressure over the course of millions of years. Rough (i.e. unpolished) diamonds are found in two types of deposits. Primary deposits consist of diamond-laden pipes inside a kind of volcanic rock called kimberlite. These are extracted through underground or open-pit mining conducted by large, well-capitalized corporations. Secondary, or alluvial, deposits are diamonds carried from primary deposits via erosion to riverbanks and ocean shores, and are generally mined by poor people or makeshift operations using sieves and pans. (The exception is alluvial diamonds that end up in deep-sea beds, which are mined by large companies.) Diamonds, one of the strongest materials produced in nature, come in varying qualities of color and clarity, and those qualities partly determine prices. Small, low-quality stones are manufactured as industrial diamonds, and are used in lathes, drill bits and other equipment requiring a sturdy, sharp material. Higher-quality stones become gem diamonds and are polished for use in jewelry. Anyone who buys diamond jewelry is introduced to the four C s, the criteria on which diamonds are graded and priced. These are color, clarity, cut and carat. Color, Clarity and, to some extent, Carat occur naturally. Diamonds range from colorless to red, pink, yellow and blue; the most valuable stones are colorless. Clarity refers to the natural inclusions, or blemishes, that developed during formation; buyers look for the lowest number of inclusions, even though most are invisible to the naked eye. Carat refers to the size of the stone, and cut to the shape and the number of facets. The most typical cut is the 57- or 58-facet round brilliant. Important regions in the diamond industry: The largest diamond deposits are found in many countries in Africa, as well as in Russia, Australia and Canada. Native shepherds and Dutch farmers stumbled on some of the first major deposits in Southern Africa in the 1860s, setting off a diamond rush that continues today. Thanks to improved prospecting technology, new deposits were found in Siberia and Canada in the mid-twentieth century, and the Argyle pipe in Australia the world s largest by

2 of 8 6/28/2010 12:23 PM volume came online in the early 1980s. The majority of the world s diamond supply is extracted from open pits or underground mines, while only a small percentage are found in riverbeds and off-shore deposits. Every country with diamond deposits has its own ownership model. In Botswana, for instance, the largest diamond producer in the world by value, the mines are jointly owned by the national government and De Beers (each has a 50 percent stake); diamonds have long accounted for about 45 percent of GDP and at least a half of government revenue (though this was undermined by a steep dive in world diamond sales as a result of the economic crisis of 2008 and beyond). Russia s diamond mines are majority-owned by the national and regional governments. In Canada, mines are privately owned by corporations. All of these models and especially those that involve government ownership raise important questions for journalists about how diamond-related revenues are used and who benefits from them. In addition, journalists can ask how those revenues will be replaced after this non-renewable resource is exhausted. After being mined, rough diamonds which have an uneven, cloudy appearance must be sorted, cut and polished. Until around World War II, Amsterdam was the world capital of diamond polishing. Because so many stones were cut there, diamond traders arrived in Amsterdam from around the world to buy and sell rough and polished stones. After the war, many diamond merchants and cutters moved to Antwerp. Today, 80 percent of the world s rough diamonds pass through the Belgian city; it is the world s premier diamond trading city. The center of gravity for the polishing side of the businesses has shifted dramatically in the last 50 years or so. New York City became a major cutting center during and after World War II thanks to an influx of European cutters and dealers who had fled the Nazis. On West 47th Street, thousands of diamond businesses are clustered on a single block of midtown Manhattan. In the middle of the century, Israel also began developing a dynamic diamondpolishing business in the cities of Tel Aviv and Netanya, specializing in small stones (under 0.20 carats). But the discovery of new mines in Australia and Russia filled mostly with smaller, lower-quality stones than the African mines created a need for low-cost polishing skills, beginning in the 1960s. A huge polishing industry blossomed in Surat, India, where approximately one million workers cut around 90 percent (by volume) of all diamonds sold worldwide. The largest and most valuable stones are still sent to Antwerp, New York or Tel Aviv to be cut, but Indian firms are trying to move into that lucrative market (the 10 percent of diamonds cut elsewhere account for approximately half the value of all gem diamonds). As the quest for cheap labor continues, diamond companies are now opening polishing factories in other Asian countries, including Vietnam, Thailand and China. After the stones are cut and polished, they are set into jewelry in factories around the world, and then shipped to wholesalers and retailers. The United States accounts for approximately 50 percent of the $60 billion of global diamond jewelry sales; Europe and Japan are other key end markets for diamond products. The Pipeline: The Structure of the Diamond Industry The diamond business functions through a division of labor known as the pipeline, the path a diamond travels from the mine to the retail market. Producers and retailers are separated by layers of middlemen everyone from large, multinational wholesalers to the independent dealers who ply the streets of Antwerp, New York or Mumbai with wallets or briefcases full of paper-wrapped gems. For instance, a diamond may pass from one end of Manhattan s 47th Street to the other in a single day, doubling in value along the way after passing through seven or eight hands. For most of the twentieth century, the pipeline operated fairly rigidly. Each player had a niche (mining, polishing, brokering, wholesaling or retailing) and they rarely crossed into another activity within the pipeline. But recently the categories have begun to collapse; for instance, De Beers now operates its own retail stores, competing with its wholesale and retail customers, and in 1999 the jeweler Tiffany bought a 14 percent share in a Canadian mine (though it sold that share in 2004). While the mining end of the industry is mostly concentrated under a few companies, the rest of the pipeline is extremely fragmented. Below, some background on the biggest players in the business:

3 of 8 6/28/2010 12:23 PM The South Africa-based De Beers Group once sold 90 percent of the world s rough diamonds. Now, due to discoveries of new mines and more aggressive moves by broad-based mining firms such as Rio Tinto and BHP Billiton, its share has dropped to around 45 percent. De Beers was founded in 1888, with prospector John Cecil Rhodes as its chairman. The Oppenheimer family has run the company since 1926. De Beers was a publicly-traded company until 2001, when it was taken private by the Oppenheimers in a joint leveraged buyout between the family, their other firm, Anglo-American, and the government of Botswana. Today, the government of Botswana owns 15 percent of the company; the Anglo American Group owns 45 percent, and the Oppenheimers Central Holdings Group owns 40 percent (see http://www.debeersgroup.com/en/inside-de-beers/family-of-companies/ for an organizational chart). Also, as per post-apartheid Black Economic Empowerment goals, the black-led Ponahalo Investments owns a 26 percent interest in one of De Beers s related companies, its mining arm De Beers Consolidated Mines. Through its sales and marketing arm, called the Diamond Trading Company, De Beers sells its stones to about 125 diamond-cutting and wholesale customers. This elite group of companies called sightholders gather in London and Johannesburg ten times a year (at events called sights ) to buy boxes of rough diamonds. For decades, De Beers controlled the supply and, consequently, the price of diamonds by exercising monopoly control over the industry. It assiduously bought up stocks of diamonds on the open market or through partnerships with other mines, then parceled them out to the market at a rate that kept prices high and relatively stable. But in the 1990s, De Beers saw reasons to make some radical changes. It was losing its monopoly grip on the rough diamond supply, its stock price was stagnant, and growth rates for diamond jewelry were trailing those of other luxury goods. The company began a strategic review aimed at reversing that last trend and helping to modernize the insular diamond industry. The main result was an initiative called Supplier of Choice, which emphasizes streamlining the pipeline and requiring its customers to spend more money on advertising, marketing and branding. Alrosa is Russia s state-owned diamond producer, overseeing all of Russia s diamond mines. Alrosa mines and sells about a quarter of the world s rough diamonds, making it both the world s second-largest producer (after Botswana) and the second-largest seller (De Beers is number one). Alrosa s Russian mines are located in the Siberian region of Yakutia, though the company has also become more aggressive overseas lately, buying up stakes in mines in Angola, for instance. After the Soviet collapse, the federal government took 37 percent ownership of Alrosa, gave 40 percent to the Yakut regional government and divided the rest among the company s employees and a variety of private investors. But the federal government recently took a controlling share, a controversial decision that angered locals and raised concerns about greater federal control over other natural resources. Rio Tinto Group, based in England and Australia, owns interests in everything from copper and gold mines to diamond mines. The firm got involved in diamonds in the 1960s, when it began prospecting in Australia. It now fully owns the Argyle mine there, having acquired its minority partner in the mine in 2000. It also owns interests in Canadian and African diamond mines. BHP Billiton, based in Melbourne, Australia, was formed in 2001 through the merger of BHP and Billiton. It is the world s largest mining company, selling aluminum, coal, copper, oil, gas, diamonds and a host of other resources. Its primary diamond interest is the Ekati mine, in Canada s Northwest Territories, which represents about three percent of world diamond production by weight and six percent by value. The Leviev Group is owned and run by Lev Leviev, a Russian-born, Israeli-based billionaire who has become a major force in the industry over the last two decades. Leviev, who trained as a diamond cutter, was a De Beers sightholder early in his career, but rebelled against the cartel s rigid structure and rules and was eventually kicked off the exclusive sightholder list. He made his first big fortune by helping Russia set up a diamond-polishing industry to cut its own stones and therefore keep much of the value and profits within the country. In 1999, he signed an exclusive agreement for Angola s diamonds with the government of that country, which was then in the midst of a civil war with UNITA rebels. Leviev filled the void left by De Beers, which pulled most of its operations out of Angola in 1999 due to concerns that its Angolan diamonds were helping to finance the UNITA rebel movement.

4 of 8 6/28/2010 12:23 PM Leviev now also has mining interests in Botswana and Namibia. He was one of the first diamantaires to recognize the value of vertical integration, owning everything from the mine to the polishing factories to the retail shops. His close relationships with powerful figures, such as Vladimir Putin of Russia and Jose Eduardo dos Santos, the Angolan president, have brought a great deal of scrutiny to his businesses. Through his other firm, Africa Israel Investments, Leviev has expanded his interests into tourism, technology, fashion and real estate. He now owns several Manhattan landmarks, including the Apthorp, a famous apartment building, and the New York Times s former headquarters in Times Square. Topics and Controversies Conflict Diamonds The diamond industry faced perhaps its greatest challenge over the issue of conflict diamonds, which emerged in relation to wars in Sierra Leone, Angola and Congo during the 1990s. Government and rebel armies frequently fought not over who could most effectively govern those countries, but over who would control their valuable diamond resources. Meanwhile, those same diamonds were also funding the weapons and soldiers who did all the killing and fighting. Hundreds of thousands of people were raped, maimed or killed in these conflicts; rebels in Sierra Leone, for example, became notorious for such tactics as cutting off the arms or legs of civilians. Images of these victims galvanized action in Western countries and in the United Nations, which in 2000 passed a resolution on the role of conflict diamonds in prolonging those wars. In 2006 the film Blood Diamond starring real-life eco-warrior Leonardo DiCaprio did a lot to raise awareness of conflict diamonds. Estimates vary on how many conflict diamonds entered the world market during this period. NGOs said that as many as 15 percent of the diamonds in the market came from illegitimate sources. Many industry groups said the amount never exceeded four percent. Part of the difficulty with tracking conflict diamonds and now in stemming their flow is that diamonds are extremely difficult to trace, even in rough form (once they re polished, it becomes virtually impossible to determine where a stone was mined). They also cannot be detected with metal detectors or other security equipment. And because they re so small, a person can put $1 million of value in a handkerchief and walk through an airport unnoticed. Thus, diamonds are a convenient vehicle for money-laundering, drug smuggling and all sorts of nefarious activities. Rebel armies in those African conflicts were able to easily exchange diamonds for arms and related equipment. Kimberley Process In 2000, the United Nations, national governments, NGOs and diamond industry representatives who worried that their product might be vulnerable to a consumer boycott similar to the one against fur met in Kimberley, South Africa, for the first meeting of what ultimately became known as the Kimberley Process. Together, the participants created a Certification Scheme implemented in 2003 and designed to prohibit conflict diamonds from entering the market. The system requires that rough diamonds be sent to government-run diamond offices, where the source of the stones is checked. They are then placed into sealed containers and given serial numbers and certification documents. Once exported, the customs office in the importing country checks the documents. From that point on, every time the stones change hands, they are accompanied by warranties stating the diamonds are conflict-free. Only countries that have signed onto the Kimberley Process Certification Scheme (KPCS) and have adopted it as national law can legitimately export or import diamonds. As of the beginning of 2009, there were 49 members, consisting of 75 countries, including all the major diamond exporters (the EU countries count as an individual participant). Now, thanks to the KPCS and the cessation of conflicts in Angola and Sierra Leone, the diamond industry and NGOs agree that less than one percent of all diamonds come from conflict sources. (However, NGOs say that conflict and non-certified diamonds still enter the system, partly because dealers and consumers don t ask to see the

5 of 8 6/28/2010 12:23 PM warranties). The United Nations continues to monitor illegal diamond sales; for instance, an October 2006 report to the U.N. Security Council said that conflict diamonds are leaking out of the Ivory Coast into Ghana, an issue the KP countries have taken up by requiring greater controls and reviewing Ghana s KP membership. De Beers s diamond monopoly For close to a century, De Beers maintained a tight lock on the world s rough diamond supply. Whatever stones it didn t extract from its own mines, its Central Selling Organization the London-based sales and marketing arm, now known as the Diamond Trading Company bought up through agreements with other mining companies or purchased on the open market. At times, De Beers controlled about 90 percent of the rough diamond market. Thanks to its hoard of rough stones, De Beers also controlled worldwide diamond prices whenever prices started to soften, De Beers withheld gems until prices rose again. Its vaults were said to contain as much as $5 billion in diamonds in the late 1990s. Within the pipeline, De Beers was often referred to as the Syndicate for the power it exerted over the whole industry. De Beers s strategy the company called it supply management raised the ire of antitrust regulators around the world. U.S. regulators at the Department of Justice investigated the company for years, and brought a price-fixing suit against De Beers and General Electric (related to sales of industrial diamonds) in 1994. The GE case was thrown out of court for lack of evidence, but De Beers remained under indictment and, for years, its directors were unable to set foot in the U.S. its largest end market for fear of being arrested. In 2004, De Beers agreed to pay $10 million to settle the suit. Then, in 2005, De Beers paid over $250 million to settle class-action suits filed against it in the United States, paving the way for the company to begin doing business directly in the U.S. In 2005, De Beers opened its first U.S. retail jewelry store on New York s Fifth Avenue. The European Commission also investigated De Beers, particularly its purchasing agreements with Alrosa. De Beers had been buying up most of Alrosa s supplies since the 1960s. But in 2005, a Belgian diamond trade group complained that De Beers was breaking European competition laws, and the EC responded by filing charges against the company. In February 2006, De Beers and Alrosa agreed to phase out their agreements, ending diamond sales between the two companies by 2009. De Beers s decision to settle these legal actions coincided with the implementation of a new strategy, one designed to replace its previous monopolistic control of the marketplace. Recognizing that it was losing its grip on the world diamond supply, and that it needed a new framework to support high diamond prices, De Beers hired consulting firm Bain & Co. in the late 1990s. Following Bain s internal review, De Beers unveiled its Supplier of Choice (SOC) strategy. According to SOC, De Beers and its customers would support high prices by stimulating demand by encouraging diamond merchants and jewelers to brand their gems (sometimes by patenting new cuts) and increase their own marketing spending (instead of relying on De Beers to do all the general diamond advertising). Now, instead of controlling a hoard of diamonds and dispensing them into the marketplace at a rate that kept prices high, De Beers has sold off its stockpile and is hoping that a new wave of branding and advertising will keep its business strong, though the global economic crisis knocked a large hole in both its hopes and revenues, as it did everyone else s. Environmental and Labor Concerns Diamond mining creates less adverse impact on the environment than many other types of mining, especially those that use chemicals as part of their extraction process. Still, open-pit mining requires diamond firms to move massive quantities of gravel and dirt (called overburden ), disturbing ecosystems and often leaving loose fill to run off into streams and rivers. In addition, the fuel required to run the heavy equipment used by miners adds to carbon emissions in the atmosphere. In Canada, for instance, the drainage of lakes and digging of mines has resulted in loss of fish habitats and disturbance of caribou migration patterns. Some communities that are affected by mining activities particularly in First World countries such as Canada are

6 of 8 6/28/2010 12:23 PM now making demands about environmental stewardship, including requiring that producers promise to restore mining areas as best as possible once the mines have been exhausted. That means replacing the overburden as well as replenishing topsoil so that vegetation can grow again. Along with environmental issues, watchdog groups have raised concerns about the working conditions some miners face. Particular concern has focused on the alluvial miners who dig in riverbeds to uncover diamonds in places like Sierra Leone. While the country is now at peace, the diggers often toil in conditions that come close to indentured servitude, forced to sell the diamonds they find at below-market prices to people who hold the licenses on the land. Some diggers hand over their finds for a wage of only about $2 per day. Some NGOs, mining companies and industry groups started the Diamond Development Initiative in 2005 to try to encourage better work environments and higher prices for the diggers. Among other things, they educate diggers on the market value of the stones so they will be less likely to be swindled by the buyers. Tips for Reporters The diamond industry has always operated with a high level of secrecy and distrust of outsiders. This is partly a function of diamonds high value and partly a legacy of the trade s origins in the Jewish ghettoes of Europe. Diamantaires have always kept the business closed, by hiring family members and keeping it segregated in their own religious minority groups, whether Hasidic Jews or Indian Jains. The only exceptions to these rules are at either end of the pipeline: large mining concerns dominate the business at the production end, and a few large retailers (Tiffany, Zale s and, increasingly, discounters such as Wal-Mart, Target and Costco) dominate the end market. The secretiveness and insularity make the diamond industry a tough business for reporters to penetrate. To get access to industry players, try to develop a network of contacts and referrals. And as with any business, you ll get the party line from organized groups like the World Diamond Council or the various diamond bourses, but for the unvarnished truth you need to talk to the miners or diggers, brokers, buyers, dealers and wholesalers who populate the pipeline. The issues you may want to explore will vary depending on your country s role in the industry does your country produce diamonds? Does it have major polishing operations? Is it more of a retail market (or growing its profile as a retail market, like China is)? Here are some questions to consider: Who makes money from the diamond trade in your country? Who owns the relevant resources? If your country has diamond deposits, who owns them? Is it the government, or are the mines held privately (by local or foreign companies)? If the government owns the mines, does it have partnership agreements with mining firms? Which firms? What are the terms of the agreements? Who has the leverage in these negotiations? How much revenue (taxes or sales) does your government earn from diamonds? What percentage of the government s total revenue does that represent? How is that revenue being spent? Is it earmarked for certain programs (e.g. public health, education, economic development)? Is the money going where it s supposed to go? What are working conditions like for workers in the diamond industry? Is your country adhering to the requirements of the Kimberley Process Certification Scheme? Do dealers and retailers check for the certification documents? What are the environmental impacts of diamond-related activities? Rough diamonds are a non-renewable resource. What plans does your government have to replace diamond revenues if and when diamond deposits dry up? Do synthetic diamonds represent a threat to your country s diamond revenue? Glossary of terms

7 of 8 6/28/2010 12:23 PM Alluvial diamonds: Diamonds that are transported via water erosion and wash up on riverbanks and ocean shores or undersea beds. People in diamond-rich countries sometimes eke out a subsistence wage from digging these gems using sieves, pans and other equipment to sift through sand, gravel and clay, and then selling the stones to dealers, often at unfairly low rates. The more common method of extracting diamonds is open-pit mining. Bourse: An association (and often a physical location a trading room of some kind) for dealers in rough and polished diamonds. Most diamond-trading cities have a bourse. The World Federation of Diamond Bourses lists 26 member organizations. Conflict diamonds (also called blood diamonds ): Diamonds that are illegally mined and traded to help finance conflicts around the world. The United Nations defines conflict diamonds as gems that originate from areas controlled by forces or factions opposed to legitimate and internationally recognized governments, and are used to fund military action in opposition to those governments, or in contravention of the decisions of the Security Council. The term has primarily applied to diamonds from war-torn areas with significant diamond deposits, such as Sierra Leone and Angola. Gem diamonds: High-quality (e.g. clear, with few flaws) stones that are polished and cut for use in jewelry. Industrial diamonds: Low-quality diamonds that cannot be used in jewelry. Instead, they are used in many kinds of machinery requiring an extremely hard, durable material. Kimberley Process: A gathering of national governments, non-governmental organizations and diamond industry groups that has agreed on a certification scheme to cut down on the trade in conflict diamonds and ensure that as many stones as possible are legitimately mined and sold. The parties in the Kimberley Process held their first meeting in May 2000, organized by the government of South Africa. The Kimberley Process Certification Scheme, mandated by the United Nations, was implemented in 2003. Only the 75 countries that have adopted the Kimberley Process can legitimately trade rough diamonds. Open-pit mining: Large-scale extraction of diamonds from kimberlite pipes. Miners such as De Beers or Rio Tinto dig enormous pits to capture the rough stones. Overburden: The rocks and gravel that are removed in order to dig open-pit mines. Pipeline: Refers to the structure of the diamond industry the path a diamond travels from the mine to the retail marketplace. Most diamonds go through multiple hands, including wholesalers, brokers, polishers and jewelry makers. Rough diamonds: The stones that are extracted from the earth, in their raw form, before they are polished and cut. Sightholders: The 125-or-so direct customers of De Beers. These are generally large, well-capitalized wholesalers and manufacturers. Ten times a year, sightholders gather in London and Johannesburg to buy rough stones from De Beers. Synthetic diamonds: Stones manufactured in a laboratory by simulating the high-pressure environments in which natural diamonds are born. Scientists have been creating synthetic industrial diamonds since the 1950s. Only recently, however, have they developed technology to make gem-quality diamonds. This is threatening to De Beers and other miners, who have demanded that consumers receive disclosure about synthetic diamonds or diamonds that have been chemically treated in any way. Resources and Links News and Information: http://www.diamonds.net the Website of the Rapaport Diamond Report, one of the most comprehensive and credible trade magazines for the diamond industry. All articles are available online. The site tracks daily movements

8 of 8 6/28/2010 12:23 PM in the diamond market. Go to the News button and search from there. (Full disclosure: In 2001, I wrote several articles for the magazine). http://www.jckonline.com Website of JCK, a jewelry trade magazine that keeps tabs on everything from regulatory issues to marketing and branding news. http://www.kimberleyprocess.com The official Website of the process includes useful background and relevant documents Companies and Industry groups: http://www.debeersgroup.com/debeersweb -- De Beers, the largest diamond miner and seller in the world. The Website includes financial statements, annual reports, corporate history and other useful information, albeit told with the company s own slant. http://www.diamondfacts.org a Website sponsored by the World Diamond Council, a trade organization, presenting information and data about diamonds, designed to reflect positively on the trade. The site includes useful background information on the structure of the industry and the formation and mining of diamonds. http://www.worlddiamondcouncil.com Website of an industry trade group, with useful statistics and information about conflict diamonds. http://www.gjepc.org the Website of the Gem and Jewelry Export Promotion Council, a trade group for Indian gem companies, has lots of statistics about the worldwide diamond business along with information about the Kimberley Process and other issues. Watchdog groups: http://www.globalwitness.org Global Witness, a UK-based watchdog, has been keeping an eye on conflict diamonds for years. The site has a section called combating conflict diamonds. Global Witness participates in the Kimberley Process. http://www.pacweb.org the Website for Partnership Africa Canada, an NGO that has been actively involved in the conflict diamonds issue and participates in the Kimberley Process. The Website offers a good and relatively balanced view of the KP s strengths and weaknesses. http://www.amnesty.org Amnesty International s Website includes many reports on conflict diamonds. To find them, do a search for conflict diamonds in the search box at the top of the home page.