Diamonds are not forever

Efforts were directed towards boosting demand

By the BBC's business reporter Rodney Smith

South African mining group De Beers' grip on the diamond mining industry may be threatened by a new EU ruling

Giving with one hand - taking with the other - is how De Beers, the international diamond cartel operation partly owned by the Anglo American mining giant, must feel about the European Commission.

The Commission has cleared De Beers' joint venture with French luxury goods group Moet Hennessy Louis Vuitton LVMH to create a marketing operation under the new "Forevermark" brand.

De Beers plan

De Beers started to take action some years ago when it realised that forces in the world diamond mining industry that it once virtually controlled - with 85% ten years ago - were moving against it.

As its share of the diamond supply business shrank towards 60% it developed a new relationship with its customers, the so-called sight-holders, the hand-picked 125 or so wholesale experts next in the chain that moves on through gem-cutters, and stone-setters, to retailers.

Joint venture with luxury goods group Moet Hennessy Louis Vuitton

The group shifted from "buyer of last resort", where it controlled the supply of diamonds to the market by stockpiling surplus to maintain an even (high) price, to "supplier of choice" where its efforts are directed towards boosting demand, through better marketing. Hence the deal with LVMH.

Cynical ploy?

Cynical diamond experts point out that there is very little choice for sight-holders. Clearly this is also the Commission view because it has ruled that they appear to be subject to restrictions and trading conditions that violate EU competition law.

Many observers expected the European Commission to object to detail in the LVMH deal, but to leave the new approach to marketing alone.

Not so; while the Commission thinks that De Beers could create and promote the "Forevermark" without LVMH if need be, it is very exercised about the "supplier of choice" programme, which it believes confirms De Beers' as the dominant supplier in the diamond market.

De Beers fears

What worries De Beers is that the EU statement of objections is a preliminary step in what could become full scale anti-trust proceedings. De Beers is barred from direct access to the US market for the same reasons. A similar EU ruling would make life very difficult for the diamond miner.

But De Beers' officers have not been slow to note the form of language used by the Commission - "may violate European competition law" - "could well represent an abuse of position." The door is clearly open to further discussion.

The official De Beers response is that it has received the statement of objections and is reviewing it. It sees and welcomes this as a dialogue, which will be ongoing, and it will be responding positively to the issues raised.

But people in the diamond industry who know the company, say there are some very worried people indeed in De Beers' offices in London, Johannesburg and Kimberley.