A Gem Of A New Strategy

For as long as diamonds have been forever, De Beers has been intent on controlling the world supply. Since the 1930s, the South African company's strategy has been as elegantly simple as the gemstones themselves: anywhere in the world that rough diamonds existed, De Beers would be there to mine them or buy them. At one point De Beers controlled 90% of the global diamond supply, sustaining an empire worth $20 billion. But over the past decade, that monopoly has eroded, thanks to the discovery of new diamond reserves and the emergence of upstart producers determined to peddle their goods outside the cartel. De Beers now controls just 60% of the $7 billion market. This summer in London, De Beers all but acknowledged the end of its dominance; the company told its select group of 125 clients that it would no longer be the diamond producers' "buyer of last resort" and would begin to unload its $4 billion stockpile of surplus gems.

Coupled with the company's recent vows to clean up the diamond trade--tarnished by association with African warlords--the strategy may prove a spectacularly profitable act of reinvention. The firm's floundering share price nudged upward after the June announcement, and it got another boost last month, when earnings reports showed profits trebling in the first half of the year. The surge enabled De Beers to pare down its stockpile of rough diamonds--which, because the company no longer has the ability to set prices, has become a wasting asset. De Beers plans to reduce the stockpile by $1.5 billion next year--and to pump the savings into ad campaigns aimed at fostering consumer demand. The company has also launched an aggressive effort to tap new sources for gems. Last month De Beers bought Vancouver-based Winspear Diamonds, which owns a prized deposit in Canada's Northwest Territories.

The company's expansion is at least partly driven by mounting international pressure to stop the trade in "blood diamonds"--stones unearthed in African killing fields that have helped fund conflicts in Angola, Sierra Leone and the Democratic Republic of Congo. De Beers was rocked by disclosures that in 1992 the company bought $14 million worth of diamonds from Angolan rebels and has since scrambled to burnish its public image. In March, De Beers began selling stones with guarantees that they had not originated in war-torn areas. With its London announcement, the company went further, demanding that clients sign assurances not to buy diamonds from outlaw producers.

By supporting the international crackdown on blood diamonds, the cartel is also helping itself by preventing competitors from flooding the market with cheap gems. But while De Beers' cooperation with the embargo may spare the industry the sort of organized boycott that shook the fur trade in the 1980s, it probably won't stamp out trafficking. De Beers claims that only 3% of the global diamond supply comes from African conflict regions. London analysts believe the amount may be as high as 15%.