The Rise and Fall of Diamonds

by Edward Jay Epstein

  Even with the "mining" of the old dumps, Robinson admitted that the Wesselton and the other mines around Kimberley were rapidly reaching the point of diminishing returns. He estimated that the De Beers mines in Kimberley could begin to run out of gem diamonds as early as the 1980s. Kimberley might then become a ghost town.

  It was here that the diamond invention was devised, and the inseparable connection between Kimberley and De Beers, which is,, still evident when one walks through the town. The zig-zagging streets follow the pattern of the original mining claims. They then end abruptly in an enormous crater that the city literally hangs over. It is about one-quarter of a mile deep and partly filled with rain water, which reflects the buildings on the edge of the city. This abyss is called the Big Hole, and it is what remains of the Kimberley Central mine. This was the deepest open-pit mine ever dug. The ore was lifted out by a system of ropes and pulleys that looked like a giant spider web. Before it was finally abandoned in 1914, it produced over three and a half tons of diamonds. This flood of diamonds not only transformed Kimberley into a city, but it necessitated the creation of a global system for distributing and controlling the sale of diamonds.

  The Harry Oppenheimer House is a darkly tinted glass skyscraper that stands in a private park in the center of Kimberley. Built in 1974, the entire building was designed and dedicated to a single purpose: the evaluation of uncut diamonds. The entire total of all the diamond mines and diggings in South Africa and Namibia are shipped here to be sorted, classified and valued. The diamond consignments generally arrive early in the morning in armored trucks, which drive into a concrete bunker in the sub basement of the building. The sealed containers of diamonds are then sent in a special elevator, which makes no intermediary stops, to the top floor. The seal is broken in front of witnesses, and the diamonds immersed in an acid bath to clean off any particles of dirt. After the diamonds are dried by hot-air jets, they are weighed on a highly precise electronic scale. This weight is then entered into a central computer, which will track the shipment as it moves through each stage in the sorting process.

  If at any point the weight of the categories it has been divided into adds up to less than the original weight of the consignment, the computer sets off an alarm. This automatically locks the doors of the Harry Oppenheimer House. Only when the missing weight of diamonds is found will the computer permit anyone to leave the building.

  Unlike gold or other precious metals, diamonds cannot be assigned a value merely by weighing them. An ounce of diamonds can be worth $100 or $100,000 depending on the quality of the diamonds. Before either a mine-or the South African tax authorities-can determine the value of the diamonds, they have to be sorted into their proper size, shape, color and clarity categories. "By the time we finish, a shipment is broken down into some two thousand different categories. The preliminary sorting is done by a series of ingenious machines that De Beers engineers invented specifically for this purpose. First, the diamonds are passed through a series of sieves. Diamonds that are too small to be cut into jewels are screened out as industrial diamonds. The remaining diamonds are then divided into sixteen different groups according to sizes that range from under to-tenths of carat to over one carat.

  Next, within each group, the diamonds are sorted for shape by a series of machines, which by vibrating and twisting are able to separate flat and triangular shapes from the more valuable tetrahedral-shaped diamonds. At each stage in the separation process, the resulting groups are weighed and registered into the computer.

  Finally, in this rough sorting, the diamonds are fed into a series of X-ray machines, which by employing different filters are able to automatically sort the diamonds into different colors. The opaque and black diamonds, called bort, as well as the smaller brown and golden diamonds, are separated out to be crushed into industrial abrasives. The diamonds are then again reweighed and sent to the floor below for hand sorting.

  Here the gem-grade diamonds are laid out by colors on separate tables, which have been perfectly positioned in respect to the light. A team of sorters,. women in uniformly colored dresses and men in suits, then examine each diamond with a six-power jewelers' loupe to make sure that it is correctly classified. If any of the five sorters disagrees in their opinion, the chief sorter, John Gie, is called in to arbitrate and make a final decision on that particular diamond.

  "These are all highly skilled and trained quality controllers," Gie explained to me. All are given periodic eye examinations by De Beers and are tested on their ability to match unsorted diamonds to the De Beers sample set. This set contains some 240 different shades of colors and shapes which serve as a De Beers standard for sorting operations in both Kimberley and London. After every gem diamond is checked for microscopic imperfections representatives of the Diamond Producers Association, which represents individual producers as well as the De Beers-owned mines, are allowed to question any classification they disagree with. In fact this generally is nothing more than a formality.

  "A single diamond can be examined as many as ten times," observed Gie. When everyone has agreed on the proper classification of each diamond, the data is fed into the computer. As each diamond is finally weighed, the computer assigns a dollar value to it according to a complex formula. The computer then instantly tallies up the total value of the shipment and credits that amount to the account of the individual mine.

  A small percentage of these sorted diamonds are retained at Harry Oppenheimer House and distributed to a select number of local South African dealers. All the rest of the diamonds of South Africa and Namibia are shipped in sealed containers by air to the Diamond Trading Company's headquarters in London. These consignments from Kimberley amounted to some 5,400,000 carats and accounted for about half of all the gem diamonds shipped to London.

  I next followed the trail of diamonds from the sorting house in Kimberley to the Diamond Trading Company in London. The trip to the African mines had explained how diamonds were extracted from the earth, but this was only a rudimentary part of the diamond invention. The crucial element in the invention was controlling the supply available to the major diamond cutters and manufacturers, and this allocation took place in London.

  PART TWO THE GENIUS OF THE INVENTION

  [6]

  The Rules Of The Game

  On the special calendar that De Beers sends to some 250 chosen clients, there are ten circled days on which diamonds are distributed. On these designated dates, the clients, who include diamond-cutting factories in New York, Tel Aviv, Bombay, Antwerp and Hong Kong, come to Number Two Charterhouse Street in London to attend what is called a "sight." These occasions, which occur every five weeks involve the transfer of a pre-selected number of diamonds from the De Beers stockpile to the diamond-cutting industry around the world. At the sights in 1980, for example, De Beers distributed more than $2 billion worth of uncut diamonds that would eventually be resold in the retail market for more than $8 billion.

  The block-long building at Number Two Charterhouse Street is the headquarters of the Diamond Trading Company.. Its four-story-deep vault holds most, if not all, the world~s supply of uncut diamonds. As clients arrive at the fortress-like entrance, they are met by uniformed guards and are escorted to a reception room on the second floor. One by one, the clients are then taken to private viewing rooms, which all face the northern light. Each room is equipped with an electronic scale for weighing diamonds, a magnifying glass for evaluating their quality and a telephone for consulting their associates.

  After a brief wait, a guard delivers a small cardboard box to each room, weighs the contents on the scale and then leaves. Inside the box are a number of paper envelopes containing uncut diamonds that look like bits of broken glass. The type, quality, and exact weight of each diamond is marked on the outside of the envelope. On a sheet of paper accompanying the box is the price of the diamonds. The price of a diamond is heavily dependent on its quality. A discolored flat diamond weighing one carat may be worth no more than $50; but a
flawless, colorless and octahedron diamond of the same weight may be worth $10,000. The price tag for the entire box may vary between $1 million and $25 million.

  In these 200-odd shoe boxes are most of the diamonds that will eventually be sold in engagement rings and other jewelry throughout the world. The determination of who gets which diamonds in their shoe boxes completely shapes and orders the multibillion-dollar diamond business. The man who makes this decision at Number Two Charterhouse Street is E. M. Charles, a tall, gray-haired man whom everyone in the trade calls Monty.

  Monty Charles has been close to the Oppenheimer family since he was a child. In the 1930s, his father owned an inn at Brae that was a favorite weekend retreat of Otto Oppenheimer, an uncle of Harry, who was then the director of the Diamond Trading Company in London. Oppenheimer took a liking to young Monty Charles and persuaded him to come to London to work for him as a sorter of diamonds. When the Second World War began, Monty Charles enlisted in the British Army. Soon afterward he was captured by the Japanese and forced to take part in the infamous death march. He was one of the few British officers who survived the ordeal.

  In 1945, he was released from a Japanese prisoner-of-war camp. When he returned to England, he was again employed by the Oppenheimers at the Diamond Trading Company. A hard, determined man, he rose within years to the position of managing director. Nominally, he worked under Sir Philip Oppenheimer-Otto's cousin, but as far as most of the clients were concerned, Monty Charles was the court of last appeal for them.

  Before each sight takes place, Monty Charles has to decide how many diamonds of each quality will be distributed m all, and then how this supply will be divided up among different clients. To begin with, before each sight is held, Monty Charles has to himself have a dependable picture of world demand for diamonds. A full-time staff of economists and researchers are employed by the Diamond Trading Company to track such crucial indicators as the rate of family formation in the United States and Japan, the economic conditions in each country, and the amount of income after taxes that might be available to buy diamonds. From this, the demand for diamonds is estimated. Next, market analysts calculate the number of diamonds that jewelry stores, wholesalers and diamond cutters already in their inventories and how many diamonds are in the "pipeline," as the route all diamonds between De Beers and retailers take is called. N. W. Ayer, the cartel's advertising agency, assists here by surveying retail stores and asking in telephone interviews about the quantities of the diamonds that they have on hand. Diamond Trading Company executives are responsible for also making regional assessments based on reports from De Beers' partially owned subsidiaries in Israel, Belgium, India and Portugal. Through this private intelligence system, the Diamond Trading Company is able to ascertain the categories of diamonds that are either in short supply or are a glut on the market. For example, if small yellow diamonds appear to be in excess supply, they are omitted from the boxes in the next sight.

  About ten days before each scheduled sight, the staff makes a final determination of the total number of diamonds to be distributed in each category. The sorters then take this quantity of diamonds out of the vault and lay them on tables, according to size, shape and color in the sorting room on the third floor of the Diamond Trading Company. The massive display of glittering diamonds is truly extraordinary: When, for example, I was shown around the sorting room, in January of 1979, there were more than a quarter-billion dollars worth of gem diamonds heaped onto the tables.

  Moving among these tables strewn with diamonds, Monty Charles and his staff decide which clients are to receive which diamonds. About a month before a sight takes place, clients submit requests for the number and types of diamonds they want. Most clients receive, however, not what they asked for but what Monty Charles decides to give them. There are, after all, only a limited number of really lucrative diamonds distributed at each sight, and those clients who receive a large share of them will prosper-and be able to expand their businesses. For the major diamond dealers, the objective is to increase the allocation of valuable diamonds that they receive in their shoe box at each sight. It is, as one dealer put it, "the name of the game." But it is Monty Charles who spells out the rules of the game.

  The first rule: No one may question the authority of the Diamond Trading Company to decide who gets- which diamonds. Monty Charles, as director of the operation, must be accepted as the sole arbiter of both the number and quality of the diamonds placed in each box. Since the number of uncut diamonds a manufacturer receives roughly determines his volume of business, and the quality of diamonds determines his profitability, the allocation of diamonds is a crucial factor in surviving in the diamond business. Yet no client may request a larger-or smaller-consignment of diamonds than he receives. Nor may he seek redress from the Oppenheimers or any higher executive of De Beers. Monty Charles's decision is final.

  The second rule: There shall be no haggling over price. The price for each of the 2,000 classifications of diamonds is fixed by De Beers, and determines how much money the mines in Africa and Siberia will be credited for the diamonds that they shipped to the Diamond Trading Company. De Beers can change the price at will, without any advance notice, or add a "surcharge." Since the price that De Beers charges its clients at sights is usually at least 25 percent below the wholesale price for uncut diamonds, the privilege of being invited to a sight is worth about one-quarter of the value of the box. Even when wholesale diamond prices are depressed, clients are still expected to pay the fixed price, which may be above prevailing market prices. This is the price for admittance to future sights. If a client refuses to pay this price, he may not receive an invitation to future sights. For example, when wholesale prices fell in the 1974 recession, one large distributors of diamonds in the United States, refused to pay more than the fair market price for its box. As a penalty, it was not invited to another sight for three years, causing it to lay off workers, close factories and forgo profits, and when it allowed to attend another sight, it found that Monty Charles had filled its box with low-quality diamonds that were only marginally profitable to cut, which it now accepted.

  The third rule: Take the entire box or none at all. Diamond mines produce diamonds of all sizes, shapes, colors and clarities. Some diamonds, such as the octahedron-shaped clear stones, are relatively easy and profitable to cut and polish into jewels. Other diamonds, such as the twisted crystals called macles, require enormously skilled labor and yield low profits. If manufacturers were allowed to choose only the more profitable diamonds in their box, De Beers would be left with all the unprofitable diamonds. Monty Charles therefore arranges a "series" of diamonds for each client in which the less profitable diamonds are mixed in with the more profitable gems. Under no circumstances may clients pick from this series the diamonds they want. They must accept all-or none.

  The fourth rule: No client may resell the diamonds in his box in their uncut form without a special dispensation from Monty Charles. To maintain its international monopoly over the supply of diamonds, De Beers must control the world stockpile of uncut diamonds. If it permitted its clients to resell their boxes, some outside party could amass its own stockpile by bidding for the boxes. This actually occurred in 1977, when Israeli dealers paid a premium of up to 100 percent to De Beers clients for their unopened boxes. Many clients, seeing the opportunity to double their money overnight, took advantage of this windfall. The result was that by 1978, the stockpile in Israel was rapidly approaching in size De Beers' own stockpile in London. If the Israelis suddenly panicked and threw their uncut diamonds on the market, the price would collapse. If the Israelis continued to amass diamonds, they would be in a position to offer their own sights and undercut the mechanism De Beers had invented for controlling the market. De Beers succeeded by gradually forcing the diamonds out of Israeli hands in 1979. To prevent a recurrence, Monty Charles insisted that clients must immediately cut and polish all the diamonds supplied to them in their boxes and then return the cardboard containers to
assure that no one was selling their sealed boxes. He dramatically demonstrated that violators of this edict would be severely punished by purging some forty clients from the sights for reselling some of their uncut diamonds. His retribution was not lost on the other clients.

  In some cases, a select number of clients are permitted to act as sub-distributors for De Beers and resell their diamonds to small cutting factories. Clients with such a dispensation are given what is called a "dealer's sight" (as opposed to a "manufacturer's sight"). They are expected to sell uncut diamonds only to trustworthy manufacturers, and are held accountable for any leakage of their diamonds into private stockpiles.

  The fifth rule: Clients will supply De Beers with whatever information, it needs to assess the diamond market. Before attending a sight, a client must fill out a detailed questionnaire, specifying the number of uncut diamonds he has in inventory, the number of diamonds in the process of being cut, the number of diamonds previously sold, and all other relevant details of his business. He further estimates his future sales in each category. This data is processed through the computer at Charterhouse Street and helps provide a picture of the number of diamonds in the pipeline. The entire System requires that no more diamonds be released I from the stockpile than the public can absorb.

  Indeed, to make sure that its clients are not secretly disposing of or privately stockpiling diamonds, the Diamond Trading Company requires that they submit to a "diamond audit." In this procedure, a De Beers representative pays a surprise visit to a client's cutting factories to see the financial records, the actual inventory of diamonds, machinery, and number of employees at work. He then makes his own estimate of how many diamonds the client is cutting per month. If this tally does not square with the number of diamonds the client had received at the London sights, the discrepancy is reported to Monty Charles.