The 2007 movie Blood Diamond must have been tough on DeBeers, right? Well I did some digging of my own…

In the diamond valleys of Angola’s remote north-east, guerrillas control many of the richest diamond deposits. There, illegal diamond diggers and army officers, buccaneers and foreign fortune-hunters compete for a patch, scraping at the ground with tin cans and fingernails, or plunging underwater from wooden canoes to dig out the gems from the gravel beds of the Cuango River. There are no rules here. Guns are rife, and for hire. Murders, ambushes and kidnappings are common. “It’s like the Wild West…”

This is not a tale of the Kimberley diamond rush of the 1870’s, but an extract from an Economist piece dated 1997. The year previously, De Beers spent some $15m each week mopping up Angolan diamonds, mostly in Antwerp, no questions asked.

The diamond industry has seen more activity in 100 years than most of those little stones have in a couple of billion. But to recount this tale without mention of De Beers would be more than remiss.

So lets venture back and begin with Cecil Rhodes, who first hatched his plans for a diamond empire a century ago. He observed that, uncontrolled, the industry dug out too many diamonds, flooded the market and prompted a collapse in prices. Apart from low-quality industrial diamonds, the stones had no practical use that would help prop up their price. The answer was to support prices artificially by seizing control of all the mines.

In 1888 Rhodes founded De Beers Consolidated Mines, merging two of the biggest mines in South Africa (De Beers and Kimberley). From there, he went on buying up the country’s diamond mines until he controlled 90% of the world’s gemstones, most of them extracted by pitifully paid African workers under fierce surveillance.

In 1917, Sir Ernest Oppenheimer formed a mining conglomerate called Anglo American to exploit the gold mining potential of the East Rand. In 1926, Anglo American became the largest single shareholder in De Beers, of which Sir Ernest Oppenheimer became chairman in 1929 (and whose family still controls De Beers and which is thought to be worth around $4.5 billion today). Based upon more or less the same principle as Rhodes had nearly 40 years previously, he set up the Central Selling Organisation, the sales and marketing arm of De Beers.

De Beers varied its stocks of diamonds, and directed its partners to hold theirs back too, depending on market conditions. In 1977 for instance, a boom year, it held just $253m of the stones. Twenty years later, a turbulent time for the industry, the diamond stocks stashed away in the De Beers safes were worth a staggering $4.1 billion.

This manipulation does not mean that no diamonds are genuinely scarce. ‘Fancies’, or unusually coloured diamonds can be extremely rare and fetch huge prices. Small, plain diamonds, however, are in fact not all that scarce. Their reputation for rarity comes in no small part from man, not nature: between 1986 and 1996, average prices of diamonds grew by 50%; again like magic, this took place despite the fact that over the same period more and more diamonds flowed onto the market.

At Charterhouse Street in London, De Beers decided which broker got what stones, and at what price, based on their reading of the market “and on our intelligence”. When a broker was handed a little brown box containing his quota, he could reject it altogether, but he could not start quibbling about the selection or its price.

Through this system, De Beers controlled the supply of about three-quarters of the world’s rough (uncut) diamonds via its marketing arm, the Central Selling Organisation (CSO). It mined half the world’s diamonds itself, in South Africa, Namibia and Botswana and for decades, if anyone had rough diamonds to sell on the side or if some seeped onto the market, De Beers bought these too, adding them to the mix, sucking them into its system through contracts made with other diamond producers.

Wind forward one decade to 2007 and much has changed, although the allure of diamonds still rests on one great illusion above all: that ‘a diamond is forever’. That clever marketing slogan first invented in 1947 by De Beers’ American advertising men and still used today, sells two dreams in one: that diamonds bring eternal love and romance, and that diamonds never lose their value.

It was a clever manipulation of desire that supported the control of supply and it is Harry Oppenheimer, son of Sir Ernest that can be largely thanked or it, for it was he who had the idea to turn diamonds into an essential middle-class accessory, a statement of aspiration to luxury. He fixed in the public imagination an instant association between diamonds and romantic rites of passage.

In 1939 he launched the first American advertising campaign. Two years later, the sales of diamonds in the US had leaped by 55%.

De Beers continues to entice consumers the world over with clever campaigns; it was they that revived an old American custom of the eternity ring – a band to celebrate the tenth wedding anniversary – which saw the share of women wearing a diamond anniversary band increasing more than fourfold. De Beers too is the reason why 70% of Japanese women wear a diamond engagement ring when in the 1960s that number was about 5%.

De Beers has delivered big and stable revenues for governments of diamond-producing countries. Now though, this stable, established and monopolistic system is falling apart. The past 15 years has seen the end of apartheid in South Africa, the fall of communism in Russia, the opening of major mines in Canada, and the emergence of a worldwide movement against ‘conflict’ diamonds.

At the same time, other big miners got hold of their own supplies of diamonds, far away from southern Africa and from De Beers’ control. In Canada, Australia and Russia, rival mining firms have found huge deposits of lucrative stones: BHP Billiton, Rio Tinto and Alrosa have gradually been chipping away at De Beers’ dominance for two decades. These developments have pummeled the diamond industry and forced its central players – most notably De Beers – to change the nature of their trade.

In 2000 De Beers agreed to buy less of its rivals’ gems. The seller of 3/5 of the world’s uncut gems agreed to pay $250 million to settle lawsuits in the United States, which meant that more rough diamonds were available on the open market, so there would be a genuine competition and De Beers’ long-running primacy could effectively be challenged by its biggest competitors.

It is a painful shift from where it once was but while De Beers knows that its ability to control world supplies is dwindling, it is still the biggest diamond producer. And rival mining firms do share one big interest with it: high prices for the stones they dig from the ground. That is why, although it is under pressure, the central clearing system that sustains high prices could yet survive a bit longer. Rather than controlling a pure monopoly, a quasi-cartel can stop the market from opening fully.

However, there is another challenge which is proving much more troublesome and threatens to break up entirely the way De Beers organises the industry and it goes under the name of Lev Leviev.

Leviev, an Israeli of Uzbek descent and like the Oppenheimers, has made himself very rich from diamonds. Leviev has factories in Armenia, Ukraine, India, Israel and elsewhere. These give him the power to challenge De Beers’ central clearing house and seek instead to channel stones directly, and at a lower price, to his own polishers. His Lev Leviev Group is the world’s largest cutter and polisher of them; he has mining interests too. And Mr Leviev recently moved into diamond retailing and struck a deal in May with Bulgari to market Leviev-branded stones.

His breakthrough came in Russia after having cultivated close ties with Russian politicians, including Vladimir Putin (long before he became president); Mr Leviev was asked to help the Soviet state-owned diamond firm set up local factories 15 years ago. He agreed and formed a joint-venture with the state firm, now called Alrosa, but insisted that stones for the factories be supplied directly from Russian mines, rather than diverted through De Beers’ central system.

De Beers was furious at the loss of supply, but the factories got their local stones. When the factories were privatised, Mr Leviev somehow emerged as the exclusive owner. What happened in Russia set a pattern for clashes elsewhere. Mr Leviev has found that governments welcome factories that create jobs and add value to the diamonds they export; it is a smart way to challenge De Beers.

In the early 1990s De Beers’ was producing 45% of the world’s rough diamonds, but selling about 80% of the total supply from its London marketing outfit. But sitting on a big inventory was not good for financial returns. At the same time as regulators in America and Europe were calling for more competition, the stories abounded about atrocities committed by diamond-financed rebels in Africa. So after new management arrived in the late 1990s, De Beers changed tack. Its main trading outfit stopped buying diamonds on the open market. The company de-listed in 2001 and is now owned by Anglo American, the Oppenheimer family and the government of Botswana. It has settled its long-standing antitrust dispute with American regulators and is undergoing measures in order to promote competition.

As the market becomes more dynamic, De Beers is investing heavily in exploration, developing four mines in Canada and South Africa and selling underperforming operations. The diamond giant has established a chain of jewellery shops in a joint venture with LVMH. It now spends about $200m a year on marketing, which has helped to boost sales of diamonds, particularly in Asia. Marketing is also vital in persuading people to buy the real thing. Synthetic diamonds have captured 90% of the industrial market, but have made few inroads into jewellery, at least so far.

Others are anticipating change in the industry too: Africa, which produces 60% of the world’s diamonds, wants to do more than just supply rough stones. By 2009, all De Beers stones from around the world will be sent to a swanky glass building in Botswana’s capital to be aggregated. African producers are also keen to cut and polish their own diamonds, which adds 50% or so to the value of rough stones, and even move into the jewellery. Although it remains a big trading hub, Antwerp is no longer the world’s cutting and polishing centre, and Israel has suffered as well. Almost all diamonds are now cut and polished in India or China, but African producers hope to get a share of the business.

And what of the blood diamonds that have come into the public arena? In fact only a few African economies have actually benefited from diamonds, while Angola, the Democratic Republic of the Congo (DRC), Liberia and Sierra Leone are still recovering from widespread devastation resulting from wars fuelled by diamonds. It is believed that diamonds are being smuggled out of the rebel-held north of Cote d’Ivoire and out of eastern DRC, and continue to be used for money laundering, tax evasion and organized crime.

Today, Global Witness, a pressure group, say these blood diamonds make up a tiny fraction of world production. Although it is a big step forward, the Kimberley process – a certification scheme set up in 2002 to ensure that diamonds are not paying for weapons – is developing but of course is not yet perfect, and dodgy diamonds can still find their way onto the market, the difference now being that customers at the retail end of the supply chain now want to know where their diamonds come from and want a guarantee that they are clean.

This is good news for those producers that can demonstrate the provenance of their stones. Canada has developed a certification scheme for its diamonds, and since 2004 De Beers has been selling some stones in Asia with its Forevermark, a microscopic engraving that guarantees their origin. Small producers, such as Petra Diamonds, are following suit although the only way to determine the exact source of a diamond is to document all movement of the rough diamond to ensure when and where mining occurred. That is difficult given that the conflict diamonds are smuggled into other countries to enter the legitimate diamond supply chain. And the future? While the idea of commoditisation of diamonds has met with resistance in the past – many retailers say a more structured market could threaten the emotional allure of diamonds – with ever developing technology, new ways are being developed to make them a standardised, trade-able commodity. A recognised diamond product that is openly bought and sold with a price that is tracked and followed could be traded like other commodities and bought by investment funds. A pricing benchmark would enable miners in the industry to hedge or sell forward, rather than tie up sums in stocks.

De Beers has said that commoditisation will not damage the marketing potential of diamonds, but that it has no immediate plans to get into commoditisation. Martin Rapaport, founder of New York-based Index, the world’s largest internet-based diamond-trading platform, is holding regular open online auctions and will publish the prices. His platform will offer guaranteed delivery and payment, along with clearing house services.

De Beers has closed its London sorting office on 19 Charterhouse Street, a clear sign that Botswana is seeking to become the new sorting and sales centre for De Beers’ diamonds.

The diamond wedding ring is becoming even more popular; it achieved an acquisition rate of 51% for married couples in the top 50 international cities. With the slogan “A diamond for yesterday, a diamond for today and tomorrow, but why should we wait until tomorrow?”), the DTC gives the message to today’s women that every moment is an occasion to renew one’s love for the other.