Opinion ID: 150495
Heading Depth: 2
Heading Rank: 1

Heading: Deterioration Of De Beers's Market Power

Text: De Beers carried out its cartel activitiesincluding distribution to sightholdersthrough the Central Selling Organization (CSO), [1] an entity established by De Beers for the purpose of coordinating its actions with those of its competitors. Historically, the CSO was responsible for purchasing diamonds from De Beers's competitors, establishing pricing formulas, and setting output restrictions. The CSO's network of agreements and De Beers's status as founder of the CSO had for many years given De Beers nearly complete control over the market for rough gem diamonds. That hold on the diamond industry began to slip, however, during the latter part of the twentieth century, and, by the mid-1990s, it was weakening fast. In 1993, Russia's state-controlled diamond company, ALROSA, flooded the market with low-quality gems to earn cash in the face of financial pressures on the government. In response, De Beers dropped the price of low-grade stones. That action prompted cartel-member Rio Tinto, which operates Argyle Diamond Mines of Australia (Argyle), to cease dealing with the CSO in 1996. Rio Tinto's Argyle mine, like ALROSA, began selling larger numbers of low-quality diamonds than De Beers had previously sold through the CSO. With the low-end of the market moving beyond its control, De Beers turned its attention to higher-quality gems. It initially attempted to retain control over the production and sale of high-grade diamonds by purchasing its competitors' output, as it had done for many decades before. For example, in 1999, it entered into an output purchase agreement with competitor BHP Billiton (BHP) under which it acquired 35% of BHP's total diamond production. That agreement ended in 2002, and again De Beers's efforts to maintain dominance began to fade, as the market for high-quality stones saw the entrance of new competitors and as old competitors brought new mines into production. By 2006, in the overall market for rough gem diamonds, state-owned companies in Angola and the Democratic Republic of Congo collectively controlled 19% of global production; ALROSA controlled 17%, and De Beers controlled approximately 45%. Other competitors, including Rio Tinto, controlled the remaining share of the market. [2]