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Moving Away From The De Beers Monopoly

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Other commodity prices (e.g. gold, silver) fluctuate greatly in response to economic conditions. Diamonds' prices are constantly rising ... – PowerPoint PPT presentation

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Title: Moving Away From The De Beers Monopoly


1
Moving Away From The De Beers Monopoly
  • Presented by
  • Christos A Ioannou
  • University of Minnesota

2
  • Diamond is the only appropriate gem to symbolize
    lifetime love and commitment
  • The company spends 180 million a year worldwide
    to advertise cut diamonds - a product it doesn't
    even sell ...

3
What is De Beers?
  • not retailer
  • not manufacturer

BUT
  • miner and buyer of 70 of the world's
  • rough diamonds
  • arbiter of the prices

4

5
Rough Diamonds
6
Cut Diamonds
7
Jewelry Stores
8
Outline
  • Origin
  • How it achieved its market power
  • How it has managed to control the market
  • How the Monopoly operates
  • Conflict Diamonds
  • Moving Away From the Monopoly
  • Antitrust Laws
  • Technological Advances
  • Lev Leviev

9
Facts about De Beers
  • Most successful monopoly of modern trade
  • Other commodity prices (e.g. gold, silver)
    fluctuate greatly in response to economic
    conditions
  • Diamonds prices are constantly rising

10
  • 20th century, De Beers sold 85 to 90 of the
    diamonds mined worldwide
  • Rockefeller's Standard Oil
  • Gates' Microsoft

11
De Beers is a typical example of monopoly!!!
  • It is almost the sole seller of diamonds
  • Sells a commodity with no close substitutes
  • (created this illusion by advertising)
  • It restricts output and it responds to changes
    in market demand

12
  • Are diamonds rare?

13
  • Before the 19th century
  • Diamonds were exceptionally rare
  • Small quantities in India and Brazil
  • No diamond mines were discovered
  • Nowadays
  • Many diamond mines
  • Republic of South Africa
  • Sub-Saharan countries
  • Siberia
  • Australia
  • Canada

14
Origin
  • 1869
  • First diamond mines in the colonies of southern
    Africa
  • Drastically increased the number of stones
    available
  • 1870
  • Many diamond hunters bought mines

15
Cecil Rhodes
  • Bought the rights to two mines on the farm of
  • Nicolas
  • and
  • Diedrick De Beer
  • in the Cape Colony (now South Africa).

16
Diamond hunters realized that scarcity increases
diamond prices.
  • Had no other alternative than to merge their
    interests into a single entity
  • control the mines production
  • keep the scarcity illusion

17
De Beers Consolidated Mines Limited
  • Established 12th March 1888
  • Rhodes, founding chairman

18
De Beers
  • South African company
  • By 1890, De Beers controlled 95 of the worlds
    diamond production

19

20

21
Wholesalers
  • Group of 10 merchants
  • (London Diamond Syndicate)
  • Agree to be purchasing the entire production from
    all the De Beers mines
  • Resell the diamonds to cutters

22

23
Ernest Oppenheimer
  • Started buying his own mines
  • (Consolidated Diamond Mines)
  • Started competing with De Beers
  • Took over De Beers
  • Chairman in 1929
  • Oppenheimer family still controls De Beers

24
His thinking was
  • The only way to increase the value of diamonds
    is to make them scarce, that is to reduce
    production

25
Example Great Depression
  • Public stopped buying diamonds (demand shifted
    left)
  • London Diamond Syndicate could not absorb the
    worlds diamond production at the high prices
  • Huge Stockpiles
  • Wanted to put them in the market
  • Oppenheimer realized that
  • Prices will fall
  • People will lose faith in diamonds

26

27
  • Took over the Syndicate

28
  • Sell the diamonds to a selected group of cutters
    that abide De Beers rules.
  • To eliminate excess supply closed all major
    mines in South Africa
  • Year Production
    (carats)
  • 1930 2,242,000
  • 1933 14,000

29
De Beers Stockpile……
  • By 1937 De Beers stockpile of diamonds had grown
    to………..

40 million carats (20 years supply) !!!
30
How the Monopoly Functions
  • Supplier of Choice System
  • sends invitations to 120 chosen clients (diamond
    cutting factories in NY, Tel Aviv, Antwerp) to
    attend the 10 annual sights
  • client receives a small box
  • uncut diamonds
  • price of the box (1-25 million)

31
Rules of the Game
Rule 1 DTC decides who gets which box
Rule 2 No Haggling over price (price maker)
Rule 3 Take the entire Box or None
32
Rule 4 No client may resell the diamonds in his
box in their uncut form
Remark Israeli Dealers (1977)
33
Rule 5 Clients will provide any information to
evaluate the diamond market
  • Before the sight, clients fill out a detailed
    questionnaire
  • number of uncut diamonds in inventory
  • diamonds in process to cut
  • future sales
  • De Beers audits their cutting factories in
    surprised visits

34
Thus, De Beers decides
  • How many diamonds of each quality will be
    distributed in total
  • How this supply will be divided among the clients
  • Price of diamonds

35
What determines their decisions?
  • Demand
  • Information about rate of family formation in USA
    and Japan
  • Economic conditions
  • Supply
  • Questionnaires

36
Supplier of Choice aims to stimulate growth in
diamond demand and close this opportunity gap.
37
Conflict Diamonds
  • Angolan Adventure
  • 18-year civil war
  • Began as a struggle against the Portuguese
    occupation
  • Escalated to the country's natural resources

38
  • De Beers buys lots of diamonds from areas
    controlled by rebels.
  • Rebels used the money to finance the war
  • By 1994, De Beers' Angolan adventure threatened
    to become a PR nightmare
  • Fearful of a consumer backlash, De Beers closed
    its buying offices in Angola and the Democratic
    Republic of Congo (DRC)

39
Kimberley Process Certification Scheme
  • The KPCS is a joint governmental, international,
    and civil society initiative to stem the flow of
    conflict diamonds
  • Certifies that shipments of rough diamonds are
    free from conflict
  • Was decreed in 2000 at Kimberley
  • So far 45 participants

40
Moving Away Antitrust Laws
  • In 2004 De Beers paid 10 million fine for price
    fixing
  • As part of the class action settlement, De Beers
    promised to comply with the US antitrust laws
  • In February 2006, De Beers entered similar
    agreement with EU

41
Moving Away Technological Advances
  • We can manufacture diamonds (carbon, heat and
    high pressures)
  • The cost has been going down
  • Apollo is a publicly funded R D establishment

42
Moving Away Lev Leviev
  • Worth is 2 billion
  • Expressed interest in entering the diamond
    industry
  • Healthy competition will lead to a correction in
    the prices of diamonds
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