Soon after Cecil Rhodes showed up on the diamond fields of South Africa in 1871, he seized on the business concept that still drives the diamond industry worldwide: monopoly.

Forsaking prospecting, he bought a steam-powered pump for sucking water from flooded diamond mines. It was the only such pump in South Africa. Faced with severe flooding, the small mine operators soon ran out of cash to pay their sole pump supplier. So they sold their mining claims to Mr. Rhodes, the founder of the De Beers Consolidated Mines Ltd.

Sir Ernest Oppenheimer, a British diamond trader who emigrated to South Africa and who eventually succeeded Mr. Rhodes as head of De Beers, adopted the same strategy. His goal, Sir Ernest once said, was to make De Beers the ”absolute controlling factor in the diamond world.”

To Sir Ernest, that meant control of marketing as well as supply. In the 1930’s, he bought out the main wholesale diamond bourse, the”Syndicate,” a group of Jewish merchants who had dominated trading since the 19th century.

The buyout paved the way for the creation of the Central Selling Organization, the London-based diamond marketer still controlled by De Beers. Today, the C.S.O., headed by 41-year-old Nicholas Oppenheimer, the deputy chairman of De Beers and a grandson of Sir Ernest, has emerged as probably the world’s most successful monopoly. At a time when some commodity cartels, like OPEC, are battered, and others, like the International Tin Council, have collapsed altogether, the C.S.O. is proving to be that rarest of species in the 1980’s – a cartel that works.

Historically, the C.S.O.’s strength derived largely from the marketing of South African diamonds, most of them shipped from De Beers’s mines. But, with only 15 percent of worldwide diamond production originating today from South Africa, the cartel has managed to work out purchasing pacts with all the other major producers, including Zaire, the Soviet Union, Botswana, Namibia and Australia. ”Any producer would think twice about turning its back on the C.S.O.’s enormous and proven marketing muscle,” said Michael Gordon, an analyst for James Capel & Company, a London brokerage.

That muscle includes C.S.O.’s willingness to buy diamonds at reasonably high prices, even in recent periods of oversupply. And producers are able to use their C.S.O. agreements as collateral for bank loans needed to develop costly mines.

As for the C.S.O.’s customers, they can count on the cartel’s aggressive marketing machine to create demand for diamonds. These customers – a select group of some 300 traders, cutters and wholesalers – are invited to London every five weeks to look at rough diamonds that the C.S.O. has sorted into 5,000 classifications based on shape, size, color and quality. The buyers are offered small boxes of assorted diamonds at a C.S.O.-set price on a take-it-all or leave-it basis. Those with the temerity to walk away tend not to be invited back, at least not for a while.

”The reason the monopoly has endured is that it works so well,” said Hugh Wilmer, an analyst for Dean Witter Reynolds in Toronto.

These days, the cartel is not just enduring, it is thriving. Diamond demand is up worldwide, after a slack period in the early 1980’s. In the United States, the world’s largest retail diamond-jewelry market, retailers report rising sales this year.

In fact, the only uncertainty looming over the cartel is the turbulent political climate in South Africa. The threat is an indirect one. Diamonds are thought to be the commodity least likely to be included in any sanctions imposed by the West. Moreover, since several black African nations and the Soviet Union sell diamonds through the C.S.O., even an overthrow of the Pretoria Government, say some, could leave the diamond monopoly unaffected.

Nevertheless, diamonds are widely identified with South Africa and apartheid in the mind of the public, despite the fact that most of the world’s diamonds originate elsewhere and despite the Oppenheimer family’s well-known opposition to apartheid. They point out that the prospect of a consumer boycott cannot be ruled out.

Some leading members of the diamond fraternity are already grappling with the image problem. Diamond merchants, for example, are considering a change of venue for the next World Diamond Congress, now scheduled for South Africa in 1988. ”If it is bad for the image of the diamond industry, we will not go there,” Ed Goldstein, president of the World Federation of Diamond Bourses, said two months ago.

”The marketing of diamonds is potentially sensitive to political pressures and public opinion,” said Peter Miller, analyst at Shearson Lehman Brothers in London. ”That could be a problem for De Beers and the C.S.O.” THE C.S.O., to be sure, has already been severely tested in recent years. After the second oil-price shock, starting in 1979, inflation fears led to a soaring investment and speculation market for diamonds. For a while C.S.O.’s buyers were even able to quickly resell their boxes of uncut diamonds for twice the C.S.O. price. The brief boom had some speculators holding a small mountain of diamonds.

When the inflation psychology reversed with a vengeance in the early 1980’s, the C.S.O. feared that the speculators would dump their diamonds on the market and that prices would plummet. So to keep its price-setting grip, the cartel bought back many of the diamonds and held them off the market, even though financing the hoard strained the corporate pocketbook of its sponsor, De Beers. The C.S.O.’s stockpile grew from $360 million worth of diamonds in 1979 to a peak of just under $2 billion in 1984, as De Beers cut costs, and production, by shutting down two mines and trimming its work force by 25 percent.

At the time, newspaper and magazine writers dubbed it the ”Diamond Debacle” and predicted the demise of the cartel. But the C.S.O. held on to its costly stocks. It also sharply increased its advertising budget to increase sales of jewelry, whose retail prices had remained at a fairly stable level throughout most of the 1980’s, thanks to the cartel’s control of the wholesale market.

And it worked to maintain its grip on diamond producers. Zaire tried to break out of the cartel in 1981, but returned to the fold after the C.S.O. dipped into its stockpile to flood the market with low-quality diamonds similar to those from Zaire to drive down the price.

Moreover, when it appeared that the big Argyle mine in western Australia would refuse to sell its diamonds through the C.S.O., after the Labor Party protested that Australia might do better elsewhere and that any deal with De Beers would be seen as support of apartheid, the cartel put its clout into play.

The Argyle mine started its operations in 1983, with the diamond market depressed, so a stable contract with the C.S.O. became suddenly attractive. Moreover, the mine operators were able to use C.S.O. purchasing pacts as collateral for the bank loans needed to develop capital-hungry diamond mines.

This year, with diamond sales picking up worldwide – as a strong yen fuels the Japanese market and as lower interest rates encourage borrowing for luxury items – the C.S.O. looks stronger than ever. ”The recession in the early 1980’s was a chill wind the likes of which the diamond industry had not seen,” recalled Michael A. Grantham, a C.S.O. director. ”But now, after having proved its worth to producers and sellers, the C.S.O.’s future looks secure.”

For the first half of this year, the cartel’s sales rose 45 percent, to $1.2 billion. De Beers’s profits jumped 20 percent, to $161 million. The diamond market is so hearty that in May, the C.S.O. raised prices on uncut, or rough, diamonds by 7.5 percent – its first price rise in three years. At the World Diamond Congress in Tel Aviv in July, Julian Ogilvie Thompson, the current De Beers chairman, declared: ”We have succeeded where other commodity stabilization schemes have failed.”

Even the modest, American-based market for investment diamonds, which the C.S.O. does not control because antitrust laws prohibit its operating in the United States, is showing signs of life again. The wholesale asking price for a 1-carat, D-flawless diamond, an industry benchmark, has climbed to $14,500 from $12,600 in March, according to the Rapaport Diamond Report in New York. Though far from its speculative peak of $63,000 in 1980, the comparatively higher free-market price underlines the basic shift in the industry.

At the same time, United States retail sales of diamond jewelry, which represent 38 percent of the $22 billion a year in diamond retail sales worldwide, look encouraging. Claude Saujet, president of Harry Winston Inc., a New York City jeweler, reports that sales are up 57 percent over the past 11 months, bolstered in part by what he called a more ”European attitude” on the part of Americans interested in placing a portion of their personal wealth in diamonds.

Donald Zale, chairman of the largest American jewelry retailer, the Zale Corporation in Irving, Tex., says that diamond jewelry sales are running ”nicely ahead” of last year. Heading into the crucial pre-Christmas buying season, Zale will be promoting a range of diamond items from children’s pendants for less than $100 to anniversary rings costing several thousand dollars. ”We’re all pumped up about diamond jewelry this year,” Mr. Zale said.

Meanwhile, both De Beers and the C.S.O. have used the lure of their expertise and marketing muscle to enter into joint ventures with new producers. The Jwaneng mine in Botswana, north of South Africa, is brimming with large diamonds, for example, making it perhaps the most important diamond find since the discoveries at Kimberley, southwest of Johannesburg. It could have been troublesome for the cartel if Jwaneng were beyond its control.

Needing outside capital, and production and marketing skills, however, the Botswana Government decided to take on De Beers as a partner, giving it half ownership of the Jwaneng mine, which began operating in 1982. The Botswana Government now gets 70 percent of the profits, while De Beers and the C.S.O. retain their firm hold on the industry. BUT controlling the supply of diamonds is only half of the C.S.O.’s job. Its other vital chore is to create demand. Indeed, it was partly the steadily rising retail demand for diamond jewelry, even during the industry recession of the early 1980’s, that enabled the cartel to hold together.

In the United States, the diamond’s image as a ”gift of love” has been assiduously and successfully nurtured since Harry Oppenheimer, concerned about flagging American sales, visited the New York advertising firm of N.W. Ayer in 1938. It led to a classic marketing campaign best remembered for the slogan: ”A Diamond is Forever.” Linking diamonds to romance was not only a clever selling ploy but also crucial to the C.S.O.’s control of the market. An item imbued with lasting sentiment was more than a valuable gem to be disposed of in hard times. And keeping diamonds, once sold, off the market is vital to the cartel’s strategy.

Since 1980, the C.S.O.’s advertising and promotion spending has increased threefold, to $100 million. It also spends $20 million for cooperative ads with retailers.

In recent years, the C.S.O. has pushed new categories of diamond jewelry. It has found some success with men’s diamond jewelry, with retail sales of men’s rings, bracelets and the like rising to $1.08 billion last year, from $879 million in 1982. But the real breakthrough has come in the so-called anniversary rings for women. In 1982, there were 511 diamond anniversary-type rings sold in America, at an average price of roughly $400. Last year, more than 1 million such rings were sold, average price tag $778.

Now, over the past few years, the cartel’s ads have focused on fanning demand for larger gems. The message: ”A diamond of a carat or more. There’s only one in a million.” WHERE THE GEMS ARE ‘A MATTER OF RESPECT’ LONDON

In many ways, diamond advertising around the world mirrors the relations between the sexes in different cultures. A case in point – Japan, where the Central Selling Organization has brought off its biggest marketing coup.

Indeed, the C.S.O. convinced an entire nation that wedding engagements ought to be marked with a diamond ring. In the late 1960’s, only 6 percent of Japanese couples planning to be married purchased a diamond engagement ring. Today, 70 percent of all engagements are marked with a diamond ring, the same percentage as in America. That helped push Japan’s retail sales for diamond jewelry to $4.3 billion a year, the second-highest in the world.

”After Coca-Cola and Levi’s, the ground was somewhat prepared for us; but still, it has been our greatest success,” said Michael A. Grantham, a C.S.O. director.

Working through major Japanese advertising companies, the C.S.O. helped create demand with an ad campaign that differs markedly from its American advertising. ”In the U.S., you just cannot be too sentimental in advertising – romance is what sells,” said Charles Phillpot, the organization’s market controller for Japan. ”But in Japan, the relationship is more a matter of respect, and a gift is for services rendered.”

Where the typical American television ad for anniversary rings features a clingy couple exchanging suggestive remarks just short of the bedroom door in a swanky hotel, the approach in Japan is a bit different.

There, a typical ad shows the husband coming home from work at about midnight on the couple’s wedding anniversary. His wife has left his dinner out for him to eat alone. At the table, he pulls out the diamond ring he has bought and starts talking to the ring as though it were his wife. He says what a good job she has done raising the kids, praises her as a great partner all these years and declares that this ring is a sign that he loves her. The camera then moves to a sliding door, slightly open and being quietly closed by an embarrassed but pleased wife, who has been listening all the while.

”We could never have had the husband saying those things directly to his wife,” Mr. Phillpot said. ”That would be just over the top in Japan.”

A version of this article appears in print on Sept. 7, 1986, Section 3, Page 4 of the National edition with the headline: WHY A DIAMOND CARTEL IS FOREVER. 


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