Diamond Industry

Industry Analysis

Diamond Industry

(Gem Based diamonds)

The Diamond industry is essentially broken up into 3 segments:

1. Industrial Diamonds—natural and synthetic diamonds that are used in a wide range of manufacturing processes for their physical properties.

2. Jewelry Diamonds—rough diamonds cut for use as gemstones in jewelry.

3. Investment Diamonds—high-quality large gemstones, often with special

characteristics, purchased for investment.

The Jewelry and Investment segments together represent 83 percent of the value of

rough diamonds produced. The industry is controlled as a monopoly by the De Beers diamond company which operates from South Africa and London. The wholesale trade and cutting of diamonds is limited to only a few places in the world namely New York, Surat, Tel Aviv, London, and Amsterdam and the most important being Antwerp. With extensive research and sourcing, diamonds have been found in many parts of the world with Botswana producing almost one third of the world’s diamonds.

Restrictions and barriers

The diamonds industry has had to suffer many problems, the most important being the controversy over the sale of conflict diamonds. In order to rectify the problem, industry players came up the Kimberly process in 2001 along with several other countries with a set of conditions in order to monitor the sale of conflict diamonds. Another act called the Clean Diamonds trade act was also enacted in 2002 which broadened the definition of conflict diamonds by adding terrorist to the list of those who fund wars with the sale of diamonds.

Industry structure

The diamond industry is mostly controlled by the De beers diamond company. It held a market share of about 80% in the 1980’s but that share has steadily declined to 65% in 2000. This is owed to the fact that new diamond mines have been found in Siberia and Canada. De beers do not have any control over the mines especially in Siberia. This has led to the sale of diamonds outside the cartel of companies held by De beers. The different stages in the value chain of the diamond industry start from the mining process, sale of mine production, dealers of rough diamonds, cutting process, wholesale dealers and retail sale of diamonds in the consumer market. The highest margin of profit exist in the last stage that being the retail sale of diamonds.

Competitors

De Beers has 5 major competitors. We will introduce three biggest of them that operate primarily in the “diamond & other precious stone mining” industry accounting for over 30%. These companies are Alrosa with 20% market share, and BHP Billiton and Rio Tinto Group each of which holds a market share of below 10%.

Alrosa

Alrosa (translated Diamonds-Russia-Sakha) is a Russian diamond monopolist that is involved in exploration, mining, manufacturing and sales of diamonds. To understand in what environment Alrosa operates, one needs to know that Russia is the second largest diamond producing country in the world, right after Botswana. Therefore, Alrosa is World’s second largest produced of diamonds, right after DeBeers. Due to its monopolistic position, it produces nearly 100% of Russia’s diamonds. Over 50% of its production is sold in international markets, mainly India and Israel.

Alrosa has operated under its name since 1993 yet its history goes back to 1954 when Russia's first diamond-bearing kimberlite pipe “Sarniza” was discovered. As the new name indicates, the company is owned by two governments. The reason for that was the collapse of the Soviet Union. Because the mine is located in the Republic of Sakha/Yakutsk, Russian government had no choice but form a joint-venture with the government of Sakha. Today, the company is owned 37 % by the Russian government, 32% by the Republic of Sakha, and 31% by official bodies. Even though the last owe 31% of shares, the company is not listed on the stock exchange.

The company operates mines in the Republic of Sakha, and Angola and Namibia. Other than in the diamond mining, Alrosa is active in other activities such as oil exploration, natural gas production, and gold mining in Russia and Kazakhstan. Alrosa’s sales in 2005 accounted for