Diamonds aren’t forever: Oppenheimers leave De Beers

The Oppenheimer clan built the global diamond business. Now they’re getting out, leaving an industry in flux.

Diamonds aren't forever

AFP/Getty Images

Last fall, Nicholas “Nicky” Oppenheimer, the chairman of the De Beers Group and heir to one of the world’s most storied fortunes, gave a series of media interviews to explain why his family had agreed to exit the business that had made them rich.

The Oppenheimer clan had controlled De Beers, the world’s most important diamond mining and marketing firm, since the late 1920s. In many ways, they created the diamond as we know it today—as an idea and a symbol. Under the Oppenheimers, De Beers built the Central Selling Organization—the cartel that regulated global diamond prices and supply for more than half a century. They oversaw the “Diamonds Are Forever” marketing campaign. They were even crucial to the development of the Kimberley Process, a scheme to halt the sale of blood diamonds.

But now, Nicky Oppenheimer explained, it was time to get out. With so much of its fortune tied up in one commodity, the family was at constant risk of a market crash. It was an emotional decision, Oppenheimer told one radio interviewer. “But at the end of the day, we in the family decided it was the right thing to do, and it was unanimous.”

The Oppenheimers sold their 40 per cent stake in De Beers to mining giant Anglo American for over US$5 billion. (Family scion Ernest Oppenheimer actually founded Anglo American more than a century ago, but the family retains only a nominal cut of that business.) Barring any regulatory trip-ups, the Oppenheimers will be out of the diamond industry by early this year.

The move was one of a series that have shaken up the once cloistered diamond world in recent years. Old rules and old partnerships are collapsing, from the Oppenheimers and De Beers, to the edifice that certifies diamonds as ethical. New diamond suppliers, from Australia and Canada, are selling to new buyers across the global middle class. The Central Selling Organization, the co-operative that once bound the industry together, has long since fractured. And in Canada, BHP Billiton, once among the country’s most influential players, has signalled that it will leave the business entirely when its lucrative Ekati mine runs dry later this decade. (BHP sold its 51 per cent share in the Chidliak diamond project on Baffin Island in December to partner Peregrine Diamonds, an upstart Canadian miner.)

Experts see the diamond business, like the mining industry more generally, consolidating. Big players, like Anglo American and Rio Tinto, are spending billions to gain full control of their mineral assets. “Go big or go home. That’s just the mantra they’re following,” says Peter Major, a mining consultant for South Africa’s Cadiz Corporate Solutions. Wherever the industry goes, though, it will likely stay profitable. Desire for the stones remains strong in the West and is growing stronger among the middle classes in China and India, and the nouveaux riches in the Middle East. Even with continued economic weakness in the United States and the ongoing turmoil in Europe, diamond prices climbed last year. De Beers reported a 35 per cent rise in its average per-karat price for rough stones for the first half of 2011. Industry-wide, rough prices were up 49 per cent over that same period, according to Bloomberg.

In coming years, meanwhile, prices are expected to climb even higher, especially for larger, engagement-ring-calibre stones. An analysis released last fall by Bain and Company predicted that diamond demand will outstrip supply sometime in the next decade. Raymond Goldie, the senior mining analyst at Salman Partners in Toronto, believes total supply has already peaked. (“It’s not just Ekati that’s running out of ore,” he says.) Once demand moves past supply, well, that’s Economics 101—a roundup of analysts published late last year by Bloomberg predicted steady price increases through at least 2016. And while shrinking supply could spark a new wave of exploration, not everyone believes there are that many new deep finds to strike. When it comes to the high-end stones, especially those two carats or larger, the Bain report predicted any new sources will be swallowed up by increased demand from Asia.

Nothing, of course, is guaranteed. Diamond prices collapsed after the economic crash of 2008, and there is always the risk they will do so again. Not everyone has completely recovered from the downturn, either. According to Goldie’s analysis, seasonally adjusted sales at Tiffany’s stores in the Americas have only climbed back to about half of what they were at their 2007 peak.

Politically, too, everything is not perfect in the diamond world. The Kimberley Process, set up to keep conflict, or blood, diamonds from the market, is showing signs of age. Global Witness, which helped found the Process, walked away from it in disgust late last year over a decision to allow stones from Zimbabwe’s controversial Marange diamond fields into the global system.

Given all that, it’s not hard to understand why the now risk-averse Oppenheimers would want to diversify, and analysts say the multi-generational family was smart to finally accept—after years of resisting loss of control—that times have changed.

Ernest Oppenheimer, a German by birth, founded the family empire after he immigrated to South Africa in 1902, the same year De Beers founder Cecil Rhodes died. Oppenheimer (who was backed by J.P. Morgan when he founded Anglo American in 1917) took over De Beers starting in 1919 when he traded a diamond mine in what is now Namibia for a portion of company stock. Over the next decade he bought up more and more of the company.

The De Beers model relied on control. Under Oppenheimer’s leadership, the company consolidated the syndicate that manipulated the sale of global diamonds. The Central Selling Organization, as it was known, bought any stones De Beers didn’t produce itself and released them in small batches to dedicated buyers. It kept prices high by keeping diamonds off the market in times of low demand.

The problem with that, though, was that if new diamonds appeared, De Beers had to buy them or otherwise keep them from the market. As a result, the company was always at risk from new mines or new players looking to hoard their own supply. Israeli merchants, Russian mines and others threatened the cartel over the years. But it wasn’t until the late 1980s that serious cracks began to show.

The cost of buying up excess diamonds was becoming prohibitive at that time. Meanwhile, De Beers’ ability to control producers was slipping. In the 1990s, rich new mines were dug in Australia and Canada, and the companies that ran them—Rio Tinto, BHP Billiton, and others—were showing little desire to sell their stones through De Beers. At the same time, civil strife in diamond-producing African countries, such as Sierra Leone and Angola, was driving calls for a boycott of diamonds in general, which was hurting De Beers and everyone else.

In 2000, De Beers did the once unthinkable. It walked away from its own near-monopoly. The company abandoned the aim of selling all rough stones to concentrate on stones from its own mines. From a market share of over 90 per cent, De Beers control fell to around 40 per cent. A year later, Nicky Oppenheimer convinced shareholders to delist the company from the stock exchange. From that point, Major believes, the Oppenheimers were always going to walk away from the firm. “They were a shell of the company they used to be,” he says.

Under the new arrangement, the Oppenheimers held 40 per cent of the company, Anglo American controlled 45 and the government of Botswana, home to some of De Beers’ richest mines, owned the remaining 15 per cent. Nicky Oppenheimer remained chairman of the company, but as the decade went on, he could not get his son Jonathan onto the board, Major says. After diamond prices collapsed in 2008, pressure to sell began to grow from within the family itself, Major believes. And when prices climbed again last year, a deal became inevitable.

“One of the biggest reasons we heard from insiders was that [Nicky’s] sister made them sell,” Major says. “Nicky was juggling the idea, Anglo had said they’d like to buy it for awhile, and apparently the sister [Mary Slack] just said, ‘Look Nicky, this thing’s getting more cyclical each year that goes by.’ I don’t know how strong an effect she had, but we heard she was the deciding factor.”

As for the Oppenheimers themselves, Nicky said the same thing over again in statements and interviews: it was a hard choice, but the family agreed, and it was time to move on. On to what, exactly, isn’t clear, for the Oppenheimers themselves or for the diamond industry they helped create.

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