The Kimberley workings were 190 feet deep by 1875, and miners were hauling material out of the hole on aerial ropeways which covered the pit like spider webs. Soon the hauling was driven by machinery on the edge of the pit, and in 1875 the first steam-engine was installed. The cost of clearing away debris increased as the mines deepened, and slowly steam engines became necessary rather than optional. The rock became harder with depth, and by the end of the 1870s, the costs of mining became too great for one-man operations. The number of claim owners in the Kimberley pit dropped dramatically as people bought out their neighbors.
New investment poured in in 1880. Cecil Rhodes and seven partners owned a block of 90 claims in the De Beers Mining Company Ltd, named for its land holdings on the old De Beers ranch.
Rhodes was a successful politician, and he helped to draft laws that protected the mining companies. Taxation on mining profits was kept very low. The Diamond Trade Act was aimed at diamond stealing and smuggling, but it also set two very dangerous social precedents.
First, anyone found with an uncut diamond was required to explain how it came into his possession, that is, guilt was assumed while innocence had to be proved. This is a European concept, but is not usually found in English or American law.
Second, the Diamond Trade Act allowed the companies to set up "searching-houses" in a system of routine surveillance, searching, and stripping by company police. This curtailment of private rights and personal liberty became a fact of South African society. The companies were forced by strikes to be more lenient to their white workers than to blacks. The logical extension of this policy was to set up segregated, controlled, fenced-off compounds to house Africans for the length of their work contracts with the company: the first apartheid.
The methods were successful, however. After De Beers set up its "searching-houses" in March 1883, its diamond production rose significantly, showing that there had been a hemorrhage of diamonds from the workings. By the time that the South African mines were in full production in the late 1890s, 100,000 carats a year (about 8% of the total) were being recovered by searching the African contract workers leaving the compounds for home, giving some idea of the losses there must have been in previous years.
After a classic financial struggle played out on the stock market, the major diamond mines were unified under single management, De Beers Consolidated Mines Limited, founded in Kimberley in 1888. The Barnato family, Cecil Rhodes, and the London banking family of the Rothschilds had major holdings. By the end of 1889, De Beers held a virtual monopoly not only on the Kimberley diamond trade, but on the world diamond trade. Commentators predicted that the enlarged De Beers would use its monopoly to cut production, leading to higher prices for diamonds, and in fact, it did so.
It took De Beers, prodded by Lord Rothschild, a few years to organize the details of "The System" for diamond marketing. De Beers diamonds were sold at something like 1015% less than open-market price through a small syndicate of diamond brokers, who were also large shareholders in De Beers. De Beers and the syndicate had enough resources to allow surplus diamonds to be held in reserve until times of high demand. Over the next 50 years, De Beers sold diamonds worth at least twice its operating costs, and was always able to raise the funds required to control the diamond market by buying up competing mines or surplus diamonds.
A serious challenge faced De Beers early in the 20th century. The Germans discovered diamonds in sands along the coast of Namibia, then German Southwest Africa. Large quantities of diamonds began to appear on the market in Antwerp in 1908. In 1913 De Beers decided to find out for themselves how good the German fields were. An inspection party (including Ernest Oppenheimer) went to Namibia in 1914, and found that there was every prospect of high production. So in July 1914, the German and South African Governments, the South African diamond companies, the German selling agency, and members of the syndicate signed an agreement to divide up diamond production.
The outbreak of World War I just a few days later voided the agreement, and one of the first consequences of the war was the rapid entry of South Africa on the British side. The South African leaders probably saw the opportunity to seize the German diamond fields for South Africa. They were able to have the territory remain under South African "protection" after the war.
In 1919 the South African Government arranged a new producers' agreement, and a consortium including Ernest Oppenheimer took over the fields in Namibia. By 1926 Oppenheimer and his company Anglo American felt strong enough for a showdown with De Beers, and after negotiations each company took a large shareholding in the other, with Oppenheimer essentially running both.
After the great stock market crash of 1929, Oppenheimer realized that demand and sales would drop, while production continued. In 1930 he set up a new company, the Diamond Corporation Limited, specifically to bear the costs of keeping large stocks of diamonds off the sales market, while assuring some kind of cash flow to the producers. Oppenheimer was chairman of both De Beers and the Diamond Corporation by this time, and De Beers and the Rothschilds actually provided most of the cash for four years.
De Beers made a profit again in 1934. By a chain of interlocking directorships and joint stock holdings, De Beers was once again the dominant diamond producing company: it held 38% of the stock of Anglo American, and Anglo American held 34% of De Beers. Meanwhile, the Diamond Corporation began to make a profit by the middle 1930s, and dominated diamond buying. By 1939, 97% of the world's diamond trade passed through the Diamond Corporation.
In recent years, Anglo American has gradually shifted its operations to London, and is diversifying outside South Africa to an extent it never did while there was white-minority government in Pretoria. But De Beers had already for years run its diamond-selling operation in London, through a division called the "Central Selling Organization" or CSO. The CSO is the controlling company in a global diamond marketing system (cartel) that ensures stable (high) prices for all producers. In the 1950s, De Beers created one of the most successful advertising campaigns in history with the slogan "A Diamond Is Forever," which became a household phrase and made diamonds the stone of choice for rings all over the world.
Anglo American and De Beers are still controlled by the Oppenheimer family, whose patriarch is Sir Harry Oppenheimer. When Harry Oppenheimer inherited control in 1957, Anglo American was the world's largest gold producer and produced 15% of the world's copper. It produced half of South Africa's coal. De Beers controlled 80% of global diamond sales, and still does. Harry Oppenheimer has retired as chairman, but his son Nicholas is Deputy Chairman of De Beers and of Anglo American, and is clearly being groomed to take over.
South Africa now produces only 15% of the world's diamonds, not enough on its own to provide much leverage over world markets. The richest diamond mines in southern Africa are new fields in Botswana. De Beers holds 50% of these through its subsidiary Debswana (De Beers Botswana Mining Company), and all the diamond production is marketed through the System. Debswana's production is larger than that of all the South African mines put together.
Thus even though South Africa is longer the dominant diamond producer, De Beers still controls 80% of world diamond trading. But it can no longer control the market using its own resources, and is therefore evolving to become the dominant company in a traders' cartel, rather than the dominant company in a producers' cartel. It is more vulnerable now than it has been for a century. It must keep the major producers happy on its "upstream" side, and its customers in order on the "downstream" side, whatever that takes. The bottom line is that the diamond market will have to reflect general world supply and general world demand more than it has in the past. Once, De Beers could simply slow production, leaving unwanted diamonds in the ground (just as good as money in the bank), as long as it could control the market to ensure that those unmined diamonds would bring a good price once they were brought to market. Today, the producers (Australia, Botswana, Russia, De Beers, and the Congo) are most unlikely (probably unable) to sacrifice their cash flow from diamond mining, and it is up to De Beers, from its own resources, to do what it can to stabilize diamond prices rather than hold them artificially high.
In 1990, De Beers moved its international headquarters to Switzerland and Luxembourg. The new companies control all of De Beers business outside South Africa. This move occurred almost simultaneously with the release of Nelson Mandela and the renewed negotiations for greater political power for black South Africans. It is difficult to believe that these two events were independent. De Beers argued that 80% of its earnings (over $4 billion in 1989) were generated overseas, through its diamond sales in London, but that had been true for many years. De Beers was almost certainly restructured so that most of its profits involved money flow that did not pass through South Africa.
Within a few months of De Beers' move to Switzerland, it had concluded an agreement with Russia to sell that country's rough diamonds on an exclusive 5-year contract, thus maintaining an almost total control over all the global production of diamonds. De Beers paid $1 billion as a cash advance.
In 2000, the Congo looks as if it was breaking apart: rebel armies now control the diamond fields, and the supply of Congolese diamonds seems likely to drop into equal chaos. No-one can predict how that will play out, but it is noteworthy that Angolans are among the myriad mercenaries and freelance soldiers of fortune swarming into the country. Countries such as Rwanda and Uganda have begun exporting diamonds, even though they have no diamond mines: this may be due to the fact that both countries have soldiers deep inside the Congo, "assisting" the rebels.
In the early years of President Yeltsin, De Beers was threatened more by the danger of organized cheating from Russia than by the chaotic operations in Angola and the Congo, which will dry up as soon as the easily worked surface diamonds are picked off. Diamonds that had been "diverted from official channels" in the former Soviet Union began to appear in the West after the fall of Gorbachev, as Communist officials began to unload their loot in the new times of economic hardship. The price of diamonds on the Antwerp free market fell below the CSO's price. De Beers announced in 1992 that its dividend might be down as much as 25%, and its stock fell nearly 15%. Old Harry Oppenheimer came out of retirement and flew to Moscow, to try to persuade Yeltsin that it would be in everyone's best interest to clamp down on illegal diamond exports. De Beers went to far as to break off negotiations in late 1996, no doubt calculating that the Yeltsin government would prefer a steady cash flow from De Beers under a firm contract, rather than hoping to skim off taxes from any free-market diamond sales. Indeed, a contract was struck in 1998, and De Beers can live comfortably with it.
In the far north of Western Australia, the British company Rio Tinto holds 60% of a large diamond field called Argyle. The Argyle field is about ten times as large as the original De Beers pipe, and is now the single largest diamond mine in the world, producing 34 million carats a year; it probably has at least 20 years of production. Because of Argyle, Australia became the world's leading producer of diamonds in the last half of the 1980s. Argyle has opted out of the CSO, and at the moment is trying to market diamonds in competition with De Beers. De Beers has dropped the price of some grades of diamonds to undercut Argyle's position. But Argyle is said to be engaged in negotiations with the lucrative Japanese market, and we shall have to wait and see how this works out. Meanwhile, Argyle has had a major marketing triumph with some of its stones: it seems that if a pale pinkish yellow diamond is called "Champagne" it attracts many more buyers and is worth a lot more!
Buoyed by a tremendously successful "Millennium Diamond" sales pitch, De Beers had a very good year in 1999. Things look relatively stable for this long-lived operation.
Gold has long been the basis for South Africa's relative prosperity. At least half a million South Africans, including dependents and suppliers, rely on the industry. From ancient times to 1989, the South African mines produced more than 40% of all the gold that had ever been mined. In 1970 South African gold production was 1000 tonnes, then more than 70% of the output of the non-Communist world. South Africa is still the world's largest producer, by far. It has the world's deepest mine, 3585 m below surface at the East Rand mine. The Freegold mine, owned by Anglo American, was until recently the world's most productive gold mine at 115 tonnes a year; and Driefontein Consolidated has produced more than any other gold mine, at 2292 tonnes.
However, the logistics of gold mining on the Rand are frightening. At a depth of 3000 m, rocks are at 50° C, and huge quantities of water have to be pumped out of the workings every day. This is high-cost gold-mining. New refrigeration systems have to be designed to make working conditions possible at depths like this. In the Harmony mine, one of the largest ice making machines in the world (over 3 million times the capacity of a domestic refrigerator) makes 20,000 tonnes of ice a day, which is crushed and pumped along pipes that run down through the mine galleries: the warm water is pumped back to surface afterwards.
The unknown factor in South Africa is the future of labor costs. The mines employ several hundred thousand miners underground: half the production costs are for wages. Most of the gold miners are members of the black National Union of Mineworkers, which is pressing hard both for political and social reform, and for better wages and working conditions for its members. But the long-delayed beginnings of political reform in South Africa in the late 1980s coincided with a slump in gold prices. The South African gold mines, many of them a century old, were by then the world's deepest, and were technically very difficult and financially very expensive to operate even in spite of the low wages paid to the miners. The quality of the ore was slowly dropping: the average gold ore now averages less than 5 grams of gold per tonne.
From 1970 to 1990 South African gold production fell 40%. Technical problems and high costs can be attributed to the deep mines and labor-intensive methods. There have been steady wage increases with no increases in productivity‹15% in 1989, for example. There is competition from low-cost surface mines. At the same time ore grades have dropped from 13 g/t to 5 g/t, while the world price of gold dropped. In 1990, 23 mines were producing gold at more than the selling price of $373/oz, and half of the country's 36 largest mines had applied for emergency government subsidies. Some mines (like East Driefontein) had costs as low as $171 an ounce, but others (like East Rand Proprietary) had costs of $442/oz.The average cost for South African mines was about $275/oz, compared with about $250/oz in Australia and $210/oz in the US.
Winnie Mandela is on record as saying to black miners, "You hold the golden key to our liberation. The moment you stop digging gold and diamonds, that is the moment you will be free." She could not be more wrong. If the gold mines close, the economic disaster will be visited most on the poorer section of society, the blacks. The South African reforms were predicated absolutely on a stable and healthy economy. In 1999, the price of gold dropped to a low point around $250/oz. This was very bad news for South African gold companies, South African gold miners, and the South African government. Gold companies scrambled to reorganize and streamline their operations. By the time the price again reached $290 again in early 2000, the gold industry had changed dramatically, in South Africa and globally.
Page last updated March 2000.
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