Israel's diamond dealers tremble

Diamond colossus DeBeers today launches fundamental changes to $56 billion retail market.

It is a modern-day fortress for an ancient business. Workers arriving at the Israel Diamond Exchange pass metal detectors, guards, a photo station for visitors, then fortified doors that read their ID and let them in one by one. Inside, 900 cameras watch as they go about their day.

The Big Brother trappings are necessary. In the world's largest diamond market, 20,000 people buy, sell and appraise the fiery white stones and exchange millions of dollars every day.

But the fortifications don't eliminate internal threats: the odd robbery - and now a newer, more worrisome challenge.

DeBeers Consolidated Mines, the colossus of the diamond world, is making changes that will radically reshape the industry. For consumers, these shifts may lead to lower prices and better guarantees of quality. For diamantaires, as these gem dealers are known, they could end a way of life.

"We want to embrace the 21st century," says Derek Palmer of the Diamond Trading Company, the arm of DeBeers that deals with rough, or unpolished diamonds. That, says Eddy Vleeschdrager, an Antwerp-based, fifth-generation diamantaire, makes everyone "very, very nervous."

As the largest and most influential company in the diamond world, DeBeers carries heavy clout, and the coming changes are sweeping. As of today, DeBeers becomes a private company, the most formal symbol of a meticulously planned transformation.

The firm has also declared that it will soon stop acting as self-appointed industry custodian. For more than a century, the DeBeers monopoly has allowed it to keep a steely grip on the global supply of diamonds, ensuring stable prices and the organization's enormous influence.

The Johannesburg-based group has also pledged to stop buying "blood" diamonds, stones sold by gem-rich African rebels to finance war, and to certify that no DeBeers stone is battle-tainted.

The industry's ultimate wholesaler of unpolished stones will soon start selling jewelry under its own brand name, putting DeBeers in competition with its own customers for the $56 billion annual retail market.

In July, DeBeers will unveil changes to the exclusive group of 125 merchants permitted to buy its diamonds. In Israel, five of the 30 merchants on this list are expected to lose out. "Some people are really biting their nails," says Yuval Ben Yona, an Israeli diamond merchant who says he's not worried, as his diamonds come from other sources.

Most dealers "fight, beg, borrow, and steal," to stay part of this select club, says Ivan Solotaroff, a US-based writer who covers the diamond industry for Modern Jeweler magazine. This is because DeBeers controls so much of the market, but also because it generally offers better quality stones at good prices. In this business of razor-thin margins, higher prices for lesser stones can make the difference between solvency and a fire sale.

These changes could ultimately put many of the gem dealers in Israel's Ramat Gan and other diamond centers - Bombay (Mumbai), New York, and Antwerp - out of business. It comes at time when the Israeli exchange is taking business from these other exchanges: Since 1996, exports of rough diamonds from here have jumped 80 percent.

A family business

For centuries, the diamond business has been a family affair, one closely linked to Europe's Jewish communities. The European diamond trade began in earnest when the Portuguese explorer Vasco da Gama opened a sea route to India in the 15th century.

Portugal's Jewish community, barred from entering industry like most European Jews, embraced diamonds. For an oft-persecuted group, the gems provided a highly portable, capital-intensive business: a family could flee with their entire fortune tucked in a pocket.

In the 16th century, many did just that when Spain and Portugal expelled the Jews. They took their expertise to Antwerp, then Amsterdam, and eventually to London, South Africa and beyond. The diamond business has expanded in the centuries since, but it is still strongly rooted in Jewish communities and families. Grandfathers, sons, and nephews - women rarely enter the trade - often work together, and that tight-knit, tradition-bound core makes the business unique.

There are no written contracts. All deals - from Beijing to Buenos Aires - are sealed with a handshake and the Hebrew words mazal ubraha or "luck and blessing." Merchants often send diamonds overseas to prospective buyers, who keep the stones they want and return those they don't.

Cell phones, email, and airplanes figure large in the business, but it still has an Old World ethos. Personal connections are crucial, and everyone seems to knows everyone else - or at least their uncle or father or cousin.

"Trust is crucial, which is one reason there are so many families in the business," explains Efraim Raviv, managing director the Israel Diamond Institute in Ramat Gan, a Tel Aviv suburb.

Even DeBeers, run by the Oppenheimer family, requires enormous trust of its 125 customers, or "sightholders." They are summoned to the London offices of DeBeers's Central Selling Organisation 10 times a year and handed a shoebox of diamonds that they must buy. This is how DeBeers has controlled what is on the market. Sightholders can make requests, but a refusal to buy the stones on offer could mean losing the right to buy from DeBeers. Diamond merchants who buy from DeBeers are not permitted to buy from anyone else.

"Imagine if the Ford car company said, 'I'm going to make a bad car this year, and you have to buy it or I'll never sell you a car again,' " says Mr. Solotaroff.

Even so, many in this tradition-bound business see DeBeers as a source of continuity and stability. So it is doubly unnerving that the pillar of the industry is spearheading such dramatic change, including the introduction of written contracts.

DeBeers and diamantaires alike are publicly upbeat. "People are very excited that we're taking the lead to grow the market and increase competition," says Joan Braune, DeBeers's London-based corporate communications director, "but I suppose any period of change makes people feel uncertain."

The future isn't entirely certain for DeBeers, either. Its domination of the rough diamond market is eroding, slipping from more than 80 percent in the 1980s to about 65 percent today.

Aggressive new competitors are elbowing DeBeers aside in Africa, forging exclusive contracts with countries where the Oppenheimers once reigned. Newly discovered mines in Australia and Canada have created diamond sources outside the company's' control. And separately, the threat of a consumer backlash against conflict diamonds, similar to the anti-fur drive of the 1990s, sends a chill down diamantaire's spines that reinforces the need for action.

Blood-diamond factor

Some analysts say DeBeers is using one problem to solve another, waging a campaign against blood diamonds to counter its weakening control of the market.

DeBeers is promoting a plan to certify diamonds, providing each stone with documentation that guarantees it is blood-free. The firm has also declared that it will not do business with diamond merchants who deal in blood diamonds. The plan dovetails with bills currently in the US Congress and a United Nations ban on sales of blood diamonds. These initiatives fit the needs of DeBeers, observes Edward Jay Epstein, a diamond-industry author in New York, as they help the company keep stones it doesn't control from reaching the market.

As it uses new ways to manage diamond supply, DeBeers is also exploring ways to boost demand. For years, the famous DeBeers slogan - "A Diamond is Forever" - was the only advertising the business had or needed.

Now, DeBeers is promoting the idea of branding - engraving diamonds with invisible-to-the-eye logos - and all sightholders have been asked to submit advertising plans. Those with the best strategies will remain DeBeers customers. "In essence, we'll be supplying the best marketers," says Mr. Palmer of the Diamond Trading Company. "To maintain equity, diamonds must always be coveted. It's the dream that sells it."

(c) Copyright 2001. The Christian Science Monitor

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