Seismic Wave Or Symbol

The rumor that the Argyle diamond people in Australia have considered going it alone in the market and ending their ties with De Beers has been kicking around for more than a year. But back in January we got the first real signs that they are serious about the move ­ serious enough that we believed we had to start some on-site reporting. Our diamond editor Russ Shor was quickly on a plane to Perth.

After talking to the the Australians on their home turf, Russ went on to Bombay to get the Indian view of an Aussie break with De Beers. Because the Indians cut most of the Australian rough their opinions obviously are very important. Next stop was Antwerp where Argyle has its principal selling office ­ and the city through which most non-CSO controlled diamonds pass on their way to market.

The final stop was London to get De Beers’ reaction to any break away by Australia.

The outcome of all this travel and much related reporting is the story in this issue that we call Thinking the unthinkable. It tells what diamond market shifts we may see if Argyle and De Beers fail to renew their distribution contract by next month’s deadline and decide to go their separate ways.

Before we consider some of the long-term implications a break would bring, let’s put the issue into today’s perspective. Even if the contract is not renewed, something we think very likely, about the only immediate impact on day-to-day diamond market activity will be psychological. Consider that in 1981 Zaire, a bigger producer of jewelry-grade diamonds than Australia, unilaterally ended its sales agreement with De Beers without any shattering effect. And recall that in 1981 the entire world diamond industry was in deep disarray after the bursting of the great gemstone investment bubble.

Consider, too, that for the past couple of years the Russians have been leaking millions of carats onto the market in direct contravention of their De Beers contract without causing any major disruptions. Given the market’s capacity to weather the Zairean and Russian incidents, is there any reason to believe that the possible Australian defection will be any more damaging or that its effect will be any more long lasting?

The simple answer: Short term, no. Long term, yes.

The key to the answer is the nature of the players. Zaire’s break was an opportunist move to take advantage of what its government saw as a badly wounded De Beers. It figured it could make more money by going direct to the trade. That, as it turned out, was not true and before too long Zaire was back in the CSO fold.

Russia’s outside-the-contract sales share the same opportunism. With the country in an economic shambles, its leaders were and still are ready to close their eyes to any doubtful dealings if they bring in enough bucks. While it’s true that the Russians have now agreed to a new contract with De Beers which allegedly will stem the unauthorized sales, past performance suggests that some leakage probably will continue. But any such sales are unlikely to disrupt the market seriously.

What makes Australia different, especially when you consider that the total value of its diamond output last year was less than $400 million and that much of its production is of industrial-grade stones? There are three principal things.

First, the people running Argyle are corporate executives, not government officials as is the case in the other diamond-producing countries. They see De Beers more as a corporate rival than a useful organization which soaks up all diamond output, good or bad, and handles the marketing of the product world-wide.

Second, the people running Argyle are a very methodical and goal-driven bunch. They almost always do what they say they’ll do.

Third, through its corporate parents, Argyle is tied to a number of the biggest mining concerns in the world, including Australia’s CRA and Britain’s RTZ. They mine a variety of products but seem intrigued by and committed to diamonds.

For all these reasons, look for Argyle and its partners to be in the diamond business for the long haul. This may well mean that by the early 21st century we’ll see a diamond market where supply and demand rather than De Beers’ fiat decides price. I wouldn’t bet that this is a sure thing. But if I dealt in diamonds at any level of distribution, without delay I’d start to prepare contingency plans for just such a market .