University of Oxford

How De Beers Started Its Diamond Company

Nature had its own way to bring out a common diamond digger to think of starting a company which is famously know as De Beers. Cecil John Rhodes the brainstorm behind De Beers was first involved in selling water to the thirsty diamond diggers in South Africa. He started from here and went on to form the company.

Cecil's first trip to South Africa was at the age of 17 (in the year 1870) when the first diamonds were being mined. He was financially independent by the age of 19. And for the about eight years after this first trip, Cecil toggled between South Africa and England, keeping an eye on the progress of the diamond mining and completing his Oxford degree. He ensured that he made a small start even while he was pursuing academics.

During the time that he was completing his degree at Oxford's, Cecil made it a passion to study the operations, understand the dynamics, the prices, the demand and supply and the players in the game. He inferred that to control the fluctuating prices of diamonds he had to get hold of the demand and supply of the diamond production and for this he had to have control over its production.

About seventeen years after his first visit, Rhodes had complete control of what is today known as the De Beers Mines. The next year that ensued was a tumultuous one. Other players in the market like Kimberly Central and another French company were significant holders in the production game. Though he had a significant share in both operations, the control of Kimberly Central lay with Barney Barnato.

Since the French operation was relatively smaller than Kimberly Central, Cecil Rhode tried to make a bid for the company. This threatened Barnato as he anticipated the strategy. He tried to outbid Cecil Rhodes but Cecil's partners in the De Beers venture were able to convince Barnato. Now Cecil owned the De Beers mines and had complete control over the French company as well. The next step would have to be a controlling share in Kimberly Central.

With some shares of Kimberly Central to start with, Cecil advised his brokers to start picking up independent shares from the market. To protect his turf Barnato had to make a bee-line for these exact shares. In turn, the share prices shot up.

On the other hand, the production of diamonds was far higher that the market demand and as a result the price of diamonds started falling. The whole economics of the situation were unnerving. Despite all the resistance, Cecil was able to obtain 60% of the stock in Kimberly Central making his company the controlling company for Kimberly Central too.

A year later in 1888, the company De Beers Consolidated Mines Ltd was formed. The company was named after the owner of the farm where the first diamond rush took place. This new corporate had complete ownership of the De Beers mines, 75% of the Kimberly Central mines and controlling powers over Bultfontein and Dutoitspan.

The consolidated venture had a profit of £ 300,000 over, something that would translate into US $ 1.5 million today.

Another twelve years and by 1900, De Beers controlled over 90 percent of the world diamond production. With this kind of a monopoly in the production of uncut and raw diamonds, Cecil ensured a firm control over the prices by managing production levels.

Cecil Rhodes was a provocative person. He believed that diamonds could be power in his hands. He had a dream of seeing Africa as a consolidated union under the British rule. He had great plans for the nation that included telegraph lines and railway lines. With this as his goal, Cecil also entered politics and was chosen as the prime minister in 1890. He served the post for 6 years before resigning from it.

Though Cecil Rhodes did not live to see his dream for South Africa come true (he died in 1902 at the young age of 48), he did manage to create the De Beers foundation, the Oxford scholarship and various other such initiatives. Today he has a territory of Southern Africa in his name and is remembered by each and every student of the Oxford University who gain from the scholarship that he left behind.

The sudden fluctuation in the diamond market reduced with the start of the diamond market. By creating a controlling body for production at the mines, Cecil was able to create a system of demand and supply management. We have Cecil Rhodes to thank for the stability and popularity of the diamond industry that we see today.

Reference: GIA Study material.

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