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. Last Updated: 07/27/2016

De Beers Faces Threat To Gem Trade Hold

LONDON -- For more than 60 years, the South African mining giant De Beers has controlled the secretive world of diamonds, but it now faces serious threats to its grip on the multibillion-dollar gem trade.

Anarchy in war-torn Angola, new finds in Canada and -- most importantly -- tough-talking Russians could end De Beers' illustrious cartel and herald an age of turmoil in polishing centers such as Antwerp, New York and Tel Aviv.

De Beers' hold on the market began to loosen after Australia's Argyle, the world's biggest diamond mine, severed ties with De Beers' Central Selling Organization, or CSO, in June.

The move is not disastrous for De Beers, as Argyle produces mainly small, low-quality stones that made up only 6 percent of CSO sales.

But the Australian firm's pullout from the syndicate is nevertheless a significant sign of the times.

CSO, which has its headquarters in London, was founded in the 1930s by Ernest Oppenheimer, chairman of De Beers and founder of another South African powerhouse: Anglo American.

It now controls about 75 percent of all trade in uncut diamonds, selling about $4.5 billion worth of stones a year at the imposing CSO headquarters, where traders are shown boxes of diamonds for which they can bid.

The rough diamonds piled up in CSO's vaults come not only from De Beers but from other producers all over the world. They sell their stones to CSO, as the De Beers' cartel guarantees a steady demand and stable prices for the stones.

In turn, De Beers takes a fee and promotes diamonds through $400-million-a-year global advertising campaigns.

Now that Argyle has pulled out of CSO, the big question is whether Russia, the world's second-biggest producer, will stay in.

Russia and De Beers have been in talks for 18 months to strike a deal that would prevent Russian diamonds from being sold outside CSO's control directly to diamond cutters.

These "leakages" began several years ago when Russia, which accounts for roughly 20 percent of CSO sales, was still obliged under a five-year pact to sell nearly all its diamonds to the De Beers-controlled cartel.

Most of the leakages, which started as a trickle but quickly became a stream, were plugged in February when Russia and De Beers reached a framework agreement, which could be the basis for a final, watertight marketing deal.

However, says John Helmer, Moscow correspondent for the trade magazine Diamond International, "Russian diamond politics remain as complicated and as unpredictable as ever."

De Beers also faces a long-term threat from new mining operations in Canada and political turmoil in Angola -- the fourth-biggest diamond producer after South Africa, Russia and Botswana.

But all is not gloom and doom, analysts say.

They point out that De Beers' rivals in Angola, Australia and Russia must make big investments to keep production levels competitive.