GAHCHO KUÉ is too far north for trees. In the few snowless months, its surroundings in Canada’s Northwest Territories resemble a sprawling archipelago, as much lake as land, dark ponds stretching flat to the horizon. Wolverines roam, as well as bears, foxes, hares and caribou, though the herds have dwindled. There are no roads, no pipes, no electricity cables. So it seems strange when, flying over the tundra, a giant truck appears, then another, then a steel factory, rows of trailers and a big grey pit, deepening by the day.
De Beers, the world’s biggest diamond company, marked the opening of its Gahcho Kué mine in September. Local indigenous leaders prayed for the mine, beating drums. Bruce Cleaver, the firm’s chief executive, and Mark Cutifani, the boss of its parent company, Anglo American, stood by a ceremonial fire, flames tilting in the wind.
Now the hard work is under way. The area is so sodden that staff bring in heavy supplies just once a year, in the depths of winter, when they can build a thick road of ice (pictured above). A caravan bearing fuel and equipment is slowly crossing the tundra. At the mine, their colleagues are working day and night to ramp up to full production, with the aim of extracting more than 12,000 carats (2.4kg) of diamonds each day. Gahcho Kué is an astonishing endeavour, the biggest new mine in the world in over a decade. De Beers has no plans for another.
It is a turning-point for one of the world’s oddest industries. The diamond business gained its sparkle around 1866, when a farmer’s son picked up a glistening pebble on the bank of the Orange river in South Africa. For most of the next 150 years, De Beers would dominate the global market. Success depended on manipulated supply and skilfully cultivated demand.
Square-cut or pear-shaped
Much has changed since then. De Beers can no longer control the market. Though it is the biggest producer by value, it accounts for only a third of global sales, down from 45% in 2007. It faces many uncertainties, from synthetic diamonds to changing relationships with polishers and cutters. Its loosening grip is reflected in increased volatility: its sales fell 34% in 2015, before bouncing back by 30% last year. Meanwhile the source of the demand that drives sales—the link between diamonds and love—looks weaker than it used to.
But one forecast seems solid: there will be fewer new diamonds. De Beers continues to seek new places to mine, but has slashed its exploration budget. Another big find is unlikely. The supply of new diamonds is expected to peak in the next few years, before beginning a slow decline.
Natural diamonds—as opposed to the synthetic ones mostly used in industry—were formed more than 1bn years ago deep below cratons, the oldest part of continents. There, between Earth’s core and its crust, the pressure was high enough and the temperature low enough for carbon to crystallise into its hardest form. There diamonds would have remained were it not for molten rock rushing through the mantle and drawing diamonds, garnets and other minerals with it, like a furious river pulling dirt from its banks, before erupting through Earth’s surface faster than the speed of sound.
Some of the gems settled in river beds, as in Brazil, or were swept to the coast, as in Namibia. Others remained encased in extinct volcanoes, or pipes, and ended up buried under soil or lakes. De Beers’s richest diamond mine was found beneath sand in Botswana in 1972, within the Kaapvaal craton that spans southern Africa.
Speculation that diamonds might be found in Canada dates from the 19th century, when gems were found studded through the American Midwest. In 1888, the year Cecil Rhodes founded De Beers in South Africa, a 22-carat stone was unearthed near Milwaukee. Glaciers, it was posited in 1899, might have carried the diamonds south. It was decades before exploration took off. De Beers began quietly scouring Canada in the 1960s, but it was not until 1991 that BHP, one of its rivals, found kimberlite, an igneous rock, with enough diamonds to merit a mine. Within three years more than 100 companies had fanned out across the wilderness, rushing to claim some 200,000 square kilometres. At Gahcho Kué, geologists used aerial surveys and soil sampling to follow trails of minerals back to their kimberlite pipes.
The objects of these frenzied searches have intrinsic value for scientists. Gems deemed flawed by jewellers interest them most: inclusions in diamonds can carry samples from hundreds of kilometres below the surface. Evan Smith, a scientist at the Gemological Institute of America, recently studied inclusions in shards cut from diamonds of unusual size and quality. His findings, reported in Science, a journal, are the first proof that the deep mantle is peppered with metallic iron—a clue to the long-ago chemical reactions that shaped Earth.
But diamonds’ principal value has nothing to do with science. They have long been revered for their beauty—in September Mr Cutifani reminded Gahcho Kué’s visitors that the ancient Greeks regarded diamonds as the tears of the gods. Their modern status, though, is a corporate creation, a story inextricably linked with that of De Beers itself.
Diamonds had been rare before 1866; the South African finds threatened to send prices plunging. Rhodes founded De Beers to consolidate the area’s mines and to restrict sales. By his death in 1902, the firm accounted for 90% of the world market. More discoveries were made in the 20th century, notably in Siberia in the 1950s, Botswana in the 1960s and Australia in the 1970s. But De Beers kept tight control of supply, both by owning mines and by buying diamonds from others.
All I need to please me
That alone would not have turned De Beers into an empire. As essential was its scheme for conjuring up demand. In 1938 the company, then led by the Oppenheimer family, hired N.W. Ayer, an advertising agency in New York, to coax Americans to buy more rocks. It dreamed up the notion that a diamond ring should be an essential display of love and status, its gift a rite of passage. In the ensuing decades De Beers and its marketers penned slogans—memorably, “a diamond is forever”—and invented social rules, urging men to spend two months’ pay on a gift for their affianced. That benchmark not only permitted high margins, but suppressed the second-hand market—to the benefit of both the firm and its customers, who could be reassured their investment would hold its value.
The marketing worked. In 1939, 10% of American brides received a diamond engagement ring. By the end of the century 80% did. The result was a unique industry, controlled by a single company that was both marketer and miner, a capital-intensive business built on an ephemeral link to love, its success due to strangled supply and inflated demand.
But by the 1990s De Beers’s grip had started to loosen. The Argyle mine in Australia left the De Beers cartel in 1996, fed up with the giant’s terms. New discoveries in Canada, a civil war in Angola and the collapse of the Soviet Union all made supply harder to manage, meaning that more diamonds were sold outside the cartel. Concern that diamond sales were financing African conflicts threatened the gem’s image. In 2000 De Beers said it would no longer control the market so strictly, but sell instead to vetted buyers. Legal settlements in America and Europe followed, barring the company from monopolistic behaviour.
De Beers is adjusting to the new era. Its first challenge is an unfamiliar one: to grapple with competitors. ALROSA, Russia’s state-owned diamond company, produces more stones than De Beers, though it earns less (see chart). New firms have cropped up, too, some buying mines from De Beers as it sought to shore up its balance-sheet.
De Beers’s partners, meanwhile, have become more demanding. Botswana’s government owns 15% of the firm; South Africa’s state investment fund owns 14.5% of Anglo American. De Beers’s mining operations in Botswana and Namibia are joint ventures with the governments there. Both countries share the proceeds from sales of diamonds mined within their borders, and can also sell some diamonds independently, enabling them to test the prices that De Beers is getting and further loosening the firm’s control over supply.
Even in countries where De Beers does not have a joint venture with the government, it depends on local co-operation. Winning government approval for Gahcho Kué required more than 15,000 pages of environmental reviews. The firm wanted to expand a mine in Ontario, but a nearby indigenous group withheld its consent.
The limits of De Beers’s power have been revealed in the past two years. Demand slumped in China in late 2014, prompting retailers to buy fewer polished diamonds. Companies that cut and polish stones became weighed down by excess inventory. But the tools De Beers once used to use to prop up prices were no longer at hand. There are legal restrictions on the share of excess diamonds it may buy. Because it controls just one-third of the market, any production cuts have limited effect on total supply. In fact, the firm may even have made matters worse. Contracts with its customers sometimes encourage them to overpurchase—if they turn down too many of the stones De Beers offers them, they risk being allocated a smaller share in future.
There are signs of recovery. Bain, a consultancy, estimates that rough-diamond sales rose by 20% in 2016. De Beers is becoming more flexible, easing rules for buyers of its stones. More frequent reporting of its sales should help investors understand the business. It also signals to competitors—without engaging in collusion—when the market is deteriorating, enabling them to adjust accordingly. “The value of transparency will come to exceed the value of secrecy,” argues Fraser Jamieson of J.P. Morgan, a bank. Even so, excess inventory may yet drag down the market. Some jewellers have recently reported slack sales.
Mr Cleaver, an Anglo American veteran, became the boss of De Beers in July. “The fundamentals of the industry remain very good,” he says. In the coming years, he thinks, De Beers will benefit from rising incomes, particularly in China and India. Its own research shows that diamonds still capture the imagination: 26% of young American brides say they dreamed about their future engagement rings years before beginning a relationship.
But a long-term risk looms over the industry: one day young couples may no longer want diamonds at all. They are a “Veblen good”, as items that gain their value solely from their ability to signal status are named, after Thorstein Veblen, an economist who wrote about the spending of the rich. For Veblen goods, the normal law of supply and demand does not hold: higher prices support demand, rather than suppressing it. If a big gap opens up between the number of diamonds offered for sale and the number of people willing to buy them at high prices, diamonds could suffer a big, sustained fall in value and the entire business could cease to make sense.
Today’s 20- and 30-somethings grew up as De Beers lost its monopoly and, wary of helping competitors, cut spending on the advertising that had done so much to create demand for diamonds in the first place. In recent years the company’s marketing budget accounted for roughly 1% of sales, down from about 5% in the 1990s, according to Morgan Stanley. At the same time the notion of “conflict diamonds” percolated through the popular consciousness—a movie called “Blood Diamond”, starring Leonardo DiCaprio with a Zimbabwean accent, was released in 2006. Young couples, who earn less than their parents did at their age, may prefer to spend their money elsewhere.
Complicating matters, those who do want a diamond now have an alternative. Synthetic diamonds have been available for decades, but only recently has the process become cheaper and the result more refined. In 2015 a company called New Diamond Technology made a ten-carat polished diamond of excellent quality, an unprecedented feat. Sales of synthetic diamonds are thought to amount to just 1% of the rough-diamond market. But synthetic-diamond sellers are appealing to young shoppers’ concerns for social and environmental causes—Diamond Foundry, backed by Mr DiCaprio, boasts that its products are “as rock-solid as your values”.
So De Beers is trying to boost the allure of natural gems. “Long-term demand is only going to be there if we continue to generate it,” says Mr Cleaver. That means studying consumers; few other firms obsess over both mining-truck depreciation and romance among young Chinese.
It also means new advertisements. Some centre on De Beers’s Forevermark brand, a tiny code etched in a diamond that explains the gem’s provenance. Other spending is for the industry as a whole. In 2015 De Beers and other miners formed a group to pool money for generic diamond advertisements. Its first campaign ran in America before Christmas, with the slogan “Real is rare”. YouTube videos show Nick Cannon, best known as the ex-husband of Mariah Carey, a singer, interviewing couples about their engagements.
It is unclear if this will persuade young romantics to spend thousands on diamonds. If synthetics grow in popularity, De Beers may need to become more aggressive. Already, it is suing a synthetic-diamond company in Singapore for infringing its intellectual property. Its own synthetic-diamond operation, for industrial uses, holds more than 450 patents.
As the company works to shore up demand, there is a source of solace. For over a century it has fretted that big new finds would lead to plunging prices. “Our only risk,” Rhodes declared, “is the sudden discovery of new mines, which human nature will work recklessly to the detriment of us all.” But it seems that threat is waning.
In total, explorers have sampled fewer than 7,000 kimberlite pipes. Of these just 15% have held diamonds and just 1% (about 60) have held enough of them to justify building a mine. De Beers continues to explore in Canada, South Africa, Botswana and Namibia—the only thing worse than finding a big new source would be someone else finding it first. Some fancy technology is supposed to help. A “Superconducting Quantum Interference Device”, for example, searches for changes in magnetic fields below Earth’s surface, which might indicate the presence of kimberlite.
But De Beers regards any big discoveries, by itself or anyone else, as unlikely. “The best and easiest deposits are already found,” says Des Kilalea, an analyst. The company’s Canadian exploits are a reminder of just how arduous new mines can be. Mountain Province, a firm that now works with De Beers, discovered Gahcho Kué’s first pipe in 1995. The intervening years brought a separate, failed mine for De Beers in Canada, lengthy negotiations with local officials and, at last, the construction of Gahcho Kué itself.
That required draining part of a lake. To bring in building supplies, the company had to build the winter road. Staff would plough snow off a pond, drill through thin ice, then pump up water to make the ice thicker, laying down a few inches at a time. This was repeated over 120km, at temperatures often plunging to -40°C, until the ice was thick enough to support a 500-tonne mining shovel, broken into dozens of pieces. In total, building Gahcho Kué cost $1bn. That was deemed worthwhile, compared with the costs of finding and opening a mine elsewhere.
Other companies have a few mines planned. De Beers is now focused on expanding existing mines, not building new ones. New technologies may help liberate more diamonds from kimberlite more efficiently. Even so, Bain estimates, production will peak in 2019. Supplies of new diamonds will then start to fall, sinking by 1-2% each year until 2030.
For now, aircraft shuttle staff to Gahcho Kué, dropping off miners to work for two-week stretches. Nearly half the staff are locals, and a fair share are indigenous. “We want jobs, just like everybody else,” says Eddie Erasmus, grand chief of the Tlicho people. Among the mine’s maze of trailers are features typical of any big-company workplace. There is a gym. Signs in the cafeteria remind staff to eat fruits and vegetables, though many prefer heartier fare. Rob Coolen, who oversees the ice road, began work at Gahcho Kué before the mine was built, sleeping in a tent on the tundra. Coffee and bacon, he says, are essential.
The cafeteria sometimes shudders with the reverberations of a blast from the pit. Outside, work goes on day and night. Staff pile kimberlite onto huge trucks, then haul the rocks to the processing plant. There, the ore passes through breakers, crushers and scrubbers until pebbles are sent through a series of X-rays and lasers, jets of air separating diamonds from worthless stones.
When love’s gone, they’ll lustre on
No workers at Gahcho Kué touch the diamonds with bare hands. Only a few see the gems before they are sent off by plane to be valued. In September Mr Coolen stood atop a steel grate in the processing plant, the platform shaking as giant scrubbers churned beneath. “Occasionally you see one,” he shouted above the din, “and it’s just gorgeous.” The mine is expected to reach full production in March. By 2030, its diamonds extracted, it will close.