For decades, the majority of the world’s diamond trade was controlled by De Beers. It used its market power to keep the prices high. The biggest winner was De Beers; the firm thrived on artificially inflated prices, murky dealings in war zones, and strictly oral contracts. De Beers’ problems started in the early 1990s. The Russians, in desperate need of currency, began dumping low-quality near-gem diamonds. This violated Russia’s contract with the CSO (Central selling organization). The CSO retaliated by slashing the price for this type of rough stone by as much as 11%. This resulted in losses for the Australian diamond producer, Argyle Diamonds, too. During 1992-96, Argyle Diamonds was compelled to hold back nearly 15% of its production to lower the CSO’s carrying costs. In 1996, it decided not to renew its contract to sell its diamonds through the cartel. In terms of value, Argyle diamonds accounted for 6% of De Beer's input. But in terms of volume, it accounted for 40% of De Beers input. As a result of these developments, the market was flooded with cheap stones from Russia and Australia. In 1997, the diamond market became weak due to the Asian Financial crisis. The market was flooded with cheap diamonds and De Beers decided not to maintain control of the cheaper stuff. Instead, it focused on the more expensive diamonds. From November 1997, the CSO decreased supplies by reducing the sales of rough diamonds to sightholders by 50%. The Asian crisis also reduced the CSO’s sales in 1998. Though sales improved in 1999, they were lower than that of 1997. In 1997, De Beers decided to stop supporting the prices of small diamonds by maintaining a buffer stocks. The announcement came as a nightmare to Asian countries, especially India. India's diamond industry depended on the cartel to control rough diamond supplies worldwide in order to sustain prices. De Beers announced that it didn't see any reason to continue supporting the price, especially when the Indian diamond trade's main supplier of small diamonds was Argyle Diamonds. Since India lacked sufficient mining technology and financial muscle, the state government of Madhya Pradesh was unable to systematically carry out diamond exploration in the state. So, in 1998, it invited the world's mining powerhouses to carry out the exploration. While most global mining ventures paid royalties to host governments averaging 5%-7% of the value of their output, Madhya Pradesh government wanted a minimum of 10% and encouraged competition among bidders to offer more. Companies were required to set up joint mining ventures in which the state would hold an 11% share. The state government also announced that the diamonds would be sold through an open auction rather than through the CSO. In 1998, the Namibian government considered measures to increase competition in the diamond industry, thus aggravating De Beers problems. Namibia – producer of the world’s best gem diamonds – recommended that the diamond trade be deregulated under the Diamond Act, 19991. By the end of 1999, De Beers’ stock was worth around US$4 billion, nearly as much as the company's annual sales of US$5.5 billion. As these assets were not earning an attractive return, the share price fell, unnerving several large shareholders, especially in the US. Analysts estimated that De Beers shares, listed on the Johannesburg Stock Exchange, traded at a discount of more than 70% to the company's assets, even though the company recorded its highest-ever diamond sales in 1999.

1. Business environment plays a critical role in the strategic decisions taken by firms in any industry. How did the changing business environment influence the diamond industry? 2. It appears that De Beers’ hold over the prices of diamonds has come to an end. Do you think this development would benefit consumers?