De Beers maakt banden met diamantleverancier Alrosa losser - Vraag en antwoord (en)

(See also IP/06/204)

What is De Beers?

De Beers SA is the Luxembourg-based holding company of the De Beers Group ("De Beers"), which was established in 1888 in South Africa. De Beers is the largest rough diamond supplier in the world with an annual turnover of around US$ 7 billion in 2004 (approximately € 5.6 billion).

In addition to its wholly-owned diamond mines in South Africa, De Beers has entered into production joint-ventures with the governments of Botswana, Namibia and Tanzania. It has interests in operations throughout the world in relation to diamond exploration, mining, recovery, valuation, marketing, trading, cutting and polishing of rough diamonds and jewellery sales, covering in effect the entire diamond pipeline from the mine to the consumer.

Through the London-based Diamond Trading Company ("DTC"), De Beers sorts, values and currently retails more than half of the world's annual supply of rough diamonds.

Throughout most of the last century, De Beers was considered the "custodian" of the diamond market. Its position during that period, according to De Beers, enabled it " to co-ordinate and regulate the supply of diamonds in pursuit of price stability and consumer confidence."

What is ALROSA?

ALROSA Company Limited ("ALROSA") is the second largest diamond mining company in the world, accounting for over 98% of Russian diamond production. Russia is the second largest diamond producing country in the world, in value, after Botswana. ALROSA has interests in operations throughout the Russian Federation in relation to diamond exploration, mining, recovery, valuation, cutting and polishing of rough diamonds as well as jewellery manufacturing. ALROSA's 2004 turnover amounted to around US$ 2.4 billion (approximately € 1.9 billion).

What is the size of the rough diamond market concerned by De Beers' commitments?

The rough diamond market amounted to around US$12 billion in 2004, which is around €9.6 billion.

De Beers' commitments will free up a viable alternative source for supply of rough diamonds, which benefits the downstream markets of trading, cutting and polishing. The value of the polished diamonds market in 2004 is estimated to amount to approximately US$17 billion (approximately €13.6 billion), while retail sales of diamond jewellery amounted to over US$ 60 billion (approximately € 48 billion).

What is the structure of the rough diamond market and who are De Beers' competitors?

The rough diamond market is highly concentrated. Major players besides De Beers (market share above 40%) and ALROSA (market share above 20%) include Rio Tinto, BHP Billiton and Aber, each of which holds a market share of below 10%.

What is the De Beers/ALROSA Trade Agreement about?

The investigated practices arise from a purchase relationship between De Beers with ALROSA (or its predecessors), which dates back to 1959 and which developed over time. Specifically the investigation concerned a Trade Agreement, which was entered into on 17 December 2001 by DBCAG and CWEL of the De Beers group, on one side, and ALROSA, on the other.

On 5 March 2002 De Beers and ALROSA Company Limited notified this Trade Agreement to the European Commission (under the procedural rules for applying EC anti-trust rules until 1 May 2004, i.e. Regulation No 17/62, since replaced by Regulation 1/2003 - under the new procedural rules companies have to verify the compliance of their agreements with competition rules themselves, without notifying them to the Commission). Pursuant to this Trade Agreement, ALROSA would supply rough diamonds to the value of US$ 800 million (€640 million) per annum to De Beers for a duration of five years. At the time of notification, this amount represented about half of ALROSA's output and corresponded in practice to the quantities of rough diamonds ALROSA had been exporting in the previous years outside the former Soviet Union through similar Trade Agreements with De Beers (see IP/05/664).

Pending the Commission's proceedings concerning the Trade Agreement, De Beers has agreed to purchase substantial amounts of rough gem diamonds from ALROSA under a "willing-buyer-willing-seller" arrangement.

The commitments differ from those published in June 2005 for the comments of interested parties. What are the reasons for this?

Under the procedure leading to a so-called commitment decision by the Commission (rendering commitments given by undertakings legally binding) pursuant to Article 9(1) of Regulation 1/2003, there is an obligation to publish a summary of the undertakings given so that market operators and other interested parties can submit their comments to the Commission (a so-called market test publication pursuant to Article 27(4) of Regulation). In response to the Commission's publication of 3 June 2005, it received 21 observations, a large majority of which indicated that the identified competition concerns would not be resolved by the proposed commitments. As a consequence, De Beers offered amended commitments addressing the relevant points raised by third parties.

Why do the commitments allow a transitional period of three years?

The Commission's investigation has shown that the transitional period is necessary to build an efficient distribution system for the diamonds previously channelled through De Beers. In any event, from the very beginning of the transitional period, substantial quantities of rough diamonds from ALROSA's increasing production will be released onto the market in addition to the significant volumes of rough diamonds which ALROSA is already selling outside of De Beers' channels (US$400 million in 2004 or approximately €320 million).

What happens if De Beers fails to respect the commitments?

The effect of the Commission adopting a formal decision based on Article 9(1) of Regulation 1/2003 recognising De Beers' commitments is to render the commitments legally binding on De Beers. If De Beers failed to respect the commitments, the Commission could decide to impose fines of up to 10% of its global turnover without having to establish that De Beers had violated the competition rules.

What is the significance of these commitments for other basic industries?

So-called "basic industries" such as the production of raw materials are often characterised by an oligopolistic structure, high barriers to entry, capacity restraints, high capital costs, and tend to be influenced by price-setters. The decision can therefore be seen in the wider context of applying EU competition policy to basic industries.

What impact do the commitments related to the Trade Agreement have on the outstanding complaints against De Beers' Supplier of Choice system?

The commitments will enable the creation of an independent source of alternative supply of rough diamonds outside De Beers' channels. In assessing the complaints against De Beers' Supplier of Choice distribution system, the Commission will certainly consider this change in the market circumstances.

What is De Beers' "Supplier of Choice" about?

Supplier of Choice ("SOC") is De Beers' system for distributing rough diamonds that was put in place in 2003 following a clearance by the Commission (see IP/03/64). SOC limits supplies of rough diamonds by De Beers to a number of selected customers, the so-called "sightholders". The system provides amongst others for procedures and criteria for selection of "sightholders" and allocation of rough diamond supplies to "sightholders" and other rules governing the supply relationships. It also introduces an Ombudsman, whose role is to oversee the proper implementation of SOC rules on selection and allocation.

The Commission has received several complaints alleging that SOC violates Articles 81 and 82 of the EC Treaty on restrictive business practices and abuse of a dominant market position. The Commission's investigation of these complaints is ongoing.