Losses aren't forever, De Beers shows

``Diamonds are forever.'' The phrase made famous by DeBeers might well apply to the company itself. As it nears its 100th birthday, DeBeers, the world's leading diamond trader, has just announced a 40 percent increase in sales for last year.

The South African company, which controls 80 percent of the world diamond market, raked in $2.56 billion last year, nearly matching its record $2.72 billion sales in 1980. The figure represents a big comeback after a five-year slump for the diamond cartel.

Created by Cecil Rhodes in 1888, DeBeers was taken over in 1930 by Sir Ernest Oppenheimer, the South African mining magnate. He developed the market strategy that has permitted the industrial group to weather upheavals in diamond prices such as the one that hit the industry in the early 1980s.

The De Beers policy aims at reducing price fluctuations by allowing independent buyers to pay what the market will bear when prices are up. But when prices are down, the company pays more than the going rate, buying up excess stones before the market is saturated.

In return, diamond producers must abide by sales quotas that are readjusted, whenever necessary, to match the demand. Even DeBeers clients, a select group of 150 diamond dealers, are allowed to buy only the number and sizes of stones they need. DeBeers offers them a prepared package on a take it or leave it basis.

The simple recipe proved effective in controlling diamond prices. But in 1981, they dropped precipitously after a rampage of speculation by private investors. By 1984, the average price for the top quality D-flawless diamond had plunged from $60,000 a carat to $10,000.

But De Beers never lowered its prices. Instead, it slowed production of rough diamonds, shutting down two mines and buying up surplus stones to maintain their prices. The company simply sat on the unmarketable big, expensive diamonds. The question was, how long could the company hold out with melting profits and a cash reserve in 1982 of only $1.2 billion?

By 1984, the company's glittering stockpile had doubled, amounting to $1.95 million worth of dormant goods, and it had to borrow $625 million to keep afloat.

At the same time, new threats arose from other quarters. The Soviet Union flooded the European market with diamonds at bargain prices, 15 percent below the going European rate. The discovery of big new mines in Australia threatened more diamond dumping in Europe. And a diamond producer in Zaire temporarily defected from the DeBeer organization.

But by 1985, the DeBeers stick-it-out strategy began to pay off. Since diamonds are priced in dollars, the European market picked up as the dollar fell. And lower interest rates in the United States, where demand is greatest, made the gems appealing once again to investors. Japan, the second-largest outlet for De Beers's diamonds, increased its imports by 59 percent last year. For the first time in years, the industry was able to raise the price of wholesale diamonds by 14 percent.

Even expensive diamonds are selling again. Last October, a D-flawless specimen sold at Sotheby's for $56,000 a carat (compared with a similar-quality diamond that sold for $10,185 a carat at Christie's in June 1981).