Dig stuff out of the ground, dump it on a boat and then wave goodbye. The business model for miners has been stuck in a rut for centuries and it's no longer good enough, say some powerful industry players. Without clever marketing and trading strategies, they argue, commodity producers will be left with a mountain of ore and dwindling margins.
The pressure on miners to shift focus from diggers and loaders to shipping and logistics is mounting. The Financial Times reports that Anglo-American PLC, in an effort to raise its game, is reviewing all its sales activities and creating a new commercial unit with two regional hubs and a shipping desk to charter its own vessels. Anglo reckons it can earn an extra $400-million (U.S.) in operating profit by 2016, simply by being proactive and offering customers a more fine-tuned service, as opposed to dumping rock on the dockside.
The impetus for change is coming from many quarters. Cost pressures on miners are eroding the upstream profit, pushing them to seek those extra percentage points of margin by servicing their customers more effectively. At the same time, the buyers are becoming more demanding, insisting on better terms and the opportunity to hedge price risk. Meanwhile, the big commodity trading houses are ahead of the curve. These include companies such as Glencore Xtrata, which has reverse-engineered the conventional business strategy, moving from the air-conditioned office to the dirty coal seam.
Anglo says it has no intention of setting up a third-party trading business; it will only be concerned with marketing its own product. However, the distinction may be academic, as the race in the mining sector is not about speculative trading but capturing markets. The strategy of the major commodity trading houses, such as Glencore in oil and metals or Cargill in agriculture, is almost the opposite of speculation; it is the control of margin risk at one end by investing in the commodity, whether by owning mines or grain elevators, and in the consuming market at the other end, through shipping logistics and customer contracts.
What we are seeing is the emergence of a "new order in commodity trading," says Oliver Wyman, the consultancy. The energy sector, where the major oil companies all operate large trading organisations, has led the way. According to Wyman, the commodity trading arena will expand by 40 per cent in value to $54-billion with the growth in trading of liquefied natural gas, where margins can be as high as 25 per cent in what is now a thinly traded but valuable commodity.
It's not just the margin; the marketing machines operated by the commodity trading houses give them valuable data about prices, access to more customers and the contacts that can lead to the besst upstream investments. Add to that hoard of data, a portfolio of producing mines and you have a hugely powerful commercial and industrial machine taking metal from mine to factory or grain from the prairies to flour mills.
The message for those in the resource business is simple: Become integrated or become irrelevant. For the larger miners, that means building a sophisticated marketing and trading business or to be stuck at the quayside with a mountain of depreciating ore. Wyman reckons that the message will soon be heard, not just among miners but with customers, and among the national oil companies which have so far been reluctant to dip their toes in what was once seen as speculative trading but is really about connecting the dots.
It is a moot point whether Canada's resource sector has yet fully understood the implications of what is being planned in Geneva, New York and London. We are witnessing a race to occupy the middle ground between the wellhead and the gasoline pump or between grain terminals and flour mills. Secure the supply, the shipping and the customers and you are in control of your destiny. It was what the founders of the Royal Dutch Shell group understood over a century ago when they combined the tanker fleet of Shell Transport and Trading with the oil fields of Royal Dutch Petroleum.
It is the common fallacy of miners, oil engineers and farmers to believe in the primacy of production. It has been Canada's bitter experience to discover that it is often the buyers who are in control.