Mining giants focus on small profit areas

Making extra dollar in previously ignored ways vitally important, companies realise

THE world’s big mining groups are sharpening their marketing strategies in a post-crisis scramble for even tiny increases in profit, seeking marginal gains they previously left for others to pick up.

Anglo American, BHP Billiton and Rio Tinto are using varying tactics to boost profitability on commodities such as copper, iron ore and coal, as the traditional model of simply producing more is under strain and the recovery from a deep downturn remains tentative.

BHP and Rio Tinto, the biggest miners, have both appointed executives this year to extract the maximum value from every stage of their business process, from the mine to the consumer.

For BHP and Anglo American, the strategies include commodity trading, although on a far smaller scale than rival Glencore, which began life as a pure trader and says income from this business helped it through the commodity slump.

Overall, the objective is to cushion the mining groups from the kind of extreme price swings that the market has experienced in recent years.

“I am confident that the culture changes we’re building on will allow us to move away from this boom-and-bust mentality,” new BHP marketing and supply head Arnoud Balhuizen said.

The strategic shift, which began with the price crash that knocked billions off the miners’ earnings last year, has gained momentum this year despite a revival on commodity markets.

“Prices have lifted, but the world will remain a very competitive place and everybody will still be looking for that extra dollar,” one industry source said, speaking on condition of anonymity.

Even after investors piled back into mining stocks this year, making them the biggest gainers on the London’s FTSE index, their prices are still barely back to where they were around the start of last year.

Jefferies Investment Bank executive Chris LaFemina said: “In a bull market, companies would not have been worried about incremental margins through marketing, but now everyone is focused on getting the maximum price.

“They can get a little bit of extra margin over a lot of tons.”

Balhuizen, who was appointed to his newly created position in May after more than a decade with BHP, said a traditional focus on selling large volumes through standard contracts may have been good for consumers, but not for producers.

Following zealous cost-cutting over the last two years, the next stage was to assess every stage of the value chain.

That led to the conclusion that the best price could be achieved if brokers were cut out, long-term contracts torn up and specific products delivered to specific consumers.

It is an approach that echoes Glencore’s use of its network of an estimated 7 000 customers to deliver a tailored service to clients willing to pay a premium over market prices.

Balhuizen signalled a shift at BHP. The group gives no figures for how many marketing staff it employs, but he said traders – who he defined as people who buy material on their own account and take risk – were among them.

Anglo American also does some pure trading. While the group does not disclose volumes, it has said it met a goal set in 2014 that marketing activities should contribute $400-million (R5.6-billion) in core earnings by this year.

This remains modest compared with Glencore, which expects trading to account for up to $2.7-billion (R39.9-billion) of core earnings for the full year.

Outside trading by Anglo American has also boosted platinum margins by as much as 5%.

Rio Tinto says it does not trade but has appointed Steve McIntosh as its group executive of growth and innovation to span the entire value chain from ore body to market to earn the extra dollar.