Vertical integration has been a significant driver of acquisitions in the mining industry in the past decades. As steelmakers and other mineral processers were trying to secure supply of resources, they increasingly decided to buy mines and mining companies. The next decade will show another interesting development. The vertical integration will increasingly include the next step in the value chain: trading.
Vertical integration in mining
The looming merger of Glencore and Xstrata will create the first of a new type of companies. The integrated mining, processing and trading companies will span the entire value chain of the resource world. This development is not unique. In many other industries the drive to become more customer-centric has resulted in similar moves.
The fact that a large part of the global resource production never enters the global trade and the nature of commodity markets, in which price is the key differentiator, has made the development in mining and metals slower than elsewhere. Furthermore, there is a large difference between the corporate cultures of the trading houses and the large mining companies.
Why integration?
Now why would the resource producers want to merge with traders? What synergies will be achieved in such a combination? The key of the answer is improvement of supplier power. A significant cost reduction and productivity improvement will be achieved by eliminating the trading department of the resource company after transferring the crucial activities to the trading house. However, most money will be made because of improved trading terms.
An exiting additional benefit in the long term could be that mines are going to produce on demand and just in time. If customer A in Japan sends its specified needs to the traders, the next step should be to translate the order into a production schedule for the mine and plant.
Consequences for mining
What will the integration along the value chain imply for miners? First of all they will slowly be forced to think more about the customer and less about the technology. Secondly, the production schedules will need to become more flexible in order to be able to deliver what is demanded. Finally, as the new company will be able to better respond to changes in commodity prices, more mines will start aligning their output volume with demand. In the extreme case this will mean that more mines will temporarily be shut down or sleeping mines temporarily opened again.
Concluding: Mining will become more flexible. Vertical integration including trading houses will not cause a revolution in the industry, but it will change priorities and slowly make the mining industry a more customer-centric environment.