Supply Chain Analysis Of Rio Tinto
Rio Tinto group was a company formed in 1873 to reopen copper mines besides Rio Tinto river in Hueva, Spain. In 1962 The Rio Tinto- Zinc Cooperation was formed after merger of the two companies The Rio Tinto-Zinc Company (RTZ) and The Consolidated Zinc Company, same year the Australian interest of both company were merged to form Conzinc Riotinto of Australia limited which was renamed CRA limited in 1980.(Anon. 2017e)
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Rio Tinto is also one of the founding member of International Council on Mining and Metals. In 2008 Rio Tinto unveiled its vision for the “mine of the future” aiming to be the leader in automated mining and transport. In January 2013 they produced the first concentrate from their newest operation in Mongolia the Oyu Tolgoi copper- gold mine, the mine is scheduled to be one of the top five copper producer and also a significant gold producer.(Anon. 2017)
Their major products are aluminium, copper, diamonds, gold, iron ore, industrial minerals (borates, titanium dioxide and salt), thermal and metallurgical coal and uranium. (Anon. 2017f)
They released their 2018 first half result on 1 Aug 2018 which stated a total cash return to shareholder of $7.2billion and a underlying EBITBA of $9.2billion.
They have a comfortable position in the market right now in-spite of competition from major mining companies like Vale S.A and Bhp Billiton, iron ore had been there key asset as its has generating the most revenue for the company along with aluminium being the second most profitable commodity for the company.
This analyses is about Rio Tinto’s business strategy to remain among the top mining companies in the world, there vision and long term approach in the field of mining to produce ore bodies in much cost effective system by implementation of technology and innovation to transform the mining industry.
World industrial production is majorly accelerated by global trade which is mostly driven by stronger demand by Asian countries, the developing economies remains the main drivers of global growth.(United Nations Desa 2018)
In the past year East and south east Asia have had a significant share in global growth, majority of which was influenced by the growth in Chinese economy.(United Nations Desa 2018)
This growth in Asian market have heightened their demand of minerals and metals, almost half of Rio Tinto’s revenue was generated by supplying the raw material needed for rising demand of better infrastructure in these developing countries.
Source: Rio Tinto Chartbook August 2018
COMMODITY PRICES AND MARKET
“The World bank’s Metals and mineral price index rose by 4 percent in the first quarter”(World Bank Group 2018).
Despite a good start metal prices started falling in march because of trade war between China and United states. Rio Tinto’s key assets Iron ore and Aluminum were majorly affected by these key events in the global market, where on one hand the trade war between China and USA and also China’s demand for high quality iron ore caused a sharp drop in iron ore prices on the other hand U.S. sanctions on Rusal, the world’s second largest aluminum producing company caused a surge in Aluminum market.(World Bank Group 2018)
Rio Tinto delivered strong result among these changing market trends and commodity prices most of their revenue was generated by strong sales in Iron ore, copper and aluminum. Though the sharp drop of iron ore price was not expected by the company but they did anticipate the market moving to surplus from deficit.
Rio Tinto Pilbara Mine of the future operation in Australia contributed largest share in the company’s revenue in first half of 2018 by achieving lower per tonne prices.
The rise in aluminum prices also helped the company in keeping a strong balance sheet.
“The Aluminium group’s underlying EBITDA of $1,831 million increased by ten per cent compared with 2017 first half” (Anon. 2018b)
These results were highly affected by the increase in aluminum prices due to US sanctions.
They have a list of world class assets including one of the world’s largest integrated mine in Pilbara region of Australia to their Queensland Bauxite Asset and Canadian aluminum smelters. In 2017 the company invested US$2.0 Billion in capital expenditure and US$2.5 billion in Growth opportunities which includes their Silvergrass iron ore mine in Western Australia, underground copper mine development in Mongolia and Amrum bauxite project in Australia.(Anon. 2017g)
They successfully completed construction of Silvergrass iron ore mine and opened it for business in 12 months, Approved investment of US$368 million for their joint venture of Resolution copper project in the US with BHP Billiton in which they hold 55 per cent share and also successfully completed sale of their Coal and allied thermal coal business for US$2.69 million. (Anon. 2017)
BUSINESS: PERFORMANCE COMPETITION AND STARTEGY
Rio Tinto iron ore mine in Pilbara region of Western Australia consist of 16 mines, four port terminal and 1700 km railway network. They opened their 16th mine Silvergrass recently and reached the historical milestone of five billion tonnes export of iron ore in 2017. (Anon. 2018a)
Pilbara iron ore shipment in the first half of 2018 was 168.8 million which was 9 % higher than first half of 2017 but had a 2 % drop in FOB EBITDA margin, 31% of their sales were free on board and rest was sold including freight. (Anon. 2018)
Rio Tinto’s aluminum smelters are spread all over the globe including both wholly owned and joint venture alumina refineries located in Australia, Brazil and Canada. There wholly owned and joint ventures bauxite mines are located in Australia, Brazil and Guinea.(Anon. 2017b)
Due to stronger pricing and higher bauxite volumes The Aluminum group generated a underlying EBITDA of $1831 millions and also made a 14% increase in 3rd party shipment in first half of 2018.(Anon. 2018)
Rio Tinto currently have copper and diamond production from four copper mines located in US, Mongolia, China and Indonesia. There diamond production comes from Agryle mine in Western Australia and Diavik mine in Canada in which the company holds 60% share.(Anon. 2016)
Rio tinto made extremely good copper and diamond sales in the first half of 2018 compare to their sales in first of 2017. They recorded a underlying EBITDA of $1360 million and gross sales revenue of $3032 millions. (Anon. 2018)
Rio Tinto Energy & Mineral consists of product such as Borates, Uranium, Coal, Iron pellets and Titanium oxide fertilizer.(Anon. 2017c)
Energy and Mineral group consist of both wholly owned and joint venture companies.
Their 2018 first half underlying EBITDA was 6% lower than H1 2017.(Anon. 2018)
From above commodity performance data it is clear that iron ore generates a higher amount of share in Rio Tinto annual revenue than its any other product.
The Aluminum group of Rio Tinto is the second asset after iron ore that has been consistent in its share of companies revenue.
But both Iron ore and Aluminum had seen lots of ups and down in prices over the year, on one had where iron ore prices have seen a downfall over the decade on the other aluminum prices have not been consistent either.
The global demand of seaborne iron ore have been comparatively higher than that of Aluminum due to increasing demand of iron ore in china for steel production.
As its clear from the above statistics that global aluminum demand Is almost 10 times less than China’s individual demand for iron ore “China’s iron ore imports grew by 4.5 per cent to a record 1,075 million tonnes in 2017, propelled by strong growth in steel production “ (Resources and Energy Quarterly March 2018)
Applying the Boston matrix system its clear Iron ore is a star product of the company and also a product which shows quality of becoming a cash cow.
Rio Tinto faces competition from two major mining companies that is Vale S.A. and BHP Billiton as they are the top producer of seaborne iron ore and also the top three supplier of iron ore to China.
“The iron ore market is expected to continue to be dominated by the ‘Big 4’ producers, with Rio Tinto, BHP, Vale and Fortescue Metals Group (FMG) projected to account for around 72 per cent of the seaborne market. The first three companies are expected to increase production to reach their long-term targets in the first half of the outlook period”( Resources and Energy Quarterly March 2018)
These production figures are in metric tonnes
China is the world largest steel producing country and also have one of the largest iron ore reserves in the world but Chinese iron ore is of low grade, it has iron content of around 30% percent.(Resources and Energy Quarterly March 2018).
You require iron ore with iron(Fe) percentage ranging for 58% to 65% to make pig irons for the production of steel These high grade of iron are mostly found in two countries around that are Brazil and Australia.(Anon. 2017d)
Rio Tinto and BHP Billiton both produces there maximum amount of iron ore from Australia, where as Vale being a Brazilian based company is currently the largest producer of iron ore.
Vale is the world largest producer of iron ore in the world but Rio Tinto and BHP Billiton strategic location of iron ore mines in Australia played a significant role in giving them advantage of having a shorter trade route to transport iron ore to China.
In the race of producing highest quality of iron ore at cheapest per tonne price vale approached this issue by expanding their fleet by large VLOC’s carrier to reduce transportation cost.
But this strategy did not proceed that smoothly as Chinese government under pressure from the local shipowners banned the vessels from entering Chinese ports claiming safety concerns as the reasons.(Anon. 2018c)
But after 3 years in early 2015 the ban was removed by Chinese government when in September 2014 Vale formed alliance with Chinese shipping company COSCO by signing a provisional cooperation agreement by selling ships to COSCO and then again chartered back on long term 25 year charter.(Anon. 2018)
But during those 3 year Vale did not stop using its Valemax as it was made for the key purpose of transporting huge amount of iron ore to China, Vale had no option but to opt for a different strategy, Vale built transhipment and distribution centres in Oman, Malaysia, and the Philippines where Valemax could discharge all the cargo and then it will be loaded into capsize vessels to transport to its final destination.(Anon. 2018)
These distribution points now serve as a strategical location for Vale to distribute its cargo in the highly targeted Asian Market.
Rio Tinto being a major producer in mining business established Marine and Logistics department in 1996 as a critical supply chain partner to their mining businesses.
They have their own ships and also charters large number of ships to meet the demand of their commodities. (Anon. 2017a)
There current fleet consists of eight Capsizers, seven Post Panamax and two Panamax, these vessels are managed and crewed by Anglo Eastern Limited and ASP ship management. (Anon. 2014a)
They also own four ports in Australia two in Cape Lambert and two in Dampier, each capable of train unloading, stockpiling and blending and ship loading. (Anon. 2014b)
On the other hand BHP Billiton is one of the largest bulk charterers in the world, they uses chartering system for transportation of their dry bulk commodities.(Anon. )
In February 2017 they started online auction platform, this platforms enables vessel owners and operators to bid for transportation of their commodities to its global customers.(Anon. )
Merger And Acquisition
BHP Ltd. and Billiton Plc. Merged in 2001 creating a the world’s leading diversified resources group, to be called as BHP Billiton.
The main reason for the merger has been the portfolio of interest of both the companies. BHP has been involved in oil and gas, aluminum, copper, nickel, iron ore, manganese, metallurgical coal and energy coal. On the contrary Billiton has been involved in petroleum, copper, and steel.
But this merger have not been that fruitful as contribution of Billiton assets to the group has fallen from 30% to 10% over the years.
Overall the company has seen lots of ups a down in the last decade
“BHP Billiton’s profit recently peaked in 2011 at 21.1 billion U.S. dollars and decreased to a loss of 312 million U.S. dollars in 2016”
Rio Tinto, Vale and BHP Billiton all three have adopted the cost leadership society within porters competitive strategy.
“ Cost Leadership
“In cost leadership, a firm sets out to become the low cost producer in its industry. The sources of cost advantage are varied and depend on the structure of the industry. They may include the pursuit of economies of scale, proprietary technology, preferential access to raw materials and other factors. A low cost producer must find and exploit all sources of cost advantage. if a firm can achieve and sustain overall cost leadership, then it will be an above average performer in its industry, provided it can command prices at or near the industry average”(Porter 1985 Ch. 1, pp 11-15)
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This strategy adopted by the three major producers of iron ore is to continue producing iron ore at low price in order to grow their market share and also to pressure smaller producers and drive them out of the competition. They intend to make their operation more efficient by using advanced technologies that offers efficiency gains as the industry leaders have prioritise technology to remain competitive and also have better contingency against cost volatility. This acceleration towards technology integration will help them widen the gap from small producers.
Rio Tinto launched “Mine of the Future” programme in 2008 which showed impressive foresight in commitment towards this approach of using technology to lower operating cost and increase efficiency.(Anon. 2014)
They have enabled 11 automated drilling system now, they are also focused in making automated trains to transport iron ore to its port facilities, these trains can cover 60% of the distance required. They also have 80 autonomous trucks in operation which they plan to increase up to 140 by end of 2019.(Anon. 2014)
This allows them to operate more efficiently which increases their productivity and also help them access real time information across their demand chain.(Anon. 2014)
Rio Tinto has discovered ore bodies in both greenfield and brownfield settings and they intent to maintain these arrangements, they believe in evolving resources in way that they add values to the group.
Investing and developing ore bodies which adds value over long term by using means of their efficient planning and configuration for mining.
They are committed in pursuing their curiosity for transforming mining industry using technology and innovation, Mine of the future project have made them competent to fight their competition and also enabled them to extract minerals deep within the earth while reducing environmental impacts and also improving safety.
The company belief in maintaining standards in health, safety, environment, operation and maintenance is one of the key agenda and strategy as this extends life of equipment and optimizes the extraction of ores meaning higher production at lower cost and maximized value.
To maintain their initiative of transforming the mining industry with technology & innovation.
Keep their approach to develop an effective business model in greenfield and brownfield settings .
Seek new market and alternate trade routes in the Asian market apart from China.
Discover more ore bodies around the world
In the current day scenario the rising economy of the developing countries have been driving the commodity market as they look forward in improving their standard of living by urbanization and improved infrastructure which increases their demand for metals and minerals. China thirst for iron ore has brought a competition in the market to which Rio Tinto being have kept their position among the top miners by bringing quality and efficiency in the mining operation
Their investment in Pilbara “mine of the future” product shows their intention of producing quality over quantity, iron ore has been their top revenue generating commodity in the last few years which shows there vision of producing large volumes of good quality iron ore at lower cost has paid off.
Rio Tinto huge investments in capital expenditure and growth opportunities for development of their new mines including underground copper mine in Mongolia and Amrum bauxite project in Australia shows their efforts in developing ore bodies which add long term value.
The company is in a comfortable position despite of the ups and down in commodity prices due to overall performance of their assets which have helped them in maintaining a strong balance sheet.
The supply chain analysis of Rio Tinto shows they are one of the leaders among the top miners in the world because of their vision of mining ore bodies in a way that helps them avoid direct exposure to price and cost risks.
- About Marine & Logistics 2017a. [viewed Nov 3, 2018]. Available from: http://www.riotinto.com/commercial/about-rio-tinto-marine-9943.aspx
- Aluminium in-depth 2017b. [viewed Nov 3, 2018]. Available from: http://www.riotinto.com/aluminium/aluminium-in-depth-4765.aspx
- BHP Billiton launches a shipping platform to buoy productivity [viewed Nov 3, 2018]. Available from: https://www.bhp.com/media-and-insights/news-releases/2017/02/bhp-billiton-launches-a-shipping-platform-to-buoy-productivity
- Copper & Diamonds in-depth 2016. [viewed Nov 3, 2018]. Available from: http://www.riotinto.com/copperanddiamonds/copper-and-diamonds-in-depth-1539.aspx
- Energy & Minerals 2017c. [viewed Nov 3, 2018]. Available from: http://www.riotinto.com/energy-and-minerals-162.aspx
- Fleet 2014a. [viewed Nov 3, 2018]. Available from: http://www.riotinto.com/commercial/fleet-9945.aspx
- Full Year 2017 Rio Tinto PLC Earnings Call – Final. 2018a. CQ-Roll Call, Inc
- Global iron ore production data; Clarification of reporting from the USGS. 2017d. Mining Engineering, 69(2), 20
- Half Year 2018 Rio Tinto PLC Earnings Call – Final. 2018b. CQ-Roll Call, Inc
- History 2017e. [viewed Nov 2, 2018]. Available from: http://www.riotinto.com/aboutus/history-4705.aspx
- Mine of the Future™ 2014b. [viewed Nov 3, 2018]. Available from: http://www.riotinto.com/australia/pilbara/mine-of-the-future-9603.aspx
- Our business 2017f. [viewed Nov 2, 2018]. Available from: http://www.riotinto.com/our-business-75.aspx
- Our business 2017g. [viewed Nov 3, 2018]. Available from: http://www.riotinto.com/our-business-75.aspx
- PORTER, M.E., 1985. Competitive advantage. New York [u.a.]: Free Pr. [u.a.]
- UNITED NATIONS DESA, 2018. World Economic Situation and Prospects 2018. US: United Nations
- Vale savours stability with shift away from shipowning | IHS Fairplay 2018c. [viewed Nov 3, 2018]. Available from: https://fairplay.ihs.com/bulk/article/4305846/vale-savours-stability-with-shift-away-from-shipowning
- WORLD BANK GROUP, 2018. Commodity Markets Outlook, April 2018. World Bank, Washington, DC
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