Pilbara Blend. Robe Valley. Yandicoogina Fines. The names may sound as if they belong on a tea caddy or in a wine cellar – but Rio Tinto investors know better. These are the labels under which the company sells Australian iron ore, the prosaic yet hugely important commodity on which its fortunes depend.
The idea of branding a commodity that is shovelled into blast furnaces to make steel may seem strange. But iron ore has many variations in mineral content and purity.
Miners such as Rio say part of their skill lies in matching ores to the right buyers. Their marketing strategies are therefore crucial to their success – more so this year, when a flood of low-cost supply from Rio and its peers helped to drive the iron ore price down by almost 50 per cent.
Now investors have another important reason to consider Rio’s marketing skills: they are central to a possible tie-up with Glencore, the rival commodities group that this year approached Rio about a potential merger.
Glencore is one of the world’s most successful and entrepreneurial trading companies, spanning commodities such as coal, copper, oil and agricultural products. Its pursuit of a combination with Rio next year may hinge on whether Ivan Glasenberg, Glencore’s chief executive, judges he can extract value from Rio’s iron ore assets – the source of almost 90 per cent of its earnings – with better marketing and trading.
The issue of whether Rio is leaving money on the table for Glencore’s traders – is one of the “critical things that people are going to make a call on”, says Paul Gait, an analyst at Bernstein Research.
Miners have been guilty in the past of neglecting opportunities beyond the mine gate. An Accenture report last year said some coal miners could do much more to improve earnings with better trading, marketing and logistics, although Rachael Bartels, managing director for mining at Accenture, says the largest iron ore miners have been better in this regard.
Some analysts are confident Glencore could squeeze savings out of a combination with Rio. When Mr Glasenberg’s overtures to Rio were revealed, analysts at UBS suggested Glencore could aim for $600m of marketing synergies – between $1 and $2 per tonne of Rio’s annual iron ore sales. HSBC said there were perhaps about $1bn in synergies: $3 per tonne of iron ore.
For the rest of this article, click here: http://www.ft.com/intl/cms/s/0/28777420-794e-11e4-a57d-00144feabdc0.html?ftcamp=crm/email/follow/author/Q0ItMDAwMDc3Nw==-QXV0aG9ycw==/product&&siteedition=intl#axzz3KkjeXtm9