Onwards and upwards

By Mike O'Driscoll
Published: Tuesday, 22 November 2011

Vertical integration, or “verticalisation”, is making a comeback in the industrial minerals business

Vertical integration, or “verticalisation”, is making a comeback in the industrial minerals business. This is not a new concept, Henry Ford was busy utilising the benefits of vertical integration for his pioneering automotive business back in the 1920s.

The term describes a style of ownership and control. Vertically integrated companies are united through a hierarchy - in the case of minerals, this is represented as a supply chain from mine to market. Above all, the supply chain shares a common owner.

Usually each member of the supply chain produces a different product or service, and the products combine to satisfy a common goal, supplying high quality products to the end market in the most economically and logistically efficient way.

A typical example might be a refractory mineral miner, supplying a refractory manufacturer, who in turn supplies a steelmaker with refractories, who then supplies a steel consumer with steel, such as a shipbuilder or automotive manufacturer.

In reality, the vertical integration model might work best only in certain parts of such supply chains, eg. miner-refractory producer, or refractory producer-steelmaker. It all depends on the specific market sector dynamics. But what is clear is that vertical integration is becoming more attractive.

Why now?

Generally speaking, good business practice dictates that it is best to focus on one’s core competences, avoiding dilution of effort into areas of inexperience.

But in the mineral commodity markets, and especially in certain industrial mineral markets, there have been three primary drivers for vertical integration in the last 2-3 years:

- increasing demand for raw material

- scarcity or inconsistent supply of suitable raw material grades

- rising prices

All three of these factors have been central to much of the news covered in IM this year and have contributed to increased exploration and project development for industrial minerals worldwide. They have also sparked a renewed interest in vertical integration in the industry, primarily from intermediate or ultimate end users of minerals.

The obvious benefits in going upstream to manage your own raw material sources include security of consistency of quantity and quality of supply; being able to engage in some control over raw material pricing; and contribute to the company’s future growth prospects.

Of course, it’s not all plain sailing. There are inherent risks and difficulties with vertical integration.

For starters, managing a mining enterprise might be well outside an end user’s “comfort zone” - bringing with it a high degree of unknown complexity, poorly understood technical know-how, and overstretching management.

That’s not to mention capital and maintenance expenditure demands, a perceived decrease in flexibility to shift market focus, and a need to embark on M&A activity if unable to go upstream organically.

It is worth reminding of the fundamental differences between mining and manufacturing: mineral resources are non-renewable, they are site specific, and become depleted over time. All that said, it’s the still the talk of the town.

So who’s doing it, and how?

For certain industries, such as power (coal, gas), plasterboard (gypsum), fertiliser (potash, phosphate), and cement (limestone, shale), vertical integration is old hat, since these manufacturers consume raw material at such high volumes.

The steel industry has started to trend this way also, with steelmakers attracted to iron ore sources. More recently, other industrial mineral sectors have caught the bug.

Over the last twelve months, the refractories industry has had two high profile end users striving to attain up to 80% or more self-sufficiency in their respective mineral requirements - RHI AG and Magnesita Refratarios SA. The former has expanded its magnesia sources through acquisition of existing operations, while the latter is securing and developing its own magnesia, graphite, and aluminosilicate reserves.

In the titanium dioxide (TiO2) pigment industry soaring feedstock prices and tight supply has prompted Tronox Inc. to acquire Exxaro Resources’ minsands assets following in the footsteps of Cristal Global’s 2008 purchase of Bemax Resources. Meanwhile, further downstream in this sector, Akzo Nobel (paintmaker) is to partner with a Chinese TiO2 pigment supplier.

In the fluorochemicals market, China’s hydrofluoric acid industry is being encouraged to secure fluorspar sources, which is also central to Sephaku Fluoride’s development in South Africa, while Solvay SA recently acquired a Bulgarian fluorspar mine.

Last month, Greek alumina and aluminium producer Mytilineos secured 40% of its current bauxite supply requirements by merging, to eventually own, S&B’s bauxite assets (see p.8).

Source acquisition is not the only way of vertically integrating of course. Other methods include strategic investments - eg. South Korean and Japanese end users in lithium, rare earth, and iodine projects - and TiO2 pigment producers securing substantial offtake agreements from emerging feedstock producers.

The signals are clear. Vertical integration, despite its risks, has become a serious proposition to mineral end users. Expect more of the same for 2012.



Mike O’Driscoll
Editor