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
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.
Generally speaking, good business practice dictates that it is
best to focus on ones 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:
demand for raw material
- scarcity or
inconsistent supply of suitable raw material grades
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
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 companys future growth
Of course, its not all plain
sailing. There are inherent risks and difficulties with
For starters, managing a mining
enterprise might be well outside an end users
comfort zone - bringing with it a high degree
of unknown complexity, poorly understood technical know-how,
and overstretching management.
Thats 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, its the
still the talk of the town.
So whos 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
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
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 Globals 2008 purchase of Bemax Resources.
Meanwhile, further downstream in this sector, Akzo Nobel
(paintmaker) is to partner with a Chinese TiO2
In the fluorochemicals market,
Chinas hydrofluoric acid industry is being encouraged to
secure fluorspar sources, which is also central to Sephaku
Fluorides 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&Bs 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