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Mining in Africa Untapped Potential 31

Commercial
excellence in mining
Unlocking the full potential
of marketing and sales
Mining managers who have taken the lead in the new era of commercial excellence have shown that it
helps companies stand out in the marketplace and creates significant value for very little investment.

Andreas Mirow More and more mining and minerals companies are investing in marketing, and using increasingly
Jukka Maksimainen sophisticated strategies and tools to do so. For a handful of skillful companies, commercial excellence
has delivered EBIT margin increases of as much as 8 percentage points. Their success is raising the
bar. Our research shows that commercial excellence has become a core element of metals and mining
company capabilities and strategy.

While mining companies are focused heavily on delivering maximum value from their operations, few
apply the same rigor to their marketing and sales. Some assume that, in a sellers market, its not worth
the trouble. Others apply tactical marketing measures and capture modest upside, such as through
pricing of premium products. Yet several companies are systematically pursuing excellence in their
commercial functions, and are reaping very attractive rewards. Our own analysis and experience makes
it clear that marketing and sales represent an opportunity for mining companies in nearly all regions
and commodities to add substantial value to the bottom line. While many companies recognize this,
only a few have developed truly ambitious commercial aspirations and shaped robust strategies to
deliver on them.
32 McKinsey on Metals & Mining Number 07

The opportunity: creating major long-term prompted the company to adopt a more strategic
value from marketing and sales approach to capturing value along the marketing
and sales value chain.
Mining companies that systematically pursue
excellence in marketing and sales can reap very The company undertook a thorough scan of
attractive rewards. Our analysis suggests that its product market to identify customers for
improved pricing, contract management, trading, whom its product grades were particularly
and key account management can together boost valuable. Leveraging its shipping and stockpiling
EBIT margins by between 3 and 8 percentage capabilities, the company positioned itself as an
points, depending on the metal, the asset base, integrated solutions provider to such customers,
and the companys context (Exhibit 1). commanding a significant price premium as a
result. It also began shipping the orders of multiple
There is growing recognition of the opportunity: customers in bulk, so boosting margins further. To
in the past few years we have observed a clear support the strategy, the company built a proactive
shift towards a more commercial orientation in marketing function, organized around key account
mining companies marketing and sales efforts. management and enabled by technical capabilities
However, there are still striking differences such as a sophisticated value in use capability.
between companies. This reflects the fact that All in all, the companys commercial strategy has
most mining companies remain tactical in their been a major source of value creation, adding
marketing approaches. Only a few have built 10 to 15% to its market capitalization.
competitive marketing strategies that truly
assess, and fully develop, the companys unique
Achieving commercial excellence:
commercial opportunities.
a systematic approach
Tactical moves can certainly produce results: How, then, does a mining company chart its
for example, an iron ore producer can typically own course to unlocking the full value? Our
add an incremental value of between 1 USD/t research across the industry suggests that, for
and 3 USD/t by capturing pricing premiums true commercial excellence, companies must
for particular product grades. But for the most be distinctive in every element of a five-layer
successful companies, such steps pave the way for pyramid (Exhibit 2). They must have:
a more systematic approach to marketing. These
companies have made a very clear evolution from A clearly defined, and ambitious, commercial
an exploratory phase that tackles a limited set aspiration
of attractive opportunities, to a coherent go-to-
market strategy that shapes the value chain from A robust product-market strategy
mine to customer.
A clear set of choices on which parts of the
Consider the example of a medium-sized mining mining value chain to participate in
company. It had traditionally paid little attention
to marketing, but began exploring a more active Well-honed levers to capture commercial
commercial role by modeling how valuable its value, including pricing, contract man-
products were to particular export customers. agement, trading, branding, and key
Next it focused on capturing additional margin account management
through shipping and stockpile sales in key export
markets. The success of these tactical moves A powerful commercial operating system.
Commercial excellence in mining Unlocking the full potential of marketing and sales 33

Clearly defined commercial aspirations or a special service, such as the concept of total
setting the ultimate target delivery from mine to customer gate. Solution
providers are able to command an additional
The starting point is to define the companys premium because of their unique position and
commercial aspirations very clearly. This choice deep understanding of what creates value for
will be aligned with the companys overall a customer.
strategic aspirations, and informed by a fact-based
assessment of its asset base and of the market Active traders seek to capture additional value
conditions of its main commodities. There is through continuous arbitrage opportunity scans
certainly no one right aspiration: in our analysis of and superior insights into short-term price
the most successful marketers in the industry, we developments. They typically have swing assets
have identified three quite different archetypes: and access to tactical market information that
enables them to exploit differences in product
Solution providers typically have an asset base that quality, across time periods, or between geo-
is technically unique, (for example, of very high graphic markets. Active traders are recognizable
grade), and thus are able to capture maximum by their sophisticated understanding of short-
value based on their distinctive position in the term price movements and the action they take to
market. This may take the form of a niche product capture maximum value with that knowledge.

Exhibit 1 Value creation potential in metals and mining


Commercial value- Levers to
capturing levers provide capture
commercial Value estimate
the practical means value EBIT margin improvement Description
and ways to materialize Capturing the value driven by a companys position, quantifiable
created value Pricing 0.9 - 2.7 differences in products, and transaction-specific conditions

Contract Having an optimal contract portfolio to capture maximum upside


0.9 - 2.0 with given risk profile, combined with managing negotiations
management and existing contracts

Capturing opportunistic profits with a trading strategy, typically


Trading 0.5 - 1.41 focusing on either arbitrage or speculation

Differentiating the product/the company or developing the


Branding ? image of the commodity in ways that improve margin, secure
volumes, or increase sales

Key account Understanding the differences between customer accounts


0.8 - 1.9 at a very granular level to capture client-specific value
management

Total value
3.0 - 8.0
potential

1 Includes only the margin improvement, not the increased revenue or new business creation potential

Source: McKinsey analysis


34 McKinsey on Metals & Mining Number 07

Strategic marketers create value by shaping the passive. Such a company would not aspire to add
market. They typically have significant market further value to the standard market price of its
power as well as an in-depth understanding of metal; it would see marketing and sales merely
long-term market dynamics including supply- as a means to place all of its output in the market.
demand sensitivity, market mechanisms, and On the other hand, in setting a clear strategic
value-in-use differences between products. aspiration, companies should be careful not to
The market-shaping moves can range from a settle simply for a fragmented list of marketing
change in pricing and contracting principles, to initiatives. In our scan of the industry, we have
the introduction of a new logistics system, to the identified several agile agents that seek to capture
development of a totally new market segment for a a premium on top of the reference price, but have
particular commodity. not developed a coherent strategic position. The
commercial departments of such companies
Of course, bold strategic marketing aspirations typically have a long list of value-capturing
are not appropriate for all companies. For initiatives, but lack a strong strategic rationale
example, a gold mine that distributes its gold for value creation that ties their commercial
through one agent might elect to be commercially activities together.

Exhibit 2 Organizational best practices


World-class commercial
excellence requires a
holistic set of closely
linked organizational Strategic commercial
aspiration (archetype)
best practices ?

Product-market
strategy vs.

Value chain
choices

Pricing
Contract management
Commercial value- Trading
capturing levers Brand
Key account management
Total

Management infrastructure
Commercial Operating system
system
Mindsets and capabilities

Source: McKinsey analysis


Commercial excellence in mining Unlocking the full potential of marketing and sales 35

Metals and mining companies need to decide


which part of the value chain to participate in

A robust product-market strategy matching measure of the true value of the products
the companys assets to the market characteristics, a company can make the correct
trade-offs in product design and pricing
Guided by its commercial aspiration, a distinctive
marketer develops a clear product-market Once all of these factors have been analyzed and
strategy the second layer in the pyramid. This a tentative product-market strategy has been
defines the optimal portfolio of products for developed, the strategy should be rigorously
the company given its asset base, and links that checked against market realities using multiple,
portfolio to the most attractive market segments sequential filters including:
or to individual customers.
A logistics filter: What does it cost to get our
An optimal product-market strategy should have product to the customer?
a clear value creation rationale that supports
the companys commercial aspiration. For A feasibility filter: Can we realistically capture
example, an active trader would invest in swing the value-in-use advantages of our product?
assets that are flexible in terms of volume and What is its competitive position against
geography. Further, an effective strategy requires other suppliers?
an extremely detailed level of market insight.
A product-market strategy for manganese ore, for A potential filter: How large are the customer
example, has to reflect that the overall market is segments we are targeting?
made up of multiple smaller segments each
with different asset configurations, access to This exercise will yield a shortlist of high-potential
local manganese ore, energy availability, and customers for each of the companys key products.
target markets.
Choosing the companys role in the value
The product-market strategy should also be based
chain from mine gate to shipping, financing,
on a thorough analysis of where the companys
and processing
products are on the quality curve, for example,
in terms of impurities and grade. This is critical As part of their commercial strategy, metals
to make sure the product meets technical cut-off and mining companies also need to make clear
points and other customer specifications and choices on which parts of the value chain to
that the company gets maximum value from its participate in. The broader value chain goes
reserve. For example, alumina in iron ore at 2.0% beyond the mine or smelter gate and includes
is a well-known cut-off grade, as higher alumina elements such as logistics (transport); stockpiling
content significantly decreases steel mills ability or warehousing; technical services; financing;
to work with the ore. Suppliers must respect this third-party trading; and, in some commodities,
limit, but below it they have multiple different processing. Value chain choices should be closely
product options to offer to customers at matched to strategic objectives, which could
potentially very different margins. include the following:

The final element of robust product-market Gaining superior market insights. Having an
strategy is a detailed value-in-use analysis. This active role beyond the mine or smelter gate can
entails quantitative comparison of how different provide access to superior insights on how the
products might perform for a given customer. market may evolve over the short term (relevant
The results yield a detailed understanding of the for a company aspiring to be an active trader)
value of the companys product compared with or long term (key for a strategic marketer). For
the customers other options. With this accurate example, selling third-party volumes or owning
36 McKinsey on Metals & Mining Number 07

a minority stake in strategic assets can lead to Boosting operating efficiency. A companys
superior insights on operational performance. position in the value chain may be driven by the
objective of strengthening operating efficiencies.
Complying with legislation. In many countries, This is often the case in bulk materials where, for
governments are requiring metals and mining example, a company might combine shipments to
companies to take over a larger portion of multiple customers to achieve economies of scale.
the overall value chain. For example, Nigeria
has content laws requiring a portion of all Creating new opportunities for the core business.
commodities exports to be transported using Companies should make value chain choices in
Nigerian vessels. conjunction with the strategy for the core mining
business. For example, since a wider role in the
Capturing additional margin. As the owners of a value chain can help overcome limitations in mine
commodity, metals and mining companies often planning and trading, a company could establish
have the ability to capture additional margin from a blending yard for a discharge port in a target
other players in the value chain. This typically market, enabling a value-maximizing mine plan
applies to adjacent businesses that do not require for assets in different continents.
any special capabilities and are financially
attractive. Examples include financing a
Shaping effective levers for value capture
customers working capital, and capturing margin
making the most of the companys
from banks when supplying a customer in a region
strategic position
with high interest rates.
Primary levers for capturing commercial value
Reducing risk. A companys production footprint are pricing and contract management as well as
and logistics chain must be sufficiently flexible to trading, branding, and key account management
minimize the risk that a shutdown could render it (cf. Exhibit 1). By nature, a company will need to
impossible to ship product. For example, an iron work through these levers and shape their two to
ore miner could own part of a pelletizing plant to three most important aspects to make the most
ensure it has a secure route to market for iron ore of its specific strategic position, talent,
concentrate; or it could own the railway used to and aspirations.
transport its product to port.
Pricing, for example, can be optimized from the
Capturing a greater share of the value pool. Most strategic, value, and transactional perspectives.
of the value chains in metals and mining have Strategically, what is the companys overall price-
undergone major shifts in the value split between setting mechanism, such as import parity versus
players. Logistics today account for about half export parity? For value pricing, the crux is to
the landed cost of bulk commodities. This might quantify and charge for tangible differences in
prompt a mining company to take over and product value for customers, as mentioned for
manage logistics for particular bulk commodities manganese ores. Optimal transactional pricing
so as to gain broader exposure to the market. requires skill in selling spot prices and the
premium based on contractual terms on top of the
Increasing volume stability. Several companies reference price.
position themselves in the value chain to achieve
increased volume stability. One way to do this is As another example, one of the top three aspects
to develop closer relationships with customers, of effective contract management is striking
for example, by providing sophisticated technical the right balance in the companys portfolio of
services, keeping a consignment inventory fixed versus floating price contracts and spot
on the clients premises, or managing the versus long-term volume commitments. It is
clients inventory. critical to get this right: for most commodities,
Commercial excellence in mining Unlocking the full potential of marketing and sales 37

Branding can create value by


conferring a preferred position

fly-ups represent two-thirds of mining company a company requires both physical laboratories
profits but only one-third of the calendar and simulation software.
time over the cycle. Trading offers further
ways to optimize how volumes are matched to With management infrastructure, the focus is
contractual commitments: at the entry level, on the organization of the marketing and sales
does the company succeed in putting additional function including its structure, staffing levels,
volumes on the market to absorb an in-house and the level of consolidation needed across
over-supply (and vice versa)? A new breed of commodities. Some companies have group-
active traders have introduced new trading level marketing and sales functions; others use
methods to the industry such as arbitrage and a business unit-driven model. The management
speculative trading that are also being adopted infrastructure also encompasses performance
by producers. management, including KPI systems to ensure
targets are being met and specific incentives to
Branding may be used to develop a preferred reward marketing and sales effectiveness.
position: can the company create a perception of
advantage, lower risk, or information efficiency The final element of the commercial system,
for the commodity, the supplier, or a specific mindsets and capabilities, can make a major
product? Key account management offers at least difference to its success. The mining companies
five areas for value capture with each important that excel at marketing and sales have invested
customer logistics, customer processes, in building distinctive capabilities, including
purchasing, regulation, and risk but they must analytical skills, industry understanding,
be systematically managed together to capture and the ability to manage complex customer
higher margin (for example, from more favorable relationships. Shifting mindsets is just as critical:
shipping terms) or increase volume stability by despite the dawn of a new era in commercial
providing support, for example, on technical or excellence, many mining companies seem to find
regulatory issues. it hard to break away from the old working model,
based on long-term relationships, and take an
active value-seeking approach.
Building a powerful commercial system
winning team, infrastructure, and systems
***
The foundation of the commercial excellence
pyramid is the commercial system the operating Regardless of their starting point, most
system, management infrastructure, and metals and mining companies have significant
mindsets and capabilities of the marketing and opportunities to unlock value through
sales functions and the company more broadly. commercial activities. When top management
As the sophistication and complexity of the considers where to invest its attention
commercial approach increases, the requirements and energy to increase profitable growth,
for these enablers become more demanding. commercial excellence should rank close
to the top of the list.
World-class operating systems comprise both
hardware and software. The hardware
includes the companys logistics infrastructure,
including vessels, discharge ports, blending
yards, and mine-to-delivery optimization
software. The software side of the operating
system consists of market intelligence, pricing,
trading, customer relations management, and
transactional systems. For value-in-use analysis,

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