Rio Tinto Iron Ore—A Situational Analysis
University: University of Newcastle Australia
Course Name: Business Strategy
Course Code: MNGT2001
Lecturer: Garry Haworth
Tutor: Warwick Hallinan
Authors: Andrew Boyce, Ashley Grady, Jordan Julius, Ryan Lee
Submission Date: 25th October 2012
The following report has applied business theory to the case of Rio Tinto Iron Ore. The over-encompassing purpose is to identify the group’s strategic position and success in terms of environment, competitors and strategic objectives.
Iron Ore are a leading group among Rio Tinto and the mining industry in general. However found Rio has been lax in operational costs following the mining boom; while leading up to a turbulent period in the world economy. A recent drop in demand for Iron ore and increasing costs due to environmental tax and high cost labour have been found as the most predominant challenge for Rio.
This report has identified areas where strategies are not being implemented as intended, and specific strategy may need modifying in order to meet objectives. Recommendations in regards to capital spending, financial monitoring and technological investment in automated machinery have been provided.
This report aims to identify and analyse the competitive and strategic position of Rio Tinto’s Iron Ore group. Academic models have been used to assess both the micro and macro environment with the intention of identifying both their current and future position.
Analysis has presented some incongruence between strategic objectives and their current situation. Use of Triple bottom line reporting and McKinsey’s 7s framework have revealed some of the internal issues faced by Rio Tinto Iron Ore, and how strategy is being modified to rectify these weaknesses.
For the purpose of this report, a PESTEL analysis has been conducted to give a general overview of the external environment Rio Tinto Iron Ore operates in.
General Overview of the External Environment
- Political: Political factors include the Resource super profits tax coupled with forecasted drop in iron ore income due to Chinese anti-inflationary policy (Martin & Colebatch, 2012), and the Australian government’s Clean Technology Program;
- Economic: Current dynamism directly affects Rio Tinto’s performance in the market. Major threats include falling commodity prices, Europe’s current debt crisis, the slowing down of China’s economic growth (SMH, 2012) and an increase in iron ore output from the United States (SMH, 2012).
During 2011, 45% of the world’s steel was produced in China (Hariharan & Dodonova, 2012). Iron ore is an essential ingredient in the creation of steel. Imported ore accounted for 34% of Chinese Iron ore consumption in 2011 (Hariharan & Dodonova, 2012) (appendix 10.1), and Australian mining operations account for 44% of these imports (appendix 10.2).
It’s expected that 80% of Rio Tinto’s earnings in 2012 will come from Iron Ore (Holton & Davies, 2012), increasing dependent on China. From 2010 to 2012, Asia produced 64.35% of world crude steel; China itself produces 46.35% (Hariharan & Dodonova, 2012) (appendix 10.3). The upward trend for steel production in Asia is increasing, whereas production in the rest of the world is falling (Ming-chou, 2012) (appendix 10.4).
Flux in the Chinese market is causing problems for mining companies with a possible end to growing Iron ore prices (Janda, 2012). The Iron ore group’s underlying earnings from the first half of 2012 were 20% lower than the 2011 first half due to lower iron ore prices (RioTinto, 2012).
- Social: Certain social trends affect the production and consumption rates of Rio Tinto. These threats include a recent warning of a waning demand for iron ore, the possibility of a global supply glut (Ker, 2012) and the increase in social stigma surrounding climate change and carbon emissions.
- Technological: Recent advances affecting the future of mining include an increase in the use of fully automated, driverless trucks and trains (Ker, 2012) and the rolling out of the National Broadband Network.
- Environmental: Environmental factors are a major talking point surrounding Rio Tinto and the decisions that they make as a company. Australia is now the world leader in Carbon emissions per capita, however this still only accounts for 1.4% of world polluters.Another major concern for the public is Rio Tinto’s ability to rehabilitate and restore used up mining facilities.
- Legal: Rio Tinto must follow numerous laws, acts and also keep the Unions happy, however there have been a few recent introductions which include the National Greenhouse and Energy Reporting Act 2007. Rio Tinto are now required to report and identify on matters including but not limited to greenhouse gas emissions, greenhouse gas projects, energy production and energy consumption.
Specific Environment: Turbulence Model
- Complexity: Rio Tinto’s Iron Ore sector is situated in a moderately complex environment. The iron ore sector of Rio Tinto only produces a single product. This sector also has minimal competitors, currently the company is ranked second to Vale in the world for largest miner of Iron Ore (Ker, Rio Tinto ramps up iron ore output, 2012). Rio Tinto is known for its strong customer base and constant investment into increasing efficiency and output, for example investing over US$15 billion in the next five years into iron operations in the Pilbara (Rio Tinto, 2012).
- Dynamism: The surroundings in which Rio Tinto Iron Ore carries out its business activities is seen to be moderately dynamic. The change of the Rio Tinto Iron Ore sector is considered to be low in frequency, this is due to the long period it takes to produce innovative technologies and develop new products. The iron ore industry is currently going through a downturn in commodity prices, due to slowing demand in China (Reuters, 2012). This has caused the intensity of change to move to a level or turbulence.
- Unpredictability: The Iron Ore sector is currently moderately unpredictable. Over the last half century, the steel industry has been seen as traditional and conservative (Smith, 2012). This system worked well when prices were stable and demand certain, but the future is unlikely to be as predictable as the past (Smith, 2012). The drivers of this are the huge increase in spot price visibility for iron ore, steel, coking coal and freight and increased volatility in prices not just of raw materials but of finished products too (Smith, 2012). This has caused Rio Tinto’s Iron Ore sector to become overall moderately unstable.
Specific Environment: Porter's Five Forces and Government
Porter’s five forces have been used to create a starting point in determining the firm’s strategic position in the current market. The effects of government in the mining industry are significant; therefore the addition of government as a force is required. The fluctuating power of both buyers and suppliers along with government are the predominant forces in the mining industry. The analysis finds Rio Tinto in a good position overall, but highlights some challenges which must be considered in the near future.
In 2008, BHP Billiton attempted a hostile bid to acquire Rio Tinto (Wasserner, 2008). Rio Tinto was shielded by their own strength, turbulence trouble for BHP and the support of regulatory authorities. This highlights the competitive nature of rivals.
Recent anti- inflationary policies in China have reduced investment growth and demand for iron ore. As fewer purchases are made, the price of iron ore decreases (Tulpule, 2012). This puts power in the hands of buyers.
According to Xie (2012), high commodity prices are driving shortages in mining equipment. As demand for their innovative technology increases, the strength of suppliers will likely increase as fewer will be capable of supplying required specialist equipment.
For a full analysis including entrants, substitutes and government see appendix 10.5).
Strategic Analysis: Conclusion
Rio Tinto is successfully covering all bases in external threats and opportunities. The power of buyers is particularly important in the moderately unpredictable environment indicated in the Turbulence model. Due to the recent decrease in demand in China there has been a fall in the price of iron ore. This also links in with PESTAL as the economic climate and the falling commodity prices. Overall Rio Tinto Iron Ore is in a great position to take advantage of all opportunities and combat threats.
Internal Competitive Analysis
- Exploration: Rio Tinto implements exploration well, as their asset portfolio only consists of quality resources. Elements to Rio Tinto’s exploration strategy include deposit focus, in-house approach, regional structure and competitive strengths (Rio Tinto, 2011, p. 3).
Rio Tinto has two methods of approach towards exploration, being ‘greenfield’ exploration ‘brownfield’ exploration (Rio Tinto, 2011, p. 4). Recent brownfield successes include iron ore discoveries in the Pilbara region, which have been acted upon over the past ten years, with a further 50% growth in future capacity (Rio Tinto, 2011, p. 4).
- Technology and Innovation: Technology and innovation are individual, yet intertwined core competencies for Rio Tinto. Without innovation there is no technology, and without technology there is no further innovation.
Innovation and technology isn’t always about discovering ground breaking practices which boost efficiency or reduce operating costs. It is also about devising new technologies which minimise negative impact on the environment.
- Strategic Competitive Advantage: Rio Tinto achieves strategic competitive advantage by comprising their three core competencies with immense iron ore demand.This combination allows the Group to practice their overriding strategy, which is to investing in and operate large, long-term, cost-competitive mines and businesses, a long-running strategy that consistently provides exceptional results (Rio Tinto, 2012). Following this strategy has turned Rio Tinto Iron Ore into an economy of scale; drastically increasing competitive advantage.
- Present Weaknesses: China’s iron ore demand has been at extremely high levels for several years, although, it is now slowing with their economy. This factor is a macro-environmental shift; however the Group’s dependence on China makes this shift a significant internal weakness for Rio Tinto. If demand continues to decrease, Rio may face a possible surplus of stock a plummet in commodity value, losses in market share and profit, and damage to their strategic competitive advantage.
Regardless of the fact that China’s immense iron ore demand is currently reducing, Rio Tinto maintains their leading market position as the 2nd largest miner for iron ore due to consistently applying their core competencies, which come together to form their strategic competitive advantage; proving to be considerably successful for the Group.
Conclusions on Competitive Position
Rio Tinto Iron Ore is highly competitive in the current market. Collusion with its major competitors offsets the threats they create, and high barriers to entry prevent new entrants. Good relationships with China ensure ongoing sales in the future and a focus on long term assets should provide the supply required.
Strategic Directions and Objectives
“To be the leading global mining and metals company”
“To maximise total shareholder returns by sustainably finding, developing, mining, processing and marketing the Earth’s natural resources”
Rio Tinto aims to maximise long term returns to shareholders (Rio Tinto, 2009).Other essential objectives include the second portion of their mission, discovering large, low cost ore bodies in order to safeguard future cash flows, developing such assets into safe and efficient operations to ensure profitability at every stage of the commodity cycle, operating in an ethically and socially responsible manner to maintain a reputable status and applying long term sustainable development to all projects (Rio Tinto, 2009). These strategies consist of five key strategic drivers (see appendix 10.6).
To ensure ethics and values are practiced across their global operations, Rio Tinto fabricated ‘The Way We Work’: a code of conduct which acts as an underlying general standard for all Rio Tinto associates to abide by, which is then collaborated with the policies and standards unique to each product group and strategic business unit. ‘
Rio Tinto has strong ethical respect for indigenous people, particularly in the Pilbara region. The group commits a minimum of 13.9 per cent of expenditures to local Aboriginal businesses and intends to increase this over time (Rio Tinto, 2012). See appendix 10.7 for a general outlining of the principles and standards contained in ‘The Way We Work’.
Analysis of Rio Tinto’s stakeholders using the Stakeholder Salience Model (Mitchell, Agle, & Wood, 1997) finds that the Group’s shareholders, customers and employees are ‘definitive’ stakeholders. The remaining stakeholders can be classified as ‘dominant’.
Rio Tinto must ensure that shareholders, customers and employees are satisfied as they are the most salient stakeholders of the Group. If the demands and needs of these stakeholders are not met, Rio Tinto may face losses in multiple areas.
Stakeholder Analysis Table
Rio Tinto focuses and incorporates three main strategies at the Business Level. These three main strategies comprise of Product Market Strategy, Diversification Strategy and Sustainable Development Strategy.
Ansoff's Product/Market Strategies
In examining Ansoff’s product market level business strategies it’s clear to see that Rio Tinto’s Iron Ore business current strategy is market penetration. Rio Tinto Iron Ore group comprises wholly owned subsidiaries and joint venture initiatives which extends to development projects in Africa and India (Rio Tinto , 2012). Rio Tinto is involved in continuous market expansion projects and it is currently investing over US$ 15 billion in the next five years in Pilbara. This expansion will increase more than 50 per cent of their current capacity and represents the largest integrated mining project in Australian history. According to the Ansoff Model this would be considered a Market Penetration.
Miles and Snow's Adaptive Strategies
Rio Tinto Iron Ore group is a mix of both Prospector and Defender strategies in the Miles and Snow organisation type (Kulzick, 2000). Rio Tinto’s product development and exploration commends itself on its capability to discover new products and mining locations in an environmentally friendly and sustainable method (Rio Tinto plc and Rio Tinto Limited 2008, 2008). Rio Tinto is the second largest iron ore supplier within the market where few other companies compete, thus making it easy to defend new entrants due to its large market share as the threat of new entrants is extremely low (Rio Tinto, 2012).
Porter's Competitive Strategies
Rio Tinto Iron Ore is using the cost leadership strategy within Porter’s competitive strategies. The iron ore sector is currently going through the biggest downturn in 20 years (SMH, 2012). This places Rio Tinto in a hard situation as the demand has fallen for their products in the iron ore sector, they must take advantage of this with the use of cost leadership strategies.
Rio Tinto uses the Multi-domestic Strategy, this allows it to work in multiple countries but to stay relatively independent of each other (appendix 10.8) (Rio Tinto, 2012). Rio Tinto uses a hierarchical organizational structure and the major decision making is made at the top of the structure by senior management (Rio Tinto , 2010). There are also individual rules and regulations for individual mines which gives the company a multi-domestic strategy (Rio Tinto, 2012).
Conclusions on Broad Business Strategies
Rio Tinto’s Iron Ore sector is doing a great job in implementing all of its broad business strategies. The company currently exercises the following strategies; product market strategy, diversification strategy, sustainable develop strategy along with Ansoff’s market penetration, Miles and Snow’s prospector & defender strategies, Porters cost leadership strategy and multi-domestic international strategies. These strategies have been reviewed and adapted due to the current uncertainty of the iron ore market that Rio Tinto operates within.
Strategic Implementation: General Perspective
Mismatch Between Environmental Turbulence and Strategy.
There is no mismatch between Rio Tinto’s strategy and environmental turbulence. Rio focuses on long term, cost competitive mines. Their aim is to outlast short term turbulence and profit in the long run.
Unrealised, Unintended or Imposed Strategy
Rio Tinto has re-aligned their strategy in terms of carbon emissions (Manning, 2012). This change is a result of imposed strategy through government influence. With the success of Rio Tinto, there is no evidence of unrealised or unintended strategy.
Strategic Drift, Transformational Change and Second Curve Activity
There is no evidence of either strategic drift of strategic flux. Rio Tinto is reacting flexibly to the market within its already defined strategic drivers (see appendix 10.6).
With a strong position in their current market environment, there is no evidence to suggest a full transformational structure change, nor is there any evidence that this is currently taking place at Rio Tinto.
There is no evidence to suggest Rio Tinto is starting or are currently taking part in any second curve activity. CEO Tom Albanese is confident in the value of current assets and strategic direction.
Strategies and the BCG Matrix
For Rio Tinto as a whole company, on the BCG matrix they would be seen as a star. This is because of the nature of the environment Rio Tinto competes in and there high investment and profit levels. However Rio Tinto Iron Ore is seen as a cash cow on the BCG matrix (Bhatti, 2010). This is to do with their high level of maturity within the market and their need for only relatively low levels of investment to keep profits coming. For Rio Tinto Iron Ore, their total past revenue is over US$1112.1 Billion which accounts for 66.9% of the current market share. Figures like this back up their position as a cash cow on the BCG matrix, because of their high profits and low investment being managed for future growth.
Rio Tinto Iron Ore have continued to be competitive in a volatile market environment. This is due to their ability to create and stick to numerous business strategies, and their lack of strategic drift, and unrealised or unintended changes to strategy.
Strategic Implementation Issues
There are two predominant strategic implementation issues facing Rio Tinto Iron Ore. The first is specific to operations in Australia, where there is a continuing shortage of skilled labour. The second is excessive gearing. Both factors hinder Rio Tinto’s first strategic driver: Financial and operational excellence aimed at cost competitiveness, productivity and high returns (Rio Tinto, 2012). The second factor also hinders the application of innovation and technology, which is important for solving the labour issue. For a list of strategic drivers see appendix 10.6.
Australian Labour Shortage
The shortage of skilled labour is having a significant impact on the Australian mining sector. The remote locations and a lack of skilled labour are driving competition among mining firms to attract employees (Ker & Spooner, 2012).
Fisher & Schnittger (2012) present evidence of a widening gap between labour and demand increasing in the foreseeable future. BHP Billiton predicts the Australian Mining industry will require 150,000 new workers over the next five years (Mining-Technology.com, 2012), where less than half the vacant jobs for geologists and engineers were filled in 2012 (Wiggins, Sprague, & Forrestal, 2011).
This crunch between reduced revenue and increased operational costs is causing Rio to double check their first strategic driver, cutting costs where ever they can to bring efficiency back to the forefront of their operations. It’s hoped that in the longer term, this maximum efficiency will be achieved through automated technology. This shows Rio Tinto’s attempt to realign the staff factor on McKinsey’s 7s Framework by modifying strategy and systems (see appendix 10.9 for 7s framework).
Rio Tinto is currently in heavy debt following a takeover of Alcan for $US38 billion (They Sydney Morning Herald, 2012). This debt has been decreasing over time; $US15 billion in 2010. It is however, preventing Rio from growing at a desired rate. Debt during environmental instability is undesirable, and Rio are taking measures to reduce it. The adverse effects of this include a lack of growth and slowing of technological advances. This exacerbates the negative effects of future labour shortages.
Conclusions on Strategic Implementation Issues
Emphasis on keeping costs down and revenue up is important in case Iron ore prices drop further. Labour shortages over the next decade are likely to constrain growth for most of the industry (Fisher & Schnittger, 2012). Rio is already ahead of the game when it comes to applying automated technology, but the short term costs are intensive. With capital forecasts dropping, there could be a problematic snowballing effect between the financial, growth and technological strategic drivers. Focusing on the first driver will help alleviate problems associated with the others.
Triple Bottom Line Reporting
The aim of this analysis is to reach a synergy between the three lines; gaining a status of sustainable management (appendix 10.11). A triple bottom line analysis has been conducted to assess how well Rio Tinto Iron Ore is meeting strategic objectives.
Economic Bottom Line
Underlying earnings for the first half of 2012 are down 20% due mainly to lower iron ore prices.The Pilbara sector increased sales by 4% this year, with production exceeding sales (RioTinto, 2012). Until demand picks up, revenue will be restricted by low prices and high costs.
Chinese steel production will likely peak by 2030, by which time Indian and Southeast Asia will become important sources of demand (Tulpule, 2012). Until then, China is expected to be the main source of demand. Matching this demand may be difficult due to challenging finance restricting expansion (Tulpule, 2012).
Social Justice Bottom Line
Improving and maintaining community relationships is important within the minerals industry for obtaining and maintaining access to new resources (Harevy & Brereton, 2005). This is exactly Rio Tinto’s motivation as mentioned in their strategic drivers (appendix 10.6). Harvey & Brereton (2005) also state that sustainability requires policy to be systemic with the organisations operations and processes. Rio Tinto focuses on developing a comprehensive system which does just this.
Rio has experienced some problems with site-based managers overlooking the importance of community relations. However, they are addressing these issues by defining clear minimum standards for all operations (Harevy & Brereton, 2005).
Environmental Bottom Line
Rio Tinto are one of few companies to obtain EMS certification (Jenkins & Yakovleva, 2004) (appendix 10.10). Rio produces an all-encompassing environmental report each year, which provides information on their global operations; as well as providing site-specific reports (Hilson & Nayee, 2001). These reports are highly transparent and all sites are thoroughly audited.
Success of Strategic Objectives
Results from the triple bottom line analysis suggest that Rio Tinto Iron Ore is achieving long term objectives in terms of sustainability. Flux in the macro environment is threatening areas of the economic bottom line, which may have effects on their level of sustainability where corners are cut. However, diligent recognition of threats are causing Rio Tinto to re-align their economic strategies with their drivers to ensure objectives are met.
The slowing of the Chinese economy is having a negative effect on the price of Iron Ore. As a result, Rio Tinto Iron Ore is suffering losses in their revenue margin due to lower prices. Continuing struggles with environmental taxes and high cost labour are creating a costly environment for miners in Australia.
Revenue is being reduced due to the combined effect of mentioned factors. Rio Tinto intends to take a more diligent stance on capital spending and operating costs in the near future. It has been realised that the financial strategic driver has not be met to full potential in recent years; due to riding off unprecedented iron ore prices.
10.4 Global steel production trend
Threat of Existing Rivalry
Rio Tinto seems to view competitors as opportunities as well as threats. The number one priority of Vale CEO Roger Agnelli is to prevent BHP’s PotashCorp acquisition (Business Mining, 2012). Comparatively, Rio Tinto’s CEO Tom Albanese doesn’t mention competitors at all in his top ten priorities (Business Mining, 2012). In late 2008, BHP Billiton abandoned its hostile bid to acquire Rio Tinto (Wasserner, 2008). Wasserner (2008) explains that Rio Tinto was shielded by their own strength, turbulence trouble for BHP and the support of regulatory authorities. Current discussion between Rio Tinto and Vale over the sharing of railway infrastructure in other areas of mining highlights the sometimes cooperative nature of an oligopoly and their strength within it. Rivalry is a major factor in the mining industry, but can be used to Rio Tinto’s advantage.
Threat of New Entrants
The mining industry is well known for having an extremely high set up cost. Along with high levels of government control over leasing and licencing, this creates a major barrier to entry. Other mining industries however, could find opportunities to increase their share of the iron ore market. The current labour shortage in Australia (Rio’s biggest concentration of Iron ore assets are based here) could cause major buyers to look elsewhere (Wisenthal, 2012). This may decrease barriers to entry.
Power of Suppliers
According to (Xie, 2012), High commodity prices are driving shortages in mining equipment. This means Rio Tinto must be careful when obtaining supplies to meet demand, while keeping costs down. More importantly, it indicates an increase in the power of Rio Tinto’s suppliers. Rio Tinto is a leader in innovative technology and just rolled out 150 new automated trucks (Rio Tinto Australia, 2012). As demand for their innovative technology increases, the strength of suppliers will likely increase as fewer will be capable of supplying required specialist equipment.
Power of Buyers
Recent anti- inflationary policies in China have reduced investment growth and demand for iron ore, putting more power in the hands of buyers; and decreasing the price of iron ore (Tulpule, 2012).
Threat of Substitutes
Approximately 98% of iron ore is used to make steel, which is one of the most sought after construction materials ever created (SEAB Gems Lmt, 2012). Because of this, it’s likely that iron ore will always be sought after. However, there are some threats which come with increasing costs of iron ore. China has a huge supply of scrap steel which struggling buyers are turning to in an attempt to relieve their dependence on overseas mining monopolies (Chen, 2010). In other industries, steel is being substituted for lighter materials such as aluminium, concrete, wood, glass, paper and plastics. Therefore iron or may be an inelastic product in general, but becomes more elastic depending on what it is being purchased for.
The Government has strong involvement in the mining industry. Rio Tinto must work within the terms of their lease or license to access land, the right to transport materials and rehabilitate the environment when they leave (Xie, 2012). Gaining permits to new mines can be difficult (Anonymous, 2003); there may be significant issues related to indigenous native title, and significant royalties must be paid on top of regular company tax (Government of Western Australia Department of Mines and Petroleum, 2012).
10.6 Strategic Drivers
10.7 The Way We Work Code of Conduct December 2009
10.8 Map of Operations
McKinsey's 7S Framework
10.11 Triple Bottom Line
10.10 EMS Systems
Environmental Management Systems
An Environmental Management System (EMS) is a structured system or management tool designed to help an organisation to reduce its negative impacts on the environment and improve its environmental performance. The system can also provide a methodical approach to planning, implementing and reviewing an organisation's environmental management.
Implementation of an EMS involves an organisation taking the following steps:
- devise a policy that articulates the organisations environmental commitments
- appoint an environmental manager or management team responsible for the ongoing coordination of the EMS
- identify the organisation's significant environmental aspects
- identify legislative and regulative requirements relevant to the organisations environmental aspects
- establish environmental objectives and targets
- implement programs to achieve those objectives and targets
- monitor and measure progress towards achieving those objectives and targets
- take steps to continually improve the effectiveness and efficiency of environmental management and
- strategically review the continuing effectiveness of environmental management within the organisation.
Standards Australia has adopted the International Standards for Environmental Management Systems (ISO14001 and ISO14004) for use by Australian organisations. These are known within Australia (and New Zealand) as:
- AS/NZS ISO 14001:2004 Environmental Management Systems - requirements with guidance for use
- AS/NZS ISO 14004:2004 Environmental Management Systems - general guidelines on principles, systems and support techniques
These standards provide a helpful framework for organisations wishing to develop a high quality EMS, regardless of whether or not they intend to achieve certification to the EMS standard.
Source: Australian Government: Department of Sustainability, Environment, Water, Polution and Communities.
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This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.