Iron Ore Market Analysis porter framework

Claudio BustosDuber JofreRodrigo ValdesIron OreMarket Analysisporter frameworkIron Ore Market General Overview

1.3 billion tonnes of iron ore annually is shipped internationally.

Move towards free market pricing has increased competition, but also introduced volatility for smaller concerns.

The global seaborne iron ore market represents approximately 42% of total iron ore production (~ 944 million t in 2009)

With 68% of total exports in 2009, Australia and Brazil dominate the export market.

India and South Africa are also significant contributors to the seaborne market.Rio tintooverview97% of the iron ore produced in Australia comes from Western Australia, from a region called Pilbara. And most of it is exported to Asia (mostly China and Japan).

Rio Tintos market share in the global market is 10%, and around 40% in Australia.

Pilbara Assets (N AUS)15 mines1,600kms of rail4 independent port terminals, with 11 berths.3 power stationsSystem fully integrated via Operations Centre.All product blending undertaken at port.Strong Resources & Reserves position provides optionality.

Rio tintodefine the marketDefined market: Regional

Almost 100% Iron ore exported from Australia is send to Asia (China, Japan & Korea).

Price:based principally on their iron content and shipping cost. Global iron ore prices have historically fluctuated with global demand for steel and availability of vessels for charter. Quarterly iron ore benchmark prices are set in the seaborne export market, based on prices negotiated by the three largest iron ore producers (Vale SA, BHP Billiton Limited and Rio Tinto plc) with global steel mills.

Rio tintoNature of productAlthough iron in cast form has many specific uses (e.g. pipes, fittings, engine blocks) its main use is to make steel.

Across Rio Tintos global iron ore operations we produce lump ore, pellets, fines and concentrate.

From Pilbara region in Westrern Australia, Rio Tinto delivers five products : Pilbara Blend lump Pilbara Blend fines Yandicoogina fines Robe Valley lump Robe Valley fines

Rio tintoPreliminary AssessmentAustralia and Brazil are the top exporters of iron ore, sharing two thirds of total global exports in 2011.

Australia is the worlds largest exporter of iron ore with a 38% global market share, followed by Brazil with 30%, both have the 68% market share for the Asian Market.

Australia are Chinas top source of iron ore, with 296 Mt or 43% and is also the dominant supplier to Japan and South Korea, supplying 62% and 68% of those countries iron ore imports respectively.

Brazil supplies around a quarter of total iron ore imports to China, Japan and South Korea. Figure 03Largest exporters of iron oreRio tintoPreliminary AssessmentConsidering a regional market and that products is semi-differentiated, the Rio Tinto Global HHI has a value of 475, defining this market as Semi-Concentrated

If we focus on the regional context, this behavior does not change because to; a) Australia is the largest exporter of iron ore with 438 Mt.b) the most important market and where the sale of Australian products (Rio Tinto in) concentrates is China.

With this information, we define preliminary the market structure as a oligopolistic because have three main actor in this Regional Market

CompanyAustralian production (% share)World production (% share)Production (Mt)200120112015BHP Billiton39%8.8%68173200Rio Tinto Ltd.43%9.6%90189283 to 353Fortescue Metals Group11%2%047.8155Vale16.3%168323469CR394%N/AHHI 3491475CR4N/A38Rio tintoPorter 5 forces analysisRIVALRYNEW COMPETITORSBUYERS BARGAINING POWERSUPPLIERS BARGAINING POWERSUBSTITUTESCONCENTRATED BUYERS.HIGHER IMPACTS ON CHINA DEVELOPMENT POLICYES.

BEEN BOUGTH BY OTHER FIRM PRESERV MARKET SHAREHIGH EXIT BARIERS (ENVIRONMENTAL ISSUES)

BRAND IMPORTANCEDISTRIBUTION NETWORK (GEOGRAFIC RELATED)CAPITALLEARNING CURVETECHNOLOGY

LIGHTER METERIALSNEW ALLOYSSCRAP

LABOURHIGH DEMAND DUE TO COMMODITY PRICES FEW SUPPLIERSRio tintoNEW COMPETITORS (STRONG FORCE)Brand Importance

Distribution Network (Geografic Related)

Capital

Learning Curve

Technology

Iron Ore (2011)Vale16Rio Tinto10BHP Billiton9Arcelor Mittal3State of India3Fortescue2Anglo American2Cliffs Natural Resources2Metalloinvest2System Capital Mgmt2CR438CR847HHI475

Rio tintoSUBSTITUTES AND SUPPLIERS BARGAIN (STRONG FORCE)Lighter MaterialsNew AlloysScrapLabourHigh Demand Due To Commodity Prices Few Suppliers

Iron Ore (2011)Vale16Rio Tinto10BHP Billiton9Arcelor Mittal3State of India3Fortescue2Anglo American2Cliffs Natural Resources2Metalloinvest2System Capital Mgmt2CR438CR847HHI475

Rio tintoRIVALRY AND BUYERS BARGAIN POWER (WEAK FORCES)RivalryBeen Bougth By Other Firm Preserve Market ShareHigh Exit Barriers (Environmental Issues)

Buyers Bargain PowerConcentrated Buyers.Higher Impacts On China Development Policies.

Western Australian Iron Ore Production And TradeRio tintoSTRATEGY AND OPORTUNNITY OF ECONOMIC RENTLead the industry by costs, because of the lack of product differentiation in iron ore industry.Increase production.Use the brand and position in the industry to make better contracts for the company.

OPPORTUNITY OF RENTSThe opportunity lies in the increase of production (and Market Share) including new projects development (considering the logistic network).

ProjectOwner/Joint VenturersValueProductionStatusStart-up($b)(Mtpa)Pilbara 283 Mtpa ExpansionRio Tinto10.253ConstructionDec 2013Roy Hill Iron Ore MineHancock Prospecting, Posco & KJTC9.555ConstructionDec 2014West Pilbara Iron Ore Mine, Rail & Port (Stage 1)Australian Premium Iron Ore JV (Aquila & AMCI)7.430Under considerationMar 2014Pilbara 353 Mtpa ExpansionRio Tinto6.170Under ConsiderationJun 2015CONCLUSIONSThe Australian iron ore market is concentrated (oligopolic) with a CR4 38 (worldwide) and CR3 in Australia of 94 (worldwide HHI 475) and Australian HHI 3491, where 97% of the production goes to Asia.The product has no relevant differentiation with his competitors.The Five Forces Analysis shows threats in inside Market Rivalry and bargaining power of buyers.Deviations come mostly from government decisions and tax changes given the concentration of buyers and his market growth forecast.Generic strategy is increase production and market share given the high logistic system and leading costs position. Important part of this is the market share growth by exploration and new projects development.