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Marketing in a cyclical business
Marketing in a cyclical business Lessons from the molybdenum industry
M. M. Lavite
In the light of the latest developments in the molybdenum industry, we have attempted to draw lessons as to how to best address cyclicality when it comes to the marketing and selling of metals and minerals in general. To that end, we will first give a brief outline of the molybdenum business and highlight the structural differences which may preclude us from extrapolating our analysis too easily to other metals. The author is with the Climax Molybdenum Company, 96 rue de la Victoire, 75009 Paris, France.
While cyclicality is the bread and butter of traders, it is widely viewed as the bane of production planners, industry analysts, marketing managers and purchasing agents. In truth, if it were not for the cyclic nature of the commodity metal markets, this latter group would either not have jobs or would be paid considerably less. Analysts would have little to predict, marketers would be reduced to mere sellers and purchasing managers would become clerks and miss out on a good many free lunches and golf outings! Molybdenum is a relatively young metal, in use for approximately 80 years, primarily used as alloying agent in speciality steels and cast irons and also, to a lesser extent, in the chemical sector for the formulation of catalysts, lubricants and pigments (Figure 1). Generally speaking the end-use sectors of molybdenum are related to the fabrication or construction of plant and equipment (made from alloy, stainless or heat resisting steels); hence there is a strong correlation between molybdenum consumption, capital investment and steel production (Figure 2). Although molybdenum demand enjoyed a long period of virtually uninterrupted steady growth, peaking to an all time high of 209 million lb of molybdenum contained in 1979 (Figure 3), 1980 marked the beginning of an era of instability, with demand retreating by about 70 million lb or 35% in four years. Conversely, free market molybdenum prices, having skyrocketed to nearly US$30 per lb of molybdenum contained in 1979 soon collapsed to abysmal depths of barely above $2.50 per lb, a virtual tenfold decrease in a matter of a few months (Figure 4). After a few years of volatility, the market has returned to a state of relative equilibrium, not only in absolute terms but also in contrast to most other base and noble metals (Figure 5). We will come back later to the reasons for this markedly different behaviour of molybdenum versus others. Molybdenum supply comes from two main sources (Figure 6): 0 0
primary production by- and coproduct
ie extraction of molybdenite by itself; output from porphyry type copper mines.
The latter source represents
0301-4207/91/020149-09
@ 1991 Butterworth-Heinemann
Ltd
about 60% of overall
molybdenum
produc149
Marketing in a cyclical business
Constructional
Chemicals
Figure 1. 1989 Western world molybdenum demand.a aExcludes tries.
exports
to Eastern
bloc coun-
tion and is basically inelastic to molybdenum prices ie the primary production sector is the only one to play a balancing role in the industry through adjusting its output to demand fluctuations. The major players in the industry can be classified according to their mine output (see Table 1). In terms of market presence, however, the situation is somewhat different because quite a few mine operators do not go beyond the production of concentrates and rely upon producers, converters and traders to process the concentrates and bring them to the market in the form of salable products. The major suppliers of molybdenum products to the world markets are therefore Climax, Cyprus, Codelco and Noranda, followed by a crowd of other producers, converters and merchants. The pricing practice in the molybdenum industry can be briefly described as follows. Due to the relatively limited size of its market (less than US$l billion) and the complex product mix, there is no terminal market for molybdenum ie no LME or COMEX to reflect fluctuations in spot cash or forward prices. Although there are a couple of 525
280
475
Figure 2. Western world crude steel production mand.
against
molybdenum
Source: Production figures for crude steel from International Iron and Steel Institute; for demand from Climax Molybdenum Company.
150
z
de160
375
325
I
I
1979
1980
I
1981
I 1982
I
1983
I 1984
I
1985
I
I
1987
1988
I
1986
RESOURCES
I 1989
POLICY June
120
1991
Marketing in a cyclical business
,
210 200 190 180 170
1I
160 150 140 130 120
Figure 3. Western world molybdenum demand 1974-90.
110 100
ii
1976
1974
molybdenum
price
982
barometers
published
19‘84
i
1986
by trade
magazines
(Metal is highly questionable as they are wide open to manipulation by the trade. The dominant references would therefore be the producer price, published by Climax and Cyprus, and at whatever levels spot transactions are concluded by prominent buyers. Unlike the situation in other markets eg vanadium, the molybdenum producer price has no specified duration, which therefore allows producers to adjust their price to account for fluctuations in free market prices. It should be noted that Codelco of Chile also has a list price; however this barely has any significance as it is hardly ever used as a reference in the pricing of its products.
Bulletin, Metals Week, Metals Price Report), their reliability
How to deal with cyclicality Simply put, the best way to live with cyclicality is to plan for it. Planning does not mean ascertaining when cycles will occur but accepting that they will occur. Companies tend to fall into one of three groups. The first group is those that pay lip service to planning, but whose actions are totally geared to the events of the day; then there are those companies which spend half of their planning efforts constructing outlooks and the
Metals Week low price ‘.‘.‘..’
Figure 4. Metals Week molybdenum dealer oxide prices compared to Amax list price (1975-90).
RESOURCES
POLICY June
1991
01
I
1976
I
I1
1978
I
1980
I
molybdenum
Climax list price (suspended between and October 1986)
I,
I
1982
1984
oxide
October
,
I,,
1986
1988
1981
,
,
1990
151
Marketing in a cyclical business
Figure 5. Metals May 1990.
Week price 1975~
All other sources
\
coproduct
mines /
Figure 6. Western world molybdenum net production by producer type.
other half arguing about why the previous outlook was wrong. Finally, there are companies which try to ascertain the general course of the market, but which invest most of their efforts ensuring their company’s ability to respond effectively to cycles whenever they occur. This last group, unless burdened with an untenable starting position, usually wins. The most highly touted and most often employed tool for dealing with cyclicality is prediction. Supply and demand forecasting generally falls under the realm of marketing. Given the title of this paper, it could reasonably be expected to address the subject of forecasting, with bell curves, regressions and correlations. This expectation will remain unfulfilled. My experience is that marketing models adhere to the well known computer axiom ‘garbage in garbage out’. When fed into these models, historical information has a canny ability to accurately predict the past but not the future. By definition, surprises cannot be predicted. Forecasting is useful in examining scenarios and focusing on a general direction for the market; but it offers no blueprints of the future; knowing when to act is important, but is subordinate to knowing how to act. Table 1. Molybdenum producers. Large size
ie production/sales in the range of 20-60 million lb MO contained (10% to 30% of world demand) Henderson mine [primary) Climax mine (primary) Thompson Creek mine (primary) Tonopah mine (primary) Sierrita mine (coproduct) Bagdad mine (byproduct) Chuquicamata, Andina Salvador, Teniente (all byproduct)
Climax Cyprus
Codelco Medium size
ie production/sales range Bingham Canyon Questa Bune Endako Gibraltar
KennecotVRTZ MolycorplUnocal Montana Resources/Asarco Placer Small size Among which Southern (Island Copper) etc
152
Peru
Copper
Corporation
(Cuajone
in the IO-20
million lb MO pa (byproduct) (primary) (byproduct) (primary) (byproduct)
and Toquepala),
RESOURCES
BHP -
POLICY June
UTAH
1991
Marketing in a cyclical business
Flexibility The metal companies which have performed best are not those which have acted on a clear view of the future but those companies which have been flexible enough to deal with whatever developments the future has in store for them. Flexibility, not prescience, is the key attitude for dealing with cyclicality. It must be built into a mining company’s planning process; but more importantly it must be translated into concrete steps which allow the company to react faster and better to a fast changing business environment. In a true commodity market, where quality, reliability and customer service are at best secondary considerations, cost efficiency provides the best flexibility. A low production cost mode is absolutely essential for the leading producer to weather the cyclical storms, which often means painful cost reduction programmes and retirement of inefficient capacity. Since the early 1980s Climax has retired approximately 35 million lb of molybdenum production capacity and has achieved very significant productivity gains and costs reductions at the Henderson primary mine (Figure 7), now on a par with certain coproduct or byproduct producers. Needless to say, flexibility should work both ways and Climax has positioned itself to be able to quickly increase capacity should market conditions warrant, as evidenced by the recent decision to redevelop the Climax mine. Flexibility also means versatility and the Climax conversion plants have developed a unique ability to process a wide variety of molybdenum concentrates in combination with those produced at the Henderson and Climax mines. The rationale behind purchasing concentrates from other non-integrated mines is simply for Climax to retain its position of first supplier of molybdenum products through optimizing the utilization of its capacity at all stages of its production system. Market stability There is no need to dwell on the point that relatively prices are good for both producers and consumers: 0
0
When prices are excessively low, there is little incentive for supply to grow and demand, spurred by low prices, quickly outweighs supply, leading to a shortage and skyrocketing prices. When prices are excessively high, substitution trends can develop, there is a strong incentive for supply to increase and an oversupply is likely to follow, together with rapidly decreasing prices.
nit operating
Figure 7. Henderson ments 1981-89.
RESOURCES
stable market
costs
mine improve-
POLICY June 1991
1981
1982
1983
1984
1985
1986
1987
1988
19
153
Marketing in a cyclical business ‘._I”
225 200
t
_
,.yduction
175 150 E
-TL-
125 -
w
(excluding Stocks consumers)
100 -
\
75 50 25 -
Figure
8. Molybdenum
demand inventory
supply/
0
1979-83.
1979
1980
1981
1982
1983
This is exactly the situation which developed in the molybdenum industry in the period 1979432, as illustrated by Figure 8. Maintaining stability, however, is easier said than done, particularly when some of the production is inelastic to price, which can be the case for a variety of reasons: very low/marginal production cost (eg byproduct molybdenum producers), the critical importance of hard currency receipts for mining companies in the developing countries, very high fixed ‘sunk’ costs but rather low variable costs, high shutdown costs etc. The burden of expansion or contraction therefore often rests on the shoulders of a small number of producers with either a higher cost structure or a different business philosophy. In the molybdenum business, non-primary production, blessed with a byproduct cost structure, is totally inelastic to molybdenum price. Its level should really be determined by the level of copper prices, simply following the rule that the higher copper prices, the stronger the incentive for these mines to extract copper and, together with it, molybdenum contained in the same mineral. This rule of thumb was generally adhered to in the recent past (see Figure 9). In the last few years, however, copper prices have been so high that a paradoxical situation has developed, whereby certain prominent copper producers eg Codelco of Chile or La Caridad in Mexico, have maxi-
0 EI
225
Primary BylCoproduct
0
1
Other
200 m g
I-
175
? 150 8 zz 125 .-
cl
z r-
Figure 9. Western world molybdenum prouction
19i30-90.a
aOther includes recovery from catalyst and imports from China.
154
t
I5
Z+ 50 25
E
1982
1983
1984
1985
1986
1987
RESOURCES
1988
198!
POLICY June 1991
Marketing in a cyclical business Million lb
Million lb
Demand
ZOO+Down
BylCoproduct suPPlY
130 -+up
Balance primary
Figure supply
for mines
5% -137
70+Down
10. Primary dynamics.
5%-_*190
25%+53
molybdenum
mized copper recovery in the flotation cells at the expense of molybdenum recovery. The responsibility for contracting or expanding production to balance non-primary supply of molybdenum must rest with the primary production segment, which represents 40% of productive capacity. For example, a 5% expansion in non-primary supply coupled with a 5% decrease in demand requires a 25% contraction in primary production to balance the market (see Figure 10) ie relatively small variations of certain market factors can make it necessary for the leading primary producers to proceed with very large cutbacks in output. Market stability, however, requires a long-term view as during market upsurges it can be very tempting to seek the highest possible prices to compensate for losses incurred during the previous downturn. Clearly the legitimate producer desire for higher prices must be balanced by fears of awakening dormant capacity and/or prompting substitution. In that regard it must be noted that mines reopen not when market prices reach a point of profitability, but when there appears to be enough momentum for the prediction that they will be able to reach profitability. The mining industry is not short of examples where sometimes artificiallly created business climates have aroused sleeping giants which have subsequently plagued the industry with permanent oversupply. Molybdenum consumption is beginning to harvest the crop of a good many years of relative price stability. While the turbulent period of the late 1970s and early 1980s has resulted in substitution of vanadium and niobium for molybdenum in certain steel grades and special alloys, reverse substitution of molybdenum for other metals eg nickel is now taking place in the stainless steel industry. However strong commitment to stability may be, molybdenum producers naturally expect to reap the benefits of it in the form of a more stable market participation. This is now coming, with quite a few major consumers recognizing the positive role played by producers in maintaining a stable market and favourably inclined to reward them through higher prices and larger volumes. Consumers still too often complain that they cannot afford to pay more than their competitors and that, much to their chagrin, they have to follow the fluctuations of the marketplace, particularly the slump side of the cycle conveniently omitting the boom side.
3.90
140 Metol~
130 -
Week
average
price
- 3.70
120 -
-
3.50
-
2.70
110 -
100 -
90 80 Producer
Figure 11. Metals Week molybdenum dealer oxide prices compared to producer inventories.
RESOURCES
POLICY
June 1991
70
I
I 3Q
4Q 1987
I 1Q
2Q
I
1988
3Q
I
4Q
inventories
I
IQ
I
2Q
I
I 3Q
4Q
2.50
1989
155
Marketing in a cyclical business
There is little doubt that one of the main weapons to enforce stability is the ability and the preparedness of producers to build and maintain stocks. Clearly the correlation between price and inventory levels is very strong, as illustrated in Figure 11 for molybdenum, and one of the reasons why prices have been reasonably stable in the last few years is the comfortable level of inventories. This, however, hinges upon the company’s ability to build stocks, which is related to its financial health and its determination to maintain them even in times when the pressure builds up to generate cash flow. Global marketing
Although price is the most conspicuous sign of cyclicality, it is only a reflection of underlying economic factors such as supply, demand and inventories. It is therefore difficult to separate marketing strategy from the overall business strategy, covering all critical aspects eg production levels, inventory policy, product development, financial strategy etc. Roughly speaking, the main players in the metals market can be broadly characterized as price makers and price takers. While the price taker will place emphasis on market share and volume with little concern for price, the price maker will have to resort to much more global marketing skills - as opposed to straightforward selling - in order to optimize the price/volume relationship consistent with its long-term strategy. As we all know, the price for a given commodity should be near the marginal cash cost for the industry ie the marginal, higher cost suppliers to the market will be the ones to determine or make the price. They will, however, have little influence on the quantities they sell and, contrary to the sell regardless of price crowd, will have to use other weapons than price to maintain a presence in the market. Market intelligence
In many instances a shortfall and oversupply in commodity markets is due to a misreading of demand and competitor activities rather than any conscious efforts by producers and consumers to disrupt the market (traders notwithstanding). It is therefore critical to develop and maintain a very thorough data base on customers and competitors and to feed it with up to date information on a timely basis. Sometimes a mechanism for exchanging basic market information pertaining to production, consumption, inventories can assist in making the market transparent and less susceptible to merchant gossip. To that end, Climax has, along with other producers and consumers, recently launched the IMOA (International Molybdenum Association) which aims to provide a more reliable statistical basis for market players and observers. It is essential that critical market information be fed to management (including senior management) on a current basis so as to allow it to respond quickly to fast changing market circumstances. Market developmentlproduct
development
One way for the producer to fight the battle on grounds other than price only is clearly to move away from commodity products and increase involvement in custom made, specialist products designed to respond to a customer’s specific needs. In the steel making area, Climax has recently brought to the market a new product called Polymox, which provides substantial productivity gains and material and cost savings in 156
RESOURCES
POLICY June 1991
Marketing in a cyclical business
comparison with conventional molybdenum oxide used for steel making applications. This product is now patented, trade marked and sold in substantial quantities worldwide. More importantly, it exhibits a better resilience to fluctuations in market prices. In the chemical and pure metal segments of the molybdenum market, where technical expertise, product development and customer service are clearly more important than price, Climax has, over the years, built a leading position which is somewhat easier to defend against the price takers. Clearly the emphasis there is on developing proprietary knowhow and products allowing the company to build rewarding niches through bringing customers a total package: custom made products and technical service combining nicely into commercial partnerships, as opposed to the traditional confrontation type relationship between supplier and customer. Customer service (long-term relationships) Despite difficult times for the industry, Climax has elected to maintain an extensive international sales network in order to be able to listen to and translate multinational customer requirements. The company has also made a point of nurturing relationships with foundry customers who, although they buy commodity products, require reliability and customer service. Again, partnership would be the key word in that area, with an increasing number of customers inclined to strike a privileged relationship with those suppliers who take a long-term view and refuse easy short-term profits.
Conclusion While Climax may not be the lowest cost miner, it is certainly the most geographically diverse and has the most technically advanced conversion facilities. Therefore, while its share of the mining market fluctuates with the cyclicality of the business, Climax remains the world’s largest convertor and marketer of molybdenum products through a combination of mining, purchases and tolling. Therefore, despite cyclicality, they have presented a constant face to the customer, providing the full range of molybdenum products deliverable everywhere in the world. Flexibility has become the key word allowing Climax to weather the cyclical storms of the market.
RESOURCES
POLICY June 1991
157
M. M. Lavite
In the light of the latest developments in the molybdenum industry, we have attempted to draw lessons as to how to best address cyclicality when it comes to the marketing and selling of metals and minerals in general. To that end, we will first give a brief outline of the molybdenum business and highlight the structural differences which may preclude us from extrapolating our analysis too easily to other metals. The author is with the Climax Molybdenum Company, 96 rue de la Victoire, 75009 Paris, France.
While cyclicality is the bread and butter of traders, it is widely viewed as the bane of production planners, industry analysts, marketing managers and purchasing agents. In truth, if it were not for the cyclic nature of the commodity metal markets, this latter group would either not have jobs or would be paid considerably less. Analysts would have little to predict, marketers would be reduced to mere sellers and purchasing managers would become clerks and miss out on a good many free lunches and golf outings! Molybdenum is a relatively young metal, in use for approximately 80 years, primarily used as alloying agent in speciality steels and cast irons and also, to a lesser extent, in the chemical sector for the formulation of catalysts, lubricants and pigments (Figure 1). Generally speaking the end-use sectors of molybdenum are related to the fabrication or construction of plant and equipment (made from alloy, stainless or heat resisting steels); hence there is a strong correlation between molybdenum consumption, capital investment and steel production (Figure 2). Although molybdenum demand enjoyed a long period of virtually uninterrupted steady growth, peaking to an all time high of 209 million lb of molybdenum contained in 1979 (Figure 3), 1980 marked the beginning of an era of instability, with demand retreating by about 70 million lb or 35% in four years. Conversely, free market molybdenum prices, having skyrocketed to nearly US$30 per lb of molybdenum contained in 1979 soon collapsed to abysmal depths of barely above $2.50 per lb, a virtual tenfold decrease in a matter of a few months (Figure 4). After a few years of volatility, the market has returned to a state of relative equilibrium, not only in absolute terms but also in contrast to most other base and noble metals (Figure 5). We will come back later to the reasons for this markedly different behaviour of molybdenum versus others. Molybdenum supply comes from two main sources (Figure 6): 0 0
primary production by- and coproduct
ie extraction of molybdenite by itself; output from porphyry type copper mines.
The latter source represents
0301-4207/91/020149-09
@ 1991 Butterworth-Heinemann
Ltd
about 60% of overall
molybdenum
produc149
Marketing in a cyclical business
Constructional
Chemicals
Figure 1. 1989 Western world molybdenum demand.a aExcludes tries.
exports
to Eastern
bloc coun-
tion and is basically inelastic to molybdenum prices ie the primary production sector is the only one to play a balancing role in the industry through adjusting its output to demand fluctuations. The major players in the industry can be classified according to their mine output (see Table 1). In terms of market presence, however, the situation is somewhat different because quite a few mine operators do not go beyond the production of concentrates and rely upon producers, converters and traders to process the concentrates and bring them to the market in the form of salable products. The major suppliers of molybdenum products to the world markets are therefore Climax, Cyprus, Codelco and Noranda, followed by a crowd of other producers, converters and merchants. The pricing practice in the molybdenum industry can be briefly described as follows. Due to the relatively limited size of its market (less than US$l billion) and the complex product mix, there is no terminal market for molybdenum ie no LME or COMEX to reflect fluctuations in spot cash or forward prices. Although there are a couple of 525
280
475
Figure 2. Western world crude steel production mand.
against
molybdenum
Source: Production figures for crude steel from International Iron and Steel Institute; for demand from Climax Molybdenum Company.
150
z
de160
375
325
I
I
1979
1980
I
1981
I 1982
I
1983
I 1984
I
1985
I
I
1987
1988
I
1986
RESOURCES
I 1989
POLICY June
120
1991
Marketing in a cyclical business
,
210 200 190 180 170
1I
160 150 140 130 120
Figure 3. Western world molybdenum demand 1974-90.
110 100
ii
1976
1974
molybdenum
price
982
barometers
published
19‘84
i
1986
by trade
magazines
(Metal is highly questionable as they are wide open to manipulation by the trade. The dominant references would therefore be the producer price, published by Climax and Cyprus, and at whatever levels spot transactions are concluded by prominent buyers. Unlike the situation in other markets eg vanadium, the molybdenum producer price has no specified duration, which therefore allows producers to adjust their price to account for fluctuations in free market prices. It should be noted that Codelco of Chile also has a list price; however this barely has any significance as it is hardly ever used as a reference in the pricing of its products.
Bulletin, Metals Week, Metals Price Report), their reliability
How to deal with cyclicality Simply put, the best way to live with cyclicality is to plan for it. Planning does not mean ascertaining when cycles will occur but accepting that they will occur. Companies tend to fall into one of three groups. The first group is those that pay lip service to planning, but whose actions are totally geared to the events of the day; then there are those companies which spend half of their planning efforts constructing outlooks and the
Metals Week low price ‘.‘.‘..’
Figure 4. Metals Week molybdenum dealer oxide prices compared to Amax list price (1975-90).
RESOURCES
POLICY June
1991
01
I
1976
I
I1
1978
I
1980
I
molybdenum
Climax list price (suspended between and October 1986)
I,
I
1982
1984
oxide
October
,
I,,
1986
1988
1981
,
,
1990
151
Marketing in a cyclical business
Figure 5. Metals May 1990.
Week price 1975~
All other sources
\
coproduct
mines /
Figure 6. Western world molybdenum net production by producer type.
other half arguing about why the previous outlook was wrong. Finally, there are companies which try to ascertain the general course of the market, but which invest most of their efforts ensuring their company’s ability to respond effectively to cycles whenever they occur. This last group, unless burdened with an untenable starting position, usually wins. The most highly touted and most often employed tool for dealing with cyclicality is prediction. Supply and demand forecasting generally falls under the realm of marketing. Given the title of this paper, it could reasonably be expected to address the subject of forecasting, with bell curves, regressions and correlations. This expectation will remain unfulfilled. My experience is that marketing models adhere to the well known computer axiom ‘garbage in garbage out’. When fed into these models, historical information has a canny ability to accurately predict the past but not the future. By definition, surprises cannot be predicted. Forecasting is useful in examining scenarios and focusing on a general direction for the market; but it offers no blueprints of the future; knowing when to act is important, but is subordinate to knowing how to act. Table 1. Molybdenum producers. Large size
ie production/sales in the range of 20-60 million lb MO contained (10% to 30% of world demand) Henderson mine [primary) Climax mine (primary) Thompson Creek mine (primary) Tonopah mine (primary) Sierrita mine (coproduct) Bagdad mine (byproduct) Chuquicamata, Andina Salvador, Teniente (all byproduct)
Climax Cyprus
Codelco Medium size
ie production/sales range Bingham Canyon Questa Bune Endako Gibraltar
KennecotVRTZ MolycorplUnocal Montana Resources/Asarco Placer Small size Among which Southern (Island Copper) etc
152
Peru
Copper
Corporation
(Cuajone
in the IO-20
million lb MO pa (byproduct) (primary) (byproduct) (primary) (byproduct)
and Toquepala),
RESOURCES
BHP -
POLICY June
UTAH
1991
Marketing in a cyclical business
Flexibility The metal companies which have performed best are not those which have acted on a clear view of the future but those companies which have been flexible enough to deal with whatever developments the future has in store for them. Flexibility, not prescience, is the key attitude for dealing with cyclicality. It must be built into a mining company’s planning process; but more importantly it must be translated into concrete steps which allow the company to react faster and better to a fast changing business environment. In a true commodity market, where quality, reliability and customer service are at best secondary considerations, cost efficiency provides the best flexibility. A low production cost mode is absolutely essential for the leading producer to weather the cyclical storms, which often means painful cost reduction programmes and retirement of inefficient capacity. Since the early 1980s Climax has retired approximately 35 million lb of molybdenum production capacity and has achieved very significant productivity gains and costs reductions at the Henderson primary mine (Figure 7), now on a par with certain coproduct or byproduct producers. Needless to say, flexibility should work both ways and Climax has positioned itself to be able to quickly increase capacity should market conditions warrant, as evidenced by the recent decision to redevelop the Climax mine. Flexibility also means versatility and the Climax conversion plants have developed a unique ability to process a wide variety of molybdenum concentrates in combination with those produced at the Henderson and Climax mines. The rationale behind purchasing concentrates from other non-integrated mines is simply for Climax to retain its position of first supplier of molybdenum products through optimizing the utilization of its capacity at all stages of its production system. Market stability There is no need to dwell on the point that relatively prices are good for both producers and consumers: 0
0
When prices are excessively low, there is little incentive for supply to grow and demand, spurred by low prices, quickly outweighs supply, leading to a shortage and skyrocketing prices. When prices are excessively high, substitution trends can develop, there is a strong incentive for supply to increase and an oversupply is likely to follow, together with rapidly decreasing prices.
nit operating
Figure 7. Henderson ments 1981-89.
RESOURCES
stable market
costs
mine improve-
POLICY June 1991
1981
1982
1983
1984
1985
1986
1987
1988
19
153
Marketing in a cyclical business ‘._I”
225 200
t
_
,.yduction
175 150 E
-TL-
125 -
w
(excluding Stocks consumers)
100 -
\
75 50 25 -
Figure
8. Molybdenum
demand inventory
supply/
0
1979-83.
1979
1980
1981
1982
1983
This is exactly the situation which developed in the molybdenum industry in the period 1979432, as illustrated by Figure 8. Maintaining stability, however, is easier said than done, particularly when some of the production is inelastic to price, which can be the case for a variety of reasons: very low/marginal production cost (eg byproduct molybdenum producers), the critical importance of hard currency receipts for mining companies in the developing countries, very high fixed ‘sunk’ costs but rather low variable costs, high shutdown costs etc. The burden of expansion or contraction therefore often rests on the shoulders of a small number of producers with either a higher cost structure or a different business philosophy. In the molybdenum business, non-primary production, blessed with a byproduct cost structure, is totally inelastic to molybdenum price. Its level should really be determined by the level of copper prices, simply following the rule that the higher copper prices, the stronger the incentive for these mines to extract copper and, together with it, molybdenum contained in the same mineral. This rule of thumb was generally adhered to in the recent past (see Figure 9). In the last few years, however, copper prices have been so high that a paradoxical situation has developed, whereby certain prominent copper producers eg Codelco of Chile or La Caridad in Mexico, have maxi-
0 EI
225
Primary BylCoproduct
0
1
Other
200 m g
I-
175
? 150 8 zz 125 .-
cl
z r-
Figure 9. Western world molybdenum prouction
19i30-90.a
aOther includes recovery from catalyst and imports from China.
154
t
I5
Z+ 50 25
E
1982
1983
1984
1985
1986
1987
RESOURCES
1988
198!
POLICY June 1991
Marketing in a cyclical business Million lb
Million lb
Demand
ZOO+Down
BylCoproduct suPPlY
130 -+up
Balance primary
Figure supply
for mines
5% -137
70+Down
10. Primary dynamics.
5%-_*190
25%+53
molybdenum
mized copper recovery in the flotation cells at the expense of molybdenum recovery. The responsibility for contracting or expanding production to balance non-primary supply of molybdenum must rest with the primary production segment, which represents 40% of productive capacity. For example, a 5% expansion in non-primary supply coupled with a 5% decrease in demand requires a 25% contraction in primary production to balance the market (see Figure 10) ie relatively small variations of certain market factors can make it necessary for the leading primary producers to proceed with very large cutbacks in output. Market stability, however, requires a long-term view as during market upsurges it can be very tempting to seek the highest possible prices to compensate for losses incurred during the previous downturn. Clearly the legitimate producer desire for higher prices must be balanced by fears of awakening dormant capacity and/or prompting substitution. In that regard it must be noted that mines reopen not when market prices reach a point of profitability, but when there appears to be enough momentum for the prediction that they will be able to reach profitability. The mining industry is not short of examples where sometimes artificiallly created business climates have aroused sleeping giants which have subsequently plagued the industry with permanent oversupply. Molybdenum consumption is beginning to harvest the crop of a good many years of relative price stability. While the turbulent period of the late 1970s and early 1980s has resulted in substitution of vanadium and niobium for molybdenum in certain steel grades and special alloys, reverse substitution of molybdenum for other metals eg nickel is now taking place in the stainless steel industry. However strong commitment to stability may be, molybdenum producers naturally expect to reap the benefits of it in the form of a more stable market participation. This is now coming, with quite a few major consumers recognizing the positive role played by producers in maintaining a stable market and favourably inclined to reward them through higher prices and larger volumes. Consumers still too often complain that they cannot afford to pay more than their competitors and that, much to their chagrin, they have to follow the fluctuations of the marketplace, particularly the slump side of the cycle conveniently omitting the boom side.
3.90
140 Metol~
130 -
Week
average
price
- 3.70
120 -
-
3.50
-
2.70
110 -
100 -
90 80 Producer
Figure 11. Metals Week molybdenum dealer oxide prices compared to producer inventories.
RESOURCES
POLICY
June 1991
70
I
I 3Q
4Q 1987
I 1Q
2Q
I
1988
3Q
I
4Q
inventories
I
IQ
I
2Q
I
I 3Q
4Q
2.50
1989
155
Marketing in a cyclical business
There is little doubt that one of the main weapons to enforce stability is the ability and the preparedness of producers to build and maintain stocks. Clearly the correlation between price and inventory levels is very strong, as illustrated in Figure 11 for molybdenum, and one of the reasons why prices have been reasonably stable in the last few years is the comfortable level of inventories. This, however, hinges upon the company’s ability to build stocks, which is related to its financial health and its determination to maintain them even in times when the pressure builds up to generate cash flow. Global marketing
Although price is the most conspicuous sign of cyclicality, it is only a reflection of underlying economic factors such as supply, demand and inventories. It is therefore difficult to separate marketing strategy from the overall business strategy, covering all critical aspects eg production levels, inventory policy, product development, financial strategy etc. Roughly speaking, the main players in the metals market can be broadly characterized as price makers and price takers. While the price taker will place emphasis on market share and volume with little concern for price, the price maker will have to resort to much more global marketing skills - as opposed to straightforward selling - in order to optimize the price/volume relationship consistent with its long-term strategy. As we all know, the price for a given commodity should be near the marginal cash cost for the industry ie the marginal, higher cost suppliers to the market will be the ones to determine or make the price. They will, however, have little influence on the quantities they sell and, contrary to the sell regardless of price crowd, will have to use other weapons than price to maintain a presence in the market. Market intelligence
In many instances a shortfall and oversupply in commodity markets is due to a misreading of demand and competitor activities rather than any conscious efforts by producers and consumers to disrupt the market (traders notwithstanding). It is therefore critical to develop and maintain a very thorough data base on customers and competitors and to feed it with up to date information on a timely basis. Sometimes a mechanism for exchanging basic market information pertaining to production, consumption, inventories can assist in making the market transparent and less susceptible to merchant gossip. To that end, Climax has, along with other producers and consumers, recently launched the IMOA (International Molybdenum Association) which aims to provide a more reliable statistical basis for market players and observers. It is essential that critical market information be fed to management (including senior management) on a current basis so as to allow it to respond quickly to fast changing market circumstances. Market developmentlproduct
development
One way for the producer to fight the battle on grounds other than price only is clearly to move away from commodity products and increase involvement in custom made, specialist products designed to respond to a customer’s specific needs. In the steel making area, Climax has recently brought to the market a new product called Polymox, which provides substantial productivity gains and material and cost savings in 156
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Marketing in a cyclical business
comparison with conventional molybdenum oxide used for steel making applications. This product is now patented, trade marked and sold in substantial quantities worldwide. More importantly, it exhibits a better resilience to fluctuations in market prices. In the chemical and pure metal segments of the molybdenum market, where technical expertise, product development and customer service are clearly more important than price, Climax has, over the years, built a leading position which is somewhat easier to defend against the price takers. Clearly the emphasis there is on developing proprietary knowhow and products allowing the company to build rewarding niches through bringing customers a total package: custom made products and technical service combining nicely into commercial partnerships, as opposed to the traditional confrontation type relationship between supplier and customer. Customer service (long-term relationships) Despite difficult times for the industry, Climax has elected to maintain an extensive international sales network in order to be able to listen to and translate multinational customer requirements. The company has also made a point of nurturing relationships with foundry customers who, although they buy commodity products, require reliability and customer service. Again, partnership would be the key word in that area, with an increasing number of customers inclined to strike a privileged relationship with those suppliers who take a long-term view and refuse easy short-term profits.
Conclusion While Climax may not be the lowest cost miner, it is certainly the most geographically diverse and has the most technically advanced conversion facilities. Therefore, while its share of the mining market fluctuates with the cyclicality of the business, Climax remains the world’s largest convertor and marketer of molybdenum products through a combination of mining, purchases and tolling. Therefore, despite cyclicality, they have presented a constant face to the customer, providing the full range of molybdenum products deliverable everywhere in the world. Flexibility has become the key word allowing Climax to weather the cyclical storms of the market.
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POLICY June 1991
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