RTIO Analysis

Main issues faced by company: - High demand in China ○ How to open market? - High spot price, though can't benefit - Sea port logistic ○ FOB or CFR or own fleet? - Depleting Pilbara core ○ Grade multiplicity - Marketing of HIsmelt ○ Strategy ○ Finalize the product Assumption and Limitation: 1. Key player and market distribution in iron industry remains the same ○ Since Top 5 producers accounts for 75%, next 5 for 3% (The Iron Ore Industry, p3) 2. In short term, RTIO's main iron mine still comes from Pilbara, though the quality of mine degrades slowly, as the mine depletes ○ Leads to grade multiplicity reduction (p12) 3. In a long term, RTIO's Guinea mine would be operational (in a decade, that is 2017) (p3) ○ We consider this mine only because: ○ IOC in Canada is a "mature business" (p3) ○ Rio Tinto Brazil, faces direct competition against CVRD, which is the "pride of Brazil" (p3) ○ RTIO India: even if barriers of bureaucracy and local resistance overcame, production of Orissa mines would be absorbed domestically (p3) 4. Short term price in China remain high (2009-2012), while long term price in China will drop (2013+) (p4) 5. Assume Chinese steel industry fragmented in a medium term (5-10 years) ○ "government's objective was to have the top 17 percent of steel manufacturers supply 50% of the market, although this was achievable, it would take time." (p10) 6. Assume cost of chartered ship, construction cost of new ship and the lead time for new ships remain the same (p12) ○ Important factor as the "marine transport was the single biggest component in the cost of iron ore […] comprising approximately 50 percent of the delivered costs" (p7) 7. Assume, if we keep using the existing Yangtze supply chain, the cost of transportation will still be high in the future (2/3 price in transportation, p24). 8. Assume HIsmelt facility become a matured products by 2010 ○ "In 2006, the first HIsmelt facility was in a three year ramp-up to full capacity" (p16) Macro-level External Analysis (social influences, etc) 1. Emergence of China give a sharp rise in iron ore, with the supplier of ore in limited capacity, trying to catch up with demand 2. Fragmentation of steel mill in China in short term 3. High transportation cost of iron ore, especially into China. 4. Tree big players in iron ore industry A) Industry value chain: same as in the report sent by Timote, though what is the "Outsource" part???? B) Macro Environment Analysis a. Economic: Iron is related to the production of steel, which relate to economic/industrial growth (p4). China become the largest consumer or iron ore at more than 40%, and trend is to continue. India was also expected to contribute substantially to iron ore demand.
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continue. India was also expected to contribute substantially to iron ore demand. b. Technological: Development of HIsmelt would enable to use of low-grade and phosphor-rich iron ore to be used for steel production, also it can use non-coking coal for fuel. Many countries are eager to use this technology. c. Sociocultural: Little product differentiation for iron ore in China. Could be changed by a brand name of RTIO d. Demographic: Steel mills in China is very fragmented, with diverse type of small-medium mills. Many of the mills are situated inland, incur a high cost of transportation. e. Political/Legal: Iron ore mine in Africa requires considerable work on environmental protection, social work and infrastructure, require about a decade before it can be mined (p3) Mine is India faces lots of bureaucracies and local resistance (p3) Porter's 5 Forces Threat of new entrants: SMALL: a. Industry was an oligopoly: top 5 producers produce 75% of iron ore, with next five for ~ 3% (p3) b. Those who can enter the market already did, situation can't be worse: Several other players had successfully entered China and steadily increased their sales, RTIO was already in a reactive mode in 2007 (p4) Bargaining power of suppliers: