Introduction To The Mining Industry

The mining sector is made up of organisations whose primary activity is the extraction of naturally occurring mineral solids or natural resources. Examples of these types of minerals are coal, ores and precious stones. The mining industry also broadly covers quarrying and well operations. The sector comprises two basic activities: mine operations and mining support activities.

"Mine operations" involve setting up the mine, quarry or well for the organization, or on behalf of another organization for a small fee.

"Mining support activities" are those operations that must be carried out before mining begins; exploration and other services (except site preparation and construction of oil/gas pipelines).

The mining and metal industry is made up of six categories: aluminum, gold, precious metals, other metal extraction, coal mining and steel. Steel (and iron) is the biggest segment, as it makes up more than half the market in terms of volume, followed by aluminum in terms of the global metal market which is focused more in the Asia-Pacific region, followed by Europe.

The metal extracted is used in industries such as automobiles and consumer durables, in particular computers which require aluminum, steel and precious metals. Therefore the market remains strong even in economic decline as demand stays high.

Porters 5 Forces Model

Michael Porter provided a framework that models an industry as being influenced by 5 forces. The model enables managers to understand the industry context in which a firm operates. The forces that the model is based on are:

Ð'* Rivalry

Ð'* Substitutes

Ð'* Buyer power

Ð'* Supplier power

Ð'* Threat of entry

Each of the above will be discussed in detail.

Rivalry

There is a certain degree of rivalry among firms operating in the same industry. The degree of rivalry, however, depends on various factors. Some of these factors are industry growth, diversity of rivals and industry concentration.

Competitive rivalry is actually very strong in the mining industry because most companies sell the same product, and there are few metals that only one company mines.

The rivalry has recently been weakened by the sharp price increase in metals due to demand and scarcity, which benefits everyone in the industry.

Lihir Gold plc and Rio Tinto jointly owned a mine in Lihir. Since mines are concentrated in certain parts of the world, there is a likelihood that one or more firms may be operating in the same area. The competition is mainly for the land and permission to mine, rather than the selling of the product.

Threat of Substitutes

The threat of substitutes is fairly small. There will always be a demand for precious metals, however the demand for some metals might decline as technology advances (for example the replacement of copper phone cables by optical fibre cables).

Many materials mined are essential, however; metals for buildings, transport and machinery; minerals for chemicals, medicines and pharmaceuticals as well as diamonds, gold and silver for items such as jewelry as well as cutting equipment and machinery. Benzene used to be extracted from coal gas, and is the basis for many chemicals used in medicine. It can now be man made through safer means, via the distillation of benzoic acid.

Diamonds can also be man made, but many jewellers and consumers prefer natural as opposed to "fake" diamonds. Also, as diamonds are incredibly hard, they have many uses in cutting machines and other applications. Therefore, demand for diamonds will remain high as there are few other things that can be used instead.

Plastic has also begun to substitute metals in many household appliances, but the computer industry in particular, along with construction and automobiles still require high volumes of metals, as other options (such as carbon fibre in cars) are too expensive to be used instead.

Buyer power

The buyers' power is quite small due to the constant demand for the earth's resources, and the fact that there are little or no substitutes.

In general, the mining companies have contracts with clients to supply them for many years. Breaches of such contracts by the clients often result in the client being heavily penalised; this is particularly true in the diamond industry

The buyers are varied due to the diverse number of materials the mining company produces, and is the basis for most heavy industries. Therefore there will always be a demand for mining products. There are not too many competitors as certain materials can only be mined in specific areas.

Supplier power

Supplier power is quite high in mining as most of the worlds mines are owned, or part owned, by three of the largest mining companies in the world; Rio Tinto, BHP Billiton and Anglo American.

Also, as mining is one of the primary activities, there are not many suppliers. The only possible exception is that of the machinery suppliers, but since this is so specialized, they will have little power over the huge multinational corporations that are the mining companies. The suppliers of mining equipment, for example Caterpillar, have little power because contracts with mining companies go in to millions of dollars and those who supply equipment don't want to lose any potential customers.

Threat of entry

In the mining industry the treat of entry is very small this is due to the extensive capital needed in order to start operating a mine.

Costs include:

- Training of employers and staff.

- A strong team of well paid engineers, scientists and managers.

- The cost of the machinery.

- Maintenance costs.

- Propriety costs

Large companies, such as Anglo American, BHP Billiton and Rio Tinto Zinc, have the ability to buy-out any potential threats and may be able to lower prices, as they mine in several areas. The mining industry is historic and well established, and large mining companies have worked hard to receive a good reputation.