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Commercial
excellence in mining
Unlocking the full potential
of marketing and sales
Mining managers who have taken the lead in the new era of commercial excellence have shown that it
helps companies stand out in the marketplace and creates significant value for very little investment.
Andreas Mirow
Jukka Maksimainen
More and more mining and minerals companies are investing in marketing, and using increasingly
sophisticated strategies and tools to do so. For a handful of skillful companies, commercial excellence
has delivered EBIT margin increases of as much as 8 percentage points. Their success is raising the
bar. Our research shows that commercial excellence has become a core element of metals and mining
company capabilities and strategy.
While mining companies are focused heavily on delivering maximum value from their operations, few
apply the same rigor to their marketing and sales. Some assume that, in a seller’s market, it’s not worth
the trouble. Others apply tactical marketing measures and capture modest upside, such as through
pricing of premium products. Yet several companies are systematically pursuing excellence in their
commercial functions, and are reaping very attractive rewards. Our own analysis and experience makes
it clear that marketing and sales represent an opportunity for mining companies in nearly all regions
and commodities to add substantial value to the bottom line. While many companies recognize this,
only a few have developed truly ambitious commercial aspirations and shaped robust strategies to
deliver on them.
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McKinsey on Metals & Mining Number 07
The opportunity: creating major long-term
value from marketing and sales
Mining companies that systematically pursue
excellence in marketing and sales can reap very
attractive rewards. Our analysis suggests that
improved pricing, contract management, trading,
and key account management can together boost
EBIT margins by between 3 and 8 percentage
points, depending on the metal, the asset base,
and the company’s context (Exhibit 1).
There is growing recognition of the opportunity:
in the past few years we have observed a clear
shift towards a more commercial orientation in
mining companies’ marketing and sales efforts.
However, there are still striking differences
between companies. This reflects the fact that
most mining companies remain tactical in their
marketing approaches. Only a few have built
competitive marketing strategies that truly
assess, and fully develop, the company’s unique
commercial opportunities.
Tactical moves can certainly produce results:
for example, an iron ore producer can typically
add an incremental value of between 1 USD/t
and 3 USD/t by capturing pricing premiums
for particular product grades. But for the most
successful companies, such steps pave the way for
a more systematic approach to marketing. These
companies have made a very clear evolution from
an exploratory phase that tackles a limited set
of attractive opportunities, to a coherent go-tomarket strategy that shapes the value chain from
mine to customer.
Consider the example of a medium-sized mining
company. It had traditionally paid little attention
to marketing, but began exploring a more active
commercial role by modeling how valuable its
products were to particular export customers.
Next it focused on capturing additional margin
through shipping and stockpile sales in key export
markets. The success of these tactical moves
prompted the company to adopt a more strategic
approach to capturing value along the marketing
and sales value chain.
The company undertook a thorough scan of
its product market to identify customers for
whom its product grades were particularly
valuable. Leveraging its shipping and stockpiling
capabilities, the company positioned itself as an
integrated solutions provider to such customers,
commanding a significant price premium as a
result. It also began shipping the orders of multiple
customers in bulk, so boosting margins further. To
support the strategy, the company built a proactive
marketing function, organized around key account
management and enabled by technical capabilities
such as a sophisticated “value in use” capability.
All in all, the company’s commercial strategy has
been a major source of value creation, adding
10 to 15% to its market capitalization.
Achieving commercial excellence:
a systematic approach
How, then, does a mining company chart its
own course to unlocking the full value? Our
research across the industry suggests that, for
true commercial excellence, companies must
be distinctive in every element of a five-layer
pyramid (Exhibit 2). They must have:
ƒ
A clearly defined, and ambitious, commercial
aspiration
ƒ
A robust product-market strategy
ƒ
A clear set of choices on which parts of the
mining value chain to participate in
ƒ
Well-honed levers to capture commercial
value, including pricing, contract management, trading, branding, and key
account management
ƒ
A powerful commercial operating system.
Commercial excellence in mining Unlocking the full potential of marketing and sales
Clearly defined commercial aspirations –
setting the ultimate target
The starting point is to define the company’s
commercial aspirations very clearly. This choice
will be aligned with the company’s overall
strategic aspirations, and informed by a fact-based
assessment of its asset base and of the market
conditions of its main commodities. There is
certainly no one right aspiration: in our analysis of
the most successful marketers in the industry, we
have identified three quite different archetypes:
Solution providers typically have an asset base that
is technically unique, (for example, of very high
grade), and thus are able to capture maximum
value based on their distinctive position in the
market. This may take the form of a niche product
Exhibit 1
Value creation potential in metals and mining
Commercial valuecapturing levers provide
the practical means
and ways to materialize
created value
Levers to
capture
commercial
value
Pricing
Value estimate
EBIT margin improvement
Contract
management
or a special service, such as the concept of total
delivery from mine to customer gate. Solution
providers are able to command an additional
premium because of their unique position and
deep understanding of what creates value for
a customer.
Active traders seek to capture additional value
through continuous arbitrage opportunity scans
and superior insights into short-term price
developments. They typically have swing assets
and access to tactical market information that
enables them to exploit differences in product
quality, across time periods, or between geographic markets. Active traders are recognizable
by their sophisticated understanding of shortterm price movements and the action they take to
capture maximum value with that knowledge.
Description
Capturing the value driven by a company’s position, quantifiable
differences in products, and transaction-specific conditions
0.9 - 2.7
0.9 - 2.0
Trading
0.5 - 1.41
Branding
?
Key account
management
0.8 - 1.9
Total value
potential
3.0 - 8.0
Having an optimal contract portfolio to capture maximum upside
with given risk profile, combined with managing negotiations
and existing contracts
Capturing opportunistic profits with a trading strategy, typically
focusing on either arbitrage or speculation
Differentiating the product/the company or developing the
image of the commodity in ways that improve margin, secure
volumes, or increase sales
Understanding the differences between customer accounts
at a very granular level to capture client-specific value
1 Includes only the margin improvement, not the increased revenue or new business creation potential
Source: McKinsey analysis
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McKinsey on Metals & Mining Number 07
Strategic marketers create value by “shaping” the
market. They typically have significant market
power as well as an in-depth understanding of
long-term market dynamics – including supplydemand sensitivity, market mechanisms, and
value-in-use differences between products.
The market-shaping moves can range from a
change in pricing and contracting principles, to
the introduction of a new logistics system, to the
development of a totally new market segment for a
particular commodity.
Of course, bold strategic marketing aspirations
are not appropriate for all companies. For
example, a gold mine that distributes its gold
through one agent might elect to be commercially
Exhibit 2
World-class commercial
excellence requires a
holistic set of closely
linked organizational
best practices
passive. Such a company would not aspire to add
further value to the standard market price of its
metal; it would see marketing and sales merely
as a means to place all of its output in the market.
On the other hand, in setting a clear strategic
aspiration, companies should be careful not to
settle simply for a fragmented list of marketing
initiatives. In our scan of the industry, we have
identified several agile agents that seek to capture
a premium on top of the reference price, but have
not developed a coherent strategic position. The
commercial departments of such companies
typically have a long list of value-capturing
initiatives, but lack a strong strategic rationale
for value creation that ties their commercial
activities together.
Organizational best practices
Strategic commercial
aspiration (“archetype”)
?
Product-market
strategy
vs.
Value chain
choices
Commercial valuecapturing levers
Pricing
Contract management
Trading
Brand
Key account management
Total
Management infrastructure
Commercial
system
Operating system
Mindsets and capabilities
Source: McKinsey analysis
Commercial excellence in mining Unlocking the full potential of marketing and sales
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Metals and mining companies need to decide
which part of the value chain to participate in
A robust product-market strategy – matching
the company’s assets to the market
Guided by its commercial aspiration, a distinctive
marketer develops a clear product-market
strategy – the second layer in the pyramid. This
defines the optimal portfolio of products for
the company given its asset base, and links that
portfolio to the most attractive market segments
or to individual customers.
An optimal product-market strategy should have
a clear value creation rationale that supports
the company’s commercial aspiration. For
example, an “active trader” would invest in swing
assets that are flexible in terms of volume and
geography. Further, an effective strategy requires
an extremely detailed level of market insight.
A product-market strategy for manganese ore, for
example, has to reflect that the overall market is
made up of multiple smaller segments – each
with different asset configurations, access to
local manganese ore, energy availability, and
target markets.
measure of the true value of the product’s
characteristics, a company can make the correct
trade-offs in product design and pricing
Once all of these factors have been analyzed and
a tentative product-market strategy has been
developed, the strategy should be rigorously
checked against market realities using multiple,
sequential filters including:
ƒ
A logistics filter: What does it cost to get our
product to the customer?
ƒ
A feasibility filter: Can we realistically capture
the value-in-use advantages of our product?
What is its competitive position against
other suppliers?
ƒ
A potential filter: How large are the customer
segments we are targeting?
This exercise will yield a shortlist of high-potential
customers for each of the company’s key products.
Choosing the company’s role in the value
chain – from mine gate to shipping, financing,
and processing
The product-market strategy should also be based
on a thorough analysis of where the company’s
products are on the quality curve, for example,
in terms of impurities and grade. This is critical
to make sure the product meets technical cut-off
points and other customer specifications – and
that the company gets maximum value from its
reserve. For example, alumina in iron ore at 2.0%
is a well-known cut-off grade, as higher alumina
content significantly decreases steel mills’ ability
to work with the ore. Suppliers must respect this
limit, but below it they have multiple different
product options to offer to customers – at
potentially very different margins.
As part of their commercial strategy, metals
and mining companies also need to make clear
choices on which parts of the value chain to
participate in. The broader value chain goes
beyond the mine or smelter gate and includes
elements such as logistics (transport); stockpiling
or warehousing; technical services; financing;
third-party trading; and, in some commodities,
processing. Value chain choices should be closely
matched to strategic objectives, which could
include the following:
The final element of robust product-market
strategy is a detailed value-in-use analysis. This
entails quantitative comparison of how different
products might perform for a given customer.
The results yield a detailed understanding of the
value of the company’s product compared with
the customer’s other options. With this accurate
Gaining superior market insights. Having an
active role beyond the mine or smelter gate can
provide access to superior insights on how the
market may evolve over the short term (relevant
for a company aspiring to be an active trader)
or long term (key for a strategic marketer). For
example, selling third-party volumes or owning
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McKinsey on Metals & Mining Number 07
a minority stake in strategic assets can lead to
superior insights on operational performance.
Complying with legislation. In many countries,
governments are requiring metals and mining
companies to take over a larger portion of
the overall value chain. For example, Nigeria
has content laws requiring a portion of all
commodities exports to be transported using
Nigerian vessels.
Capturing additional margin. As the owners of a
commodity, metals and mining companies often
have the ability to capture additional margin from
other players in the value chain. This typically
applies to adjacent businesses that do not require
any special capabilities and are financially
attractive. Examples include financing a
customer’s working capital, and capturing margin
from banks when supplying a customer in a region
with high interest rates.
Reducing risk. A company’s production footprint
and logistics chain must be sufficiently flexible to
minimize the risk that a shutdown could render it
impossible to ship product. For example, an iron
ore miner could own part of a pelletizing plant to
ensure it has a secure route to market for iron ore
concentrate; or it could own the railway used to
transport its product to port.
Capturing a greater share of the value pool. Most
of the value chains in metals and mining have
undergone major shifts in the value split between
players. Logistics today account for about half
the landed cost of bulk commodities. This might
prompt a mining company to take over and
manage logistics for particular bulk commodities
so as to gain broader exposure to the market.
Increasing volume stability. Several companies
position themselves in the value chain to achieve
increased volume stability. One way to do this is
to develop closer relationships with customers,
for example, by providing sophisticated technical
services, keeping a consignment inventory
on the client’s premises, or managing the
client’s inventory.
Boosting operating efficiency. A company’s
position in the value chain may be driven by the
objective of strengthening operating efficiencies.
This is often the case in bulk materials where, for
example, a company might combine shipments to
multiple customers to achieve economies of scale.
Creating new opportunities for the core business.
Companies should make value chain choices in
conjunction with the strategy for the core mining
business. For example, since a wider role in the
value chain can help overcome limitations in mine
planning and trading, a company could establish
a blending yard for a discharge port in a target
market, enabling a value-maximizing mine plan
for assets in different continents.
Shaping effective levers for value capture –
making the most of the company’s
strategic position
Primary levers for capturing commercial value
are pricing and contract management as well as
trading, branding, and key account management
(cf. Exhibit 1). By nature, a company will need to
work through these levers and shape their two to
three most important aspects to make the most
of its specific strategic position, talent,
and aspirations.
Pricing, for example, can be optimized from the
strategic, value, and transactional perspectives.
Strategically, what is the company’s overall pricesetting mechanism, such as import parity versus
export parity? For value pricing, the crux is to
quantify and charge for tangible differences in
product value for customers, as mentioned for
manganese ores. Optimal transactional pricing
requires skill in selling spot prices and the
premium based on contractual terms on top of the
reference price.
As another example, one of the top three aspects
of effective contract management is striking
the right balance in the company’s portfolio of
fixed versus floating price contracts and spot
versus long-term volume commitments. It is
critical to get this right: for most commodities,
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Commercial excellence in mining Unlocking the full potential of marketing and sales
Branding can create value by
conferring a preferred position
fly-ups represent two-thirds of mining company
profits but only one-third of the calendar
time over the cycle. Trading offers further
ways to optimize how volumes are matched to
contractual commitments: at the entry level,
does the company succeed in putting additional
volumes on the market to absorb an in-house
over-supply (and vice versa)? A new breed of
active traders have introduced new trading
methods to the industry – such as arbitrage and
speculative trading – that are also being adopted
by producers.
Branding may be used to develop a preferred
position: can the company create a perception of
advantage, lower risk, or information efficiency
for the commodity, the supplier, or a specific
product? Key account management offers at least
five areas for value capture with each important
customer – logistics, customer processes,
purchasing, regulation, and risk – but they must
be systematically managed together to capture
higher margin (for example, from more favorable
shipping terms) or increase volume stability by
providing support, for example, on technical or
regulatory issues.
Building a powerful commercial system –
winning team, infrastructure, and systems
The foundation of the commercial excellence
pyramid is the commercial system – the operating
system, management infrastructure, and
mindsets and capabilities of the marketing and
sales functions and the company more broadly.
As the sophistication and complexity of the
commercial approach increases, the requirements
for these “enablers” become more demanding.
World-class operating systems comprise both
“hardware” and “software.” The hardware
includes the company’s logistics infrastructure,
including vessels, discharge ports, blending
yards, and mine-to-delivery optimization
software. The software side of the operating
system consists of market intelligence, pricing,
trading, customer relations management, and
transactional systems. For value-in-use analysis,
a company requires both physical laboratories
and simulation software.
With management infrastructure, the focus is
on the organization of the marketing and sales
function – including its structure, staffing levels,
and the level of consolidation needed across
commodities. Some companies have grouplevel marketing and sales functions; others use
a business unit-driven model. The management
infrastructure also encompasses performance
management, including KPI systems to ensure
targets are being met and specific incentives to
reward marketing and sales effectiveness.
The final element of the commercial system,
mindsets and capabilities, can make a major
difference to its success. The mining companies
that excel at marketing and sales have invested
in building distinctive capabilities, including
analytical skills, industry understanding,
and the ability to manage complex customer
relationships. Shifting mindsets is just as critical:
despite the dawn of a new era in commercial
excellence, many mining companies seem to find
it hard to break away from the old working model,
based on long-term relationships, and take an
active value-seeking approach.
***
Regardless of their starting point, most
metals and mining companies have significant
opportunities to unlock value through
commercial activities. When top management
considers where to invest its attention
and energy to increase profitable growth,
commercial excellence should rank close
to the top of the list.