During boom times when commodity prices were high compared to mining costs, producers had no qualms about giving up some margin for the use of third party traders to act as middle men in brokering the deals between producer and end-user. Since the 2008 global financial crisis, companies having become more discerning over their cost base, questioned the necessity of the trader. This question has become more imperative as falling grades, increased labour, transport and utility costs and deeper mines threaten producers’ margins.
The trend among producers is to go direct.
According to William Yang, CEO of Johannesburg-based trading company, Sail Group “People believed in selling direct and buying direct and that there is less value by using a trader. Producers believe that there is very little traders can offer besides making money and squeezing margin from both ends.”
Subsequently more and more producers have made the decision to bring the marketing of their commodities in-house. Apart from protecting margin, a number of end-users have recognised the benefit of investing in the early stage development of the mines in an effort to secure off-take and cut out the middle man. To wit, Toyoto’s $150-million investment in Oro Cobre's lithium mining project in 2012 and Sinosteel’s acquisition of Zimasco in 2007. These trends potentially spell the end of the role of the traditional commodity trader.
Consequently a number of traders have sought acquisitions of mines, altering their business models from a traditional third party marketer and broker to producer. Whilst adaptability is great and certainly necessary, this begs the question as to whether there is still scope for trading companies to remain pure traders, without investments in physical assets whilst retaining and growing a sizeable client base in a market that is ever more conscious of costs?
Yang indicated to Core Consultants that the trader does indeed still have a role to play, but the key is to deliver value to their clients.
To this end, Sail Group presents a unique and interesting case study:
Since 2013, Sail has assisted Chinese owned Angoche ilmenite mine, situated in the Northern Province of Nampula in Mozambique. Like many sites in Africa, the distance from the port is 280 km and the only entry is through a dirt road which in the wet season is often rendered unusable. The product was trucked to the port of Nacala and loaded containers, the capacity of which limited the amount that the company could export at one time. Although the company has been operating Angoche since 2010, due to these infrastructure constraints, they have only managed to ship a maximum of 3 000 t/m.
Sail was faced with an interesting challenge; they wanted to handle the trade requirements of the Angoche project, but at these volumes there was no room for a trader. Furthermore, the price of the product had fallen by nearly 50% to $200/t from the start of the operations in 2010 and the low volumes per container meant that the sale price in China often exceeded the operational costs. If Sail were to become the traders and marketers for this operation, it was imperative that they first improved the output. It was evident that the mine needed a logistics overhaul and Sail provided the solution.
The Sail team identified the island of Mafamede, situated eighteen nautical miles from Angoche, which would serve as a shelter from the wind and the swell and provide an anchorage for the ocean going vessel (OGV). They then identified and made use of a fishing jetty 40 km from the mine’s operation by erecting a warehouse with a conveyor belt at the jetty. This belt extended 50 m into the sea and enabled the product to be loaded onto barges which were being towed by tugs. In high tide, the barges sail through the channel, whilst in low tide, the channel becomes extremely shallow so loading and off loading times are pressured.
At the transhipment the OGV drops anchor and awaits the barge. The barge then comes alongside the OGV. Cranes aboard the OGV attach grabs and transport the product from the barge to the vessel grab by grab. Each barge can accommodate 2 500 t which can be offloaded at an average rate of five to six hours. “It was not flashy and glamorous, we did not spend millions of dollars to build an automatic loading system. The market condition doesn’t justify big spending. The solution was difficult, yet effective. It was more than $30/t cheaper than containers and achieved what would take 3 years by container,” says Yang.
When asked what the most challenging part of the operation was, Yang replied that this operation occurs in the ocean so the water is choppy and it is not unusual that they have to change the anchorage position around the island. Furthermore, there are only two high tides per day in which to load. If they missed one of them, the cost would be in excess of $10,000 per day for the vessel.
Since Sail’s involvement in the operation in October last year, the company has shipped 100,000 tonnes of product and restored profitability and cash flow to the Angoche project. At the time of writing, a further 30,000 tonnes was estimated to be shipped in February.
So is there room for traders in this market? According to Yang, “most commodities are under price pressure and everyone hates traders as the common belief is that for traders to make more, everyone including suppliers, customers and transporters has to make less.”
What Sail demonstrated is that if traders are able to study the entire value chain and develop a unique platform in in-land logistics, shipping, market creation, funding or a combination of these factors to ensure a competitive advantage, then it is possible for all stakeholders to benefit rather than a zero-sum game with winners and losers. The commodity trader is not obsolete, but what Sail has shown is that the industry has to become much more sophisticated and value focused.
Sail Group is a diversified commodities trader and is described by industry as a “Pioneer” in its approach to commodity trading.
Edited by: Megan van Wyngaardt
Creamer Media Contributing Editor Online
EMAIL THIS ARTICLE