Strategic Analysis of Rio Tinto Plc

Rio Tinto PLC holds a dominant position in the global metals and mining industry. Even though the company has a range of strategic strengths, trends in this industry mean that it needs to take further action in order to remain competitive. Three key actions are recommended.

Introduction

Rio Tinto is the world’s third largest mining company and the eighth highest FTSE 100 company in terms of market capitalisation (PwC, 2012) (Anon., 2012). With operations spread across six continents, and activities ranging from exploration to extraction to processing, Rio Tinto has grown substantially from the Spanish mine that it started from in 1873. Annual revenue in 2011 was ?60.9 billion, profit margins stood at 24%, and the company currently employs 67,930 people worldwide (Orbis, 2011). Market capitalisation stands at ?43.3 billion (Anon., 2012)

Rio Tinto focuses its efforts on finding and mining five groups of minerals. These are aluminium, copper, diamonds and industrial minerals, energy minerals (coal and uranium), and iron ore. The central strategy of the business is to find large, cost-effective mines that will remain viable in the long-term (Rio Tinto PLC, 2011), and the company claims that a long-term approach underpins all of its work.

Key Industry trends

In the long-term, demand for metals and minerals remains strong despite the economic recession. Demand for metals has bounced back faster than expected (Helbling, 2012), and continued development in countries like China is likely to push up demand for other minerals as well (PwC, 2012). For example, the use of coal is expected to increase by 65% over the next 15 years in response to growing energy demands (IEA, 2011).

In the short-term, prices for these commodities remain volatile. The global economy is still fragile, and a four percent change in industrial production can lead to a 22 percent rise or fall in commodity prices (Temperton, 2012) in response. This can pose serious risks for the viability of individual mines: two other large mining companies have already postponed expansion or made significant cutbacks this year due to a fall in the price of iron ore (The Telegraph, 2012) (Bloomberg, 2012). The price volatility is expected to continue (PwC, 2012).

Operating costs are expected to increase in both the short and the long term. The cost of labour and equipment has risen (PwC, 2012), and regulation to tackle climate change is becoming more stringent internationally. New environmental regulation will herald higher compliance costs.

Based on the trends above, companies in this industry will need to fulfil four key criteria in order to remain competitive. As well as being able to ramp up production in order to meet new demand, they will need to astutely manage their operating costs, reduce their exposure to short-term risks, and incorporate environmental sustainability into their longer term planning. Any company that is able to meet all four of these criteria will gain a competitive advantage.

Ability of Rio Tinto to respond to trends

Rio Tinto is in a strong position to respond to price volatility and increases in demand. The diversity of its assets means that changes to the price of one metal has a limited effect on the company overall. For example, the drop in iron ore prices has had a lighter effect on the company as compared to rivals, and so it has been able to continue its plans for spending. It also has the resources to bring new aluminium and copper production online in the near future (Singh, 2012).

The company has displayed impressive foresight in its efforts to manage and reduce operating costs. Finding low cost mines has always been a key strategic goal, and recent investment has focused on automating mining equipment. For example, the Pilbara mine will use the first automated long-distance heavy rail network in the world when it opens in 2014 (AnsaldoSTS, 2012), and Rio Tinto has already invested significantly in driverless trucks (Mining Magazine, 2011). By setting up a “Mine for the Future” program in 2008, the company has been able to dedicate significant research attention into operational efficiency (Rio Tinto PLC, 2011).

The company’s efforts to tackle climate change are less advanced. Although an Energy & Climate Strategy is in place, and one of the seven company KPIs is on climate change, only modest efforts have been made to reduce energy use. The company is only aiming for a 10% improvement in energy intensity by 2015. Given that coal is itself a major source of carbon dioxide, that 45% of Rio Tinto’s carbon dioxide emissions come from Australian operations, and that Australia is now considering a carbon trading scheme, Rio Tinto is also at a significant risk of extra compliance costs (Carbon Disclosure Project, 2011). These will have a substantial impact on its ability to be competitive.

The Australian presence of Rio Tinto also brings additional risks. First, the new Marginal Rent Reduction Tax from the Australian government will incur an extra cost of ?1 billion on operations there (Rio Tinto, 2012), which will dig into profitability. Second, a number mines are vulnerable to flooding: four Queensland mines had to submit a force majeure in 2010 due to the impacts of heavy rain (Rio Tinto PLC, 2011). The concentration of activity in this area carries a strategic risk as well as a benefit.

Overall, Rio Tinto is in a strong position to cope with trends in its industry. However, to remain competitive, it needs to accelerate its efforts to reduce both operating costs and carbon dioxide emissions. A renewed focus on finding mines that are outside of Australia would also help to reduce the costs of taxation, flooding and environmental regulation.

Conclusion

Rio Tinto has the potential to become a market leader in its industry. However, although its direct exposure to price and cost risks is lower than competitors, its exposure to indirect risks requires more careful strategic management. Accelerating existing efforts and seeking more mines outside Australia will help it to remain a strong player in the years to come.

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