I hear a whisper from a substantial mining house to the effect that they are considering whether or not it would make sense for them to abandon their sales and marketing network and instead do a deal with a trading house to take their entire production and handle the selling of it. I think that’s an interesting debate, because I have long felt that the cost of running a global sales network for a mining company may well not be outweighed by the incremental income generated from selling direct to users rather than via a middle man. Indeed, a few years ago, I wrote an article which suggested that a simple policy of sales straight to the LME would be worth consideration in some cases. That article provoked quite a bit of comment - some just knee-jerk negativity from people who didn’t actually read the piece before jumping to their conclusions, but a lot of which made some very cogent arguments on both sides. If such radical ideas in sales policy are being discussed in boardrooms, then I think it may be time to have another look.
Sullying the Brand and Technical Development
Selling to a merchant or selling to the LME have both been regarded somehow as less ‘worthy’ than selling to consumers; almost as if it would sully the purity of the product. And yet that has not always been the case; if we go back to the period of industrialisation when metals grew to become the underpinnings of modern society, it was precisely the trading fraternity who enabled that enormous growth to happen. They bought from producers in far-off lands (South America or Asia, for example) and shipped the goods back to Europe for resale. Indeed, the LME emerged as the institution that enabled them to hedge their open price risk.
Over the years, though, that business model evolved and many mining houses established their own sales networks, enabling them to maintain direct contact with their end-user customers. Now, there is an argument that that direct contact spawned technological development, from which we have all gained. In other words, the direct relationship between raw material producer and consumer enabled both to work together in developing and modernising products and processes. Well, that’s an attractive argument, but I’m not sure that it’s not conflating two things - sales and R&D - which are not necessarily that closely linked. Technical advances tend to be driven by financial imperative, so I have to guess that development will happen, whether or not miner ‘X’ sells direct to cablemaker ‘Y’.
Then there’s the argument about maintaining the integrity of the product; well, I accept that I should be a bit careful here because I’m not a metallurgist, but I’ve got very limited sympathy with that point. In the end, we’re talking about a ‘commodity’ product. Yes, different brands are slightly different, but mostly the stuff is reheated to be reformed; as long as it conforms to the relevant international standards, actually brand ‘A’ and brand’B’ are both perfectly acceptable for by far the majority of users.
So, what about the operation of all the overseas sales offices as part of an information gathering and dissemination network? In the past, that was a pretty important function; it was a way of keeping up to date with news, and technical and product development. But now? The age of digital social media has surely condemned that to the pages of history. Twitter gives us news more quickly and more effectively than conventional means and we all have access to an almost infinite spectrum of information about our chosen fields. The sales office in London, New York or Beijing is no longer necessary as the mining company’s eyes and ears. Information is screamed at us all from all around.
No, the interesting part of the question centres around cost. Do you gain more than you spend by having sales offices dotted around the world and sales executives racking up air miles? Now is a good time to raise this, in view of what’s happening next week in London. Think - as you sign off all those business-class flights; all those five-star London hotels; all the Michelin-starred restaurants, and bottles of Petrus/Lafite/DRC; the nightclub bills - about what value the company is getting back. Then when the sales force shows its results, plotting it’s margin over the year’s average price, perhaps it’s time to ponder whether or not the cost of achieving that margin is in the end recouped. Then there’s the credit issue, as well. Wouldn’t it be more attractive not to be financing customers’ stocks through payment terms? Or taking credit risk on less-than-highly-rated entities? If the premium achieved still outweighs all those costs, then fine; but if it doesn’t, there’s nothing wrong with concentrating on the mining and letting the merchants fulfil their role as salesmen, marketers and financiers.