Importing Mining Chemicals: Staying in charge of your costs
It is more expensive than ever for mining companies to operate. From South Africa’s annual labor strikes to Zimbabwe’s power shortages, costs have ballooned globally. Your bottom line is probably feeling the pinch. Energy, maintenance, and labor are significant cost drivers. You can't keep costs from rising, but you can control production costs from importing mining chemicals.
COMMODITY MINING CHEMICALS
Mining chemicals are absolutely essential to mineral processing for some operations. They form a large part of production and processing costs and make good targets for mines that are performing cost reduction exercises.
The market for importing mining chemicals is a mess. Many of the existing companies are linked through joint ventures, distributorships, sales agreements, and all the other buzzwords. This makes it hard for miners to understand the dynamics and costs.
To cut your costs, you need to establish a total cost of ownership model. The first step involves looking at all the costs.
IDENTIFY COST DRIVERS
Gold mines require cyanide for gold extraction. Xanthates collectors are needed for copper mining. Many mines rely on grinding media in general If your operation uses one of these three, they could be your biggest ore processing cost. Blasting costs might form a small percentage of your mining contractor costs, but overall, ammonium nitrate could be one of the top expense items in your company. Ammonium nitrate is the largest component of emulsion explosives.
We often hear that a mining company has achieved huge savings of 30% during the downturn. It’s common to achieve savings of 15 - 20% on almost anything. And if you’re creative enough, you can achieve as high as 30% in savings for some commodities. We should be asking "why were these guys overpaying to start with?"
If you consider cutting commodity chemical costs, your first step is to know what is going in the world. Who are the major suppliers? What are the dynamics between them?
In countries where the supply base is limited, the first question to ask is about geography. What country is the largest producer or exporter of the required commodity? Answer that question and you will know where to start looking. When you carefully analyze, you will have the knowledge you need to discover a world of suppliers from which to choose.
Next, check your local market. Which suppliers are involved? What are their capacities? What buying and selling is going on among them? In some markets, chemicals change hands three times before being sold to the end-user. Each step adds a price mark-up.
As with any market, there’s a degree of rivalry between suppliers. New suppliers face barriers to entry. Look for available substitutes – some miners send samples of speciality chemicals to be reverse-engineered by Chinese manufacturers. The cost difference is just too big to ignore. Depending on the timing, you can also uncover the extent of suppliers’ and buyers’ market power.
CONTROL THIRD-PARTY SPENDING
Go through your expense items one by one. What are your major purchases? If emulsion-based bulk explosives form a large percentage of your explosive costs, ammonium nitrate is your biggest expense. Keeping tabs on the ammonium nitrate price is a key financial move.
Grinding media is a part of most major milling operations. How have your grinding media prices changed since the collapse of the iron ore market? Are you still paying a premium?
Demand transparency for bundled costs of ammonium nitrate by an explosive contractor. You need to know how much your AN component is costing you. Using this data, you can perform a total landed cost (TLC) calculation from the port of origin based on your independent research of supply dynamics.
Once you have your TLC, it’s easy to determine if you’re being overcharged, or if the supplier has put risk premium in place to cover possible future price increases. Once you complete these steps, you'll have the information you need to start negotiating for lower prices without compromising quality.
To remove the risk component in suppliers’ prices, set up a rise-and-fall price formula or adopt quarterly pricing. You can also link the pricing to third-party price indexes. Good examples include the ammonium nitrate index, or for grinding media, the Scrap or CRUspi Longs Index.
The prices used to formulate the index are published each week and include:
- Prilled Urea – $ per tonne fob Yuzhnyy
- Granular Urea – $ per tonne fob Egypt and Arabian Gulf (full range)
- Ammonium Nitrate – $ per tonne fob the Black Sea
- UAN Solution – $ per tonne fob the Black Sea
- Ammonium Sulphate (white) – $ per tonne fob the Black Sea
- Ammonia – $ per tonne fob Yuzhnyy
See more at Profercy.
Cyanide, for example, is priced in relation to the gold market price. In early 2006, cyanide price from China was priced at $1,200 FOB. At its peak in 2008, prices reached $3,000/ton. In this instance, the raw material to produce cyanide only slightly increased y/y. Sodium cyanide prices have now stabilized in the range of $1,600-$1,800 FOB.
If you don't proactively look into pricing components, suppliers will charge whatever they choose. At the same time, they will promise you that it is the best price for that type of service delivery. I once witnessed a client being discouraged from importing ammonium nitrate from China by his explosive contractor. The contractor cited quality control issues but was selling the client AN from the same source in China and adding a premium.
In our B2B world, we often lack price comparison tools. That doesn't mean you should avoid looking into prices. It just means that the task is a little more difficult. If you keep track of prices and market indexes, it becomes easy to anticipate legitimate price increases from suppliers. It's also easier to avoid getting scammed like the client in the example above.
How are you staying ahead of the (mining chemical & consumables) price curve? Share your thoughts and experiences in the comments. If you found the article helpful, please share it.