Hi Team don’t post much, but have owned FMG since 2011, so have...

Hi Team

don’t post much, but have owned FMG since 2011, so have seen and been through the challenging times and enjoying the fruits of being patient, and backing a world class leadership group and overall company in FMG.
Certainly exciting times to be a share holder in the great FMG machine.

I have been trying to get my head around the recent strategy by China to form a company to provide the procurement function for some of the largest steel manufacturing companies in China. That creating this company will provide a lever to reduce the price paid based on a tender process for a consolidated order.

I feel that the whole scenario is complex- as not every supplier has a suite of products that necessarily would meet the needs of each manufacturer. That the appetite from a supplier to be cherry picked on price on various product lines would be non existent. That not every supplier has the ability to simply ramp up supply to meet the increased demand if they are the successful supplier in a tender process for a consolidated order.

I would have thought that if you where one of the larger steel manufacturers in China , that you would be demanding and probably receiving the Tier 1 or best market price available from the supplier chain already. ( FMG, BHP,RIO,Vale).

So in order for this new company to derive key price benefits, and potential associated supply benefits for its members ( steel mills), ( for example not having to hold as much inventory in mill or possibly on dock, better trading or payment terms,), it would have to be proving a supplier with some additional incentive in order for the supplier to have the appetite to lower the price .
,
No supplier in their right mind will cut overall $margin and profitability to its business , unless it’s overall business with its current customers is under threat, or that by cutting Margin, the additional business or Market shares is beneficial to the overall profitability and longevity of the business

for example if FMG could pick up additional business say from BHP, by lowering its price, the extra business must be profitable.

the question then remain does each supplier have the capacity
to 1/ provide the additional tons and product lines ( ramp up supply), 2/ additional supply chain to cope with the additional demand ( shipping dock space etc)

I just don’t quite understand how this company is going to be able to add significant value to the procurement process, when there is limited supply options.

would like to use the above to open up discussion and get your thoughts on how you see this playing out. I probably have missed something simply in my analysis - observation on this scenario and happy to understand more on how this new Chinese company plans to impact price and hence how FMG could benefit or be impacted negatively by this scenario.

kind regards

knowlesm