Rio Tinto Case Study

Module 6: Designing Organizations for the International Environment

Case Study: Rio Tinto Iron Ore: Challenges of Globalization in the Mining Industry

Business Goals

Iron ore consumption is driven by steel production, which in turn is driven by economic growth and industrial development. In mid-2006 the steel market was booming, driven largely by the rapid development of China. With demand growing faster than supply, the iron ore business became extremely attractive and profitable. Since most iron ore production was set in long-term contracts, new entrants came into the market and the industry underwent a dramatic change. The surge in demand in China caused a disruption of the stable prices of the benchmark pricing system. Also, the Chinese steel industry was fragmented and did not necessarily follow the established industry rules. Domestic iron ore rushed in to fill the supply gap and 85% of the iron ore was supplied based on spot prices.

RTIO CEO Sam Walsh needed to address: 1) the increased demand from China, 2) a strategy to benefit from high spot market prices when most of its supply was tied up in long-term contracts, 3) how to respond to transportation and delivery changes in the industry, and 4) how it could use HIsmelt, an new technology it had developed for processing low grade iron ore, to its strategic advantage.

S.W.O.T. Analysis

The following SWOT analysis captures the key strengths and weaknesses within the company and describes the opportunities and threats facing Rio Tinto Iron Ore:

Strengths

• HIsmelt Technology – Rio Tinto Iron Ore (RTIO) developed new technology that would revolutionize the steel industry (p. 1). This technology would make fine iron ores directly into liquid iron without the pre-processing required in conventional mills (p. 12).

• Financial Strength – RTIO was the second largest revenue generator for the Rio Tinto Group in 2007. It accounted for nearly $7 billion in revenue and $2.3 billion...