Porter’s Five Forces

It is hard to think about the commodities business rationally, yet you have to do it if you are going to understand which businesses you like and which you do not like. To make these decisions, the first issue is figuring out a system or a structure in which to look at the different markets. You need a system to help you answer questions like what makes nickel less attractive than iron, but more attractive than zinc? Why do I like platinum but not gold? These are all thoughts that I have had in an abstract sense, but I have not before put my thoughts into a rational structure.

This issue seems to harken back to business school and Porter’s Five Forces, a setup that I never loved in school, but that provides a clean system to look at each of these markets. (In case you do not know them, the forces are barriers to entry, supplier power, threats of substitutes, buyer power, and degree of rivalry.) Some of the forces, like barriers to entry, do not apply as well to the mining business because no matter what else you think, if you have an ore body, you have a project. And you could have a mine, but no amount of wishing is going to give you a nice platinum reef if that is the business you want to go into. The core barrier to the business is G-d’s sense of humor regarding where on this earth he placed different things, giving every location something, but not always what people expect. You also have the fact that Europe mined out most of its domestic ores years ago, and Africa does not have the political stability to properly mine its resources.

Rather then continue rambling, I am going to systematically look at the five forces in a series of posts. I expect that going over each force for the whole industry will take a whole article, and then once I am done, I am going to go over each commodity. Expect this to take weeks to research out.