← Business Models: Industry Specific (Industrials & Materials) (all topics)
Backward integration - captive mines (steel)
What it is
Owning iron ore, coal or limestone mines that feed the plant, rather than buying at market prices. Indian producers have secured captive ore through auctions of mineral blocks, and some hold coal blocks as well
It converts the largest input cost from a market price into a production cost
Impact on industries
- The single largest cost differentiator between Indian producers - a captive ore miner and a merchant ore buyer have structurally different margins in the same price environment
- Insulates against ore price spikes and supply disruption, and secures volume during periods when merchant availability tightens
- Auction premiums bid in boom years can be punitive through the cycle, since the royalty is fixed as a percentage of sale value regardless of the price environment
- Does nothing for coking coal, and lease tenure adds a regulatory dependency a merchant buyer does not carry