Hogsback on how to kill your customers

IT’S never wise to kill your customer, if only because a dead one can’t go shopping. That might appear to be a statement from the book of the Bleeding Obvious, but Hogsback suspects that publication is not read in all business schools.

Tim Treadgold

It certainly was not recommended reading at any school attended by Marius Kloppers, the boy wonder sitting in the chief executive’s chair at the world’s biggest resource company, BHP Billiton.

Since he got his hands on the BHP reins, Kloppers has embarked on a series of high-profile adventures, with the best-known being his failure to land a single major corporate acquisition.

His face-saving fallback has been smaller deals, such as an investment in US shale gas, bolt-on expansion of iron ore and coal assets, and the introduction of a raw materials selling process he calls “market clearing”

What that means is that Kloppers has sharpened the marketing skills of BHP Billiton to the point where he is able to screw every last dollar out of his customers.

The process, which revolves around an ability to be the low-cost producer with tier one assets, has been aided by soaring global demand for raw materials which have boosted BHP’s profits into the stratosphere.

So far, so good. No one with shares in the company is complaining, and all rival producers of coal, iron ore, copper and manganese have been able to ride on Kloppers’ coat-tails.

What worries Hogsback is how far this process of skinning your customers can go before there is a revolt, and after the revolt, who’s left to clean up the mess.

Earlier this week there were signs that customers were going to fight back over the latest Kloppers skinning exercise, a plan to shift coking coal sales from a recently introduced quarterly pricing mechanism to monthly.

Said quickly, and if you work at BHP Billiton, it’s a wonderful idea because it should enable you to capture every spare dollar in the bank accounts of the world’s steel mills.

Not only will it maximise returns on a commodity in short supply, but it will enable short-term market adjustments to achieve even greater control over the supply of coking coal by preventing a build-up of stockpiles.

That Kloppers would even suggest monthly pricing less than 12 months since the switch from annual to quarterly has infuriated the steel mills.

Jost Massenberg, the chief executive of Germany’s biggest steelmaker, ThyssenKrupp, said he was horrified, adding: “I can’t imagine how we would deal with such nonsense”

Japanese steel bosses echoed the views of their German colleagues. Eiji Hayashida, chairman of the Japan Iron and Steel Federation, said monthly pricing was “completely unacceptable”

Hogsback is not a materials science specialist like Kloppers, but he does understand a little about business and what happens when one side of a deal gets too greedy – which is where BHP Billiton seems to be heading today.

The steel mills, perhaps to their advantage, had worked successfully with an annual raw materials pricing arrangement for decades, winning the argument that long-term agreements enabled them to adjust their rate of steel production, and mix of products, to suit their customers.

They could also build up a stockpile just in time for the annual price talks and use the appearance of stockpiles to manipulate price negotiations.

Going quarterly was a huge shift which required dramatic changes in the way the steel industry works, changes which are continuing today with Sumitomo Metal Industries merging with Nippon Steel to increase their competitiveness and create the world’s second-biggest steelmaker.

Significantly, and perhaps ominously, not a word has been heard yet from Chinese steel mills, which are still smarting from the way iron ore pricing was radically altered in favour of the miners.

Two years ago the iron ore marketing war escalated from rude words at 10 paces to the jailing of four Rio Tinto iron ore salesmen who continue to rot in a Shanghai prison.

Coking coal could become an even more contentious subject if China’s steel industry is pushed too far.

Whatever the short-term consequences of making life tough for its customers, the long-term effects on BHP Billiton could be far more severe with steel mills, backed by their governments, doing whatever it takes to avoid doing future business with a company which seems hell-bent on ruining them.

It might be business and it might please today’s investors, but it’s not good long-term business – it’s just greedy and against the most basic principle of working with customers, not against them.