01 Mar 2018
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Can a Digital Platform Open Up the Opaque Metals Industry?

Open Mineral wants to change how physical commodities are traded. What will it take to disrupt a market that’s stuck in the 20th century?
by Nicole Torres

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image by Edmon de Haro

Boris Eykher (MBA 2009) and Ilya Chernilovskiy (MBA 2013) watched the 2015 global price slump in commodities with horror. Prices for commodities fell to their lowest levels since the financial crisis, sending mining companies into a tailspin, forcing them to downsize and slash jobs. “It was a commodity price down cycle across almost all metals. We were obviously expecting a large negative impact,” recalls Chernilovskiy, then an asset manager at Kazakhstani zinc-producer Kazzinc, a subsidiary of Swiss commodity trading and mining giant Glencore.

Chernilovskiy and Eykher, Kazzinc’s CFO, were suddenly facing an urgent need to reduce costs and improve cash flows.

At the same time, they were growing acutely aware of the industry’s inequity: Miners (who produce raw materials) and smelters (who refine those into metals) saw relatively little of the revenues compared to third-party traders who orchestrated sales between the two. “It felt fundamentally unfair to us,” Eykher says. “We figured there had to be a better way to do things.”

In September 2017, they launched Open Mineral, a cloud-based B2B platform where mining companies can connect directly with smelters, eliminating the need for a middleman. Think of it like eBay but for million-dollar shipments of raw minerals.

Intermediaries have long played a key role in these deals because the market for metal concentrates—the raw materials that are refined into metals—is extremely opaque. Refined metals like gold and silver have a standard quality and are priced on global exchanges like the London Metal Exchange. But concentrates vary widely in terms of quality—some rocks have more copper than others, some come with arsenic, and so on—so prices are determined in bilateral negotiations between producers and buyers, with a trader in the middle who typically knows the market better than either side.

“You have to understand them and their problems and the market better than they do. You have to be an absolute insider.”

“You have to understand them and their problems and the market better than they do. You have to be an absolute insider.”

Open Mineral’s platform tries to correct this information asymmetry: The dashboard shows miners how many potential buyers might want their concentrate, and shows smelters what material is available. Users can post tenders online, make offers, and negotiate deals. If a tender or bid goes through and both parties sign a contract and deliver the material, they pay Open Mineral a fee per ton of raw material.

Chernilovskiy, who is the company’s COO, and Eykher, who is CEO, say that not only does this make the market more transparent, it also makes it much more efficient. By moving negotiations online, the process happens much faster; what used to take months, can now take weeks. Due to the complexity of shipping large quantities of materials worth millions of dollars between different countries and a pervasive lack of trust between trading partners, a considerable amount of time is spent transferring physical documents back and forth between traders, banks, and ports—as well as managing hundreds of emails to keep different parties in the loop. “When you look at the commodity space in general, it’s an industry that lives in the 20th century at best, if not the first half of the 20th century,” Eykher says.

To address the issue of trust, the Open Mineral team verifies the identity of every member and only accepts companies with a good history; they require transactions to be supported by letters of credit from banks to ensure payments; and they are introducing a rating tool for members. On top of that, they’re looking into integrating certain blockchain elements that would make it easier for transactions to happen between parties that might not trust each other.

Eykher and Chernilovskiy spent most of 2017 making in-person pitches to miners and smelters around the world—estimating that they personally reached about 80 percent of the market—explaining how Open Mineral would make them more efficient and profitable, as well as collecting their feedback. “There is only one way to get the miners and the smelters to come in, register, and use the platform: You have to understand them and their problems and the market, better than they do,” Eykher says. “You have to be an absolute insider.” The most common concern they heard: Can you really get enough players from both sides of the market?

But they’ve had good traction so far. Within a couple of months of launching, Open Mineral had more than 100 fully registered members (equal, they say, to about 40 percent of the world’s mining companies and smelters) and has begun running trades on the platform. They expect to approve more members in the coming months. The startup is initially focusing on the freely tradable global market for copper, zinc, lead, gold, and silver concentrates—estimated to be around $50 billion—which excludes companies that process their own concentrates or those controlled by commodity traders, as well as the trade within China.

That’s not to say the founders don’t realize the challenges ahead. In general, the mining industry is considered to be traditional, capital-intensive, and slow to adopt new technologies. To their knowledge, no one else is trying to disrupt the metal concentrates market. “This is, in our opinion, one of the most difficult markets,” Chernilovskiy says. “That’s why it’s stayed this way for a long time.”

One executive in the industry recently told them he admired their courage. They took this in stride. “You need to know both the commercial side and the operational side and be adventurous enough (or, if you will, crazy enough) to challenge the idea of how the world is functioning,” Chernilovskiy says. “We seem to have all three.”

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