Mining Industry’s Productivity Problem

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Jul 12, 2017

Mining Industry’s Productivity Problem

July 12, 2017

 

 

A couple of years ago McKinsey highlighted how productivity in the mining industry has declined by 30% in the last decade. It seemed counterintuitive – as technology has improved vastly in the last decade and has driven productivity improvements in most industries. So, what was the deal with mining?

 

Much of the commentary on productivity decline focused on the reckless spending by mining companies during the era of booming commodity prices. During the good old days of high commodity prices, almost all mining companies pursued a strategy of “volumes at any cost”, thus over-investing in exploration, infrastructure, labour, equipment and other resources. This stretched the balance sheets, but nobody was worried as high commodity prices still made it possible to reap huge profits, effectively masking underlying operational inefficiencies. When commodity prices fell, the party came to an abrupt stop and the inefficiencies suddenly became all too visible. Suddenly, the mining industry rediscovered “productivity” and made efforts to improve efficiency. As a result, between 2009 and 2014, McKinsey data indicates that productivity decline stabilised and even saw slight improvements. It’s 2017 now and according to a Deloitte report, “Productivity Improvement” is still the second most important item on mining industry’s menu. This only underscores the extent to which mining companies had stretched themselves before and the tough challenges they have faced while addressing productivity problems.

 

If one looks at the 2014-15 annual reports of most mining companies, it’s evident that much of the mining sector’s initiatives around productivity have been focused on cost cutting. News about site closures, scale backs and layoffs were common as most mining companies cut costs in the range of 25% to 35%. After the cost-cutting measures, came the focus on asset quality and divestment. As a result, several mining companies started selling off projects which they had difficulty managing profitably. Again, one can look at the 2016-17 annual reports of large mining companies such as RioTinto, BHP Billiton etc., which talk about exiting non-core operations (such as Coal, Shale etc.). These measures did improve the cost structure of mining companies and helped arrest the decline in productivity levels. But cutting costs is not the same as improving productivity. While cost-cutting and divestment activities offer short-term relief, they cannot drive sustained productivity improvements.

 

Mining companies have realised the need to focus on initiatives that can drive sustained improvements. Things are only going to get tougher because of slowing demand from China, an oversupply of metals, declining ore grades and regulations. Mining companies today have no option but to look at technology solutions that can deliver sustained improvements. Several leading mining companies have already started down this path several years ago and have seen incredible returns. For example, RioTinto is on the verge of automating its entire truck fleet at their iron ore operations in Australia, which has improved productivity by as much as 15%, and is following this up with automated trains. Riding on successful investments in technology, RioTinto now plans to achieve $5B improvements in productivity over five years.

 

A recent survey from Accenture confirms this trend – four out of five mining companies are expected to spend on digital technologies in the next 3 years, with 28% of them planning significant investments. In fact, 54% of survey respondents indicated that automation and robotics will be their top spending area. It’s clear that Investments in digital technologies, such as Eka’s solutions within supply chain and analytics, are going to drive the next round of productivity improvements in mining and this time, the improvements will be sustainable.