Productivity in mining has been an issue for some time. The declining quality of ore bodies, ageing infrastructure, rising labour costs and lower per-labour-unit output have been concerns for years.
However, the strength of the so-called commodity super cycle (the sustained period of high prices – a Kondratiev wave, if you’re an economist – said by commodities guru Jim Rogers to have started in 2000) has masked the consequences of this decline in productivity. After all, everyone looks clever when the tide is rising and – as Warren Buffet famously said, – “It’s only when the tide goes out that you learn who’s been swimming naked.”
Mining’s productivity problem is global. The Australian Bureau of Statistics reported a fall of one third in Multifactor Productivity (a measure of the changes in output per unit of combined inputs i.e. labour, capital and resource) over the course of 2000-10.
Statistics South Africa (SSA) reported that mining production in the country had fallen 7.7% between July 2013 and July 2014. This was largely a result of the 45% fall in production of platinum group metals (PGMs) due to the long-running strike. However, the trend is clear across the board; copper output fell 16%, gold 15% and diamonds 10%.
SSA also report that labour productivity has declined 35% since 2007 in the domestic gold sector.
The main cause of this decline is that the global industry as a whole has focused on production growth at the expense of productivity. This led to inefficiency. Now that the abundant tide of capital into the sector, attracted by ever-rising prices has receded, the emphasis must shift the other way.
This requires a cultural shift, as many in the industry are unaccustomed to operating in a marginal environment. It also requires innovation to drive competitiveness forward.
One of the key obstacles preventing this from happening is identified by Ernst & Young, who have published a number of papers on the problem of low productivity in the mining sector, as the relatively low level of research and development spending by mining companies relative to those in other sectors. According to Ernst & Young, Australian-led innovation in the gold extraction process back in the 1970s was the last major development.
With the right level of investment, there are likely to be significant gains in mining and processing methods waiting to be harnessed.
Mining companies in Africa have also often allowed themselves to rely on low-cost labour as a means of comparative advantage. But growth in wages, as countries develop, has eroded this advantage and led to uncompetitive unit labour productivity. This must improve if these mines are to be sustainable. This will likely led to greater automation – and be politically contentious.
Some companies are already committed to making substantive improvements. Acacia Mining (formerly African Barrick Gold) is aiming to reduce its All In Sustaining Costs from over $1,500/oz (2012) to under $900/oz by the end of 2016. Similarly, the big three iron ore producers are relentlessly seeking to push their costs down to the $20/tonne level.
But for mining companies, adjusting to the new reality of cyclical prices, without the ease of ever-rising prices mining companies have grown accustomed to through the nearly 15-year super-cycle, will not be easy. A complete change, a transformation even, of embedded culture is required.
According to Ernst & Young, companies with a clear strategy and aligned operating model will flourish. From their approach to mine plans, mining methods, the use of equipment fleet and its configuration, reducing production if necessary and increasing or reducing automation, are all essential elements for the next generation of profitable miners. Otherwise failure and, or, consolidation by more successful peers will be the order of the day.