It was always clear that Australia's iron ore sector faced productivity challenges similar to other areas of the domestic economy, but as the miners' profits fall to more sustainable levels in tandem with iron ore price, the scrutiny is intensifying.
Earlier this week, the Minerals Council of Australia paper, prepared by Port Jackson Partners, reported the cost of developing iron ore projects in Australia to be 30 per cent more expensive than the global average.
The heavy capital requirements for developing mining projects and high labour costs have been heavily reported, but there is another real challenge looming on the horizon – the cost of extraction itself.
As I wrote on Tuesday (Gindalbie bets on a Karara premium, September 18), the likes of BHP Billiton and Rio Tinto are mining hematite or direct shipping ore which is still high-grade and has a relatively low production cost, but the quality of this ore will continue to diminish over time. In Western Australia's mid-west there are many projects years away from seeing first production and based on complex magnetite ore bodies.
This means that as extraction and processing becomes more tricky, the cost of production per tonne will rise, leading miners to seek savings at every point in their mine to port operations.
Necessity is the mother of invention, and Australia's mining sector is being mothered towards seeking ways to optimise its operations via technology, which, in the case of many of the projects in the mid-west, may literally determine their futures.
David Glance, an associate professor at University of Western Australia's Centre for Software Practice, told Business Spectator that the overarching attitude towards technological innovation in the Australian mining community is still "conservative", but that work is going on behind the scenes.
At IBM's Natural Resources Centre in Perth on Wednesday, the company's Natural Resources chief executive officer, Murray Bruce, explained the growing number of opportunities IBM is realising as miners seek to increase productivity across every facet of their operations.
There are two broad categories under which companies are seeking to advance. One is designing and building better hardware – like new exploration or drilling technologies to improve single aspects of mining operations. Rio Tinto, in partnership with universities and other companies, is noticeably ahead of the pack in this area.
The other, which is IBM's main pursuit, deals with end-to-end optimisation through the use of big data and computational geosciences. This includes projects like helping miners respond more dynamically to the required blend of product for a particular customer and predicting extreme weather in such detail that it would allow them to significantly minimise the shut down time on their operations (which currently often costs millions of dollars).
Crosslands Resources – a wholly owned subsidiary of Mitsubishi, which is responsible for developing the stalled Jack Hills and Oakajee Port and Rail project – is one of IBM's clients.
Crosslands Resources vice president of geology, Roland Bartsch, told journalists that while the company's own projections didn't see the first shipment from the stage two expansion of Jack Hills until 2018, the consulting work on optimisation of the mine is invaluable in securing ongoing investor confidence.
IBM's Bruce said one of the main changes in the iron ore sector is that long-term contracts used to be annual, and accounted for 99 per cent of sales, with the remaining 1 per cent sold at the spot price. He said long-term contracts are now an average of about three months, and only account for 70 per cent of shipments, with the remaining 30 per cent done as spot cargoes.
If this is the case, then just about all miners are going to need to be able to adapt to the dynamics of the market far more quickly to maximise profits by making and selling the right products at the right time.
Bruce was not able to disclose many of IBM's other clients, but he did mention working with some of the major players in areas such as Karratha and Cape Lambert – which would likely include Rio Tinto.
Rio already has a remote operations centre in Perth, currently operates 150 driverless trucks in the Pilbara and is on track to have automated trains by 2014.
It is fair to say that the economies of scale are in favour of the bigger miners, who have lower costs per tonne, access to higher ore grades and the capital to spend on technology that will then give them further productivity advantages.
The miners won't talk numbers when it comes to their R&D spend, but it is clear that some miners at each end of the spectrum have recognised technological solutions as a significant measure to improving productivity.
IBM is only one of many companies consulting with the miners on the optimisation of their operations, and if the increased demand for on-the-ground-staff at its natural resources centre is any indication, the miners are beginning to queue up for help.
Josh Kenworthy travelled to Perth as a guest of IBM Australia.
Ironing out the miners' cost kinks
As resources profits fall, extraction costs and technology will come under intense focus. And the miners are beginning to queue for help on this 'make or break' challenge.
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