Miners dig deep as the pain sets in

It’s about a year since the dramatic fall-off in commodity prices – particularly coal and iron ore and more recently gold – began to affect the outlook and business plans of the resources sector. What is becoming apparent from views expressed by 60 mining leaders in this year’s Mining Business Outlook Report, compiled by Newport Consulting, is a recognition that the industry must urgently start to proactively plan for continuing low prices and tough market conditions.

The issue facing the resources sector that most commentators have focused on has been the suspension of hundreds of billions of dollars in investment in the expansion of capacity across the country.  But there is a more instructive story being played out across the sector today that hasn’t yet received much attention. Falling commodity prices have led to a collapse in the profitability of many resources companies, with mines closing and hundreds of workers being laid off.  Coal has been hardest hit, with a widespread view that the vast majority of operating coal mines in eastern Australia are unprofitable at today’s commodity prices.

While such conditions are unwelcome and painful, they have also given the industry an opportunity to shift focus away from the search for more capacity towards driving their existing operating businesses and assets more profitably. Efficient operations and active management of their businesses have become the focus for 2013-14 with 65 per cent  of mining leaders interviewed in the Mining Business Outlook Report, released today, rating their key focus for the financial year ahead to be cost control and improving productivity and throughput.

We see it every day, all around the country – miners are playing hardball with their suppliers, now seeking reduced prices across the board. Demand for flexibility from their workforce and their contracting companies are what make the news. Throughout the boom years, mining companies were willing to pay what it took to get the workforce they needed, resulting in inflation on the cost side of the business.  When coal prices more than doubled between 2001 and 2011, suppliers, contractors and employees happily came along for the ride.  In 2013, the requirement now is for those suppliers and contractors to take the journey down as well. When the take-or-pay contracts come up for renewal, we may well see a significant increase in mine closures as the miners take the opportunity to renegotiate supply rates. 

The challenge facing miners is whether or not their focus on costs can be sustained for long without affecting operational performance. You can only postpone replacing worn out equipment for so long.

One question I have is how the influence of the Fair Work Act will play out. Miners have long demanded flexibility from their workforce and it comes through again in this year’s Mining Business Outlook Report loud and clear.  It is possible that the Fair Work Act may cause more mines to close that otherwise might occur, due to the inbuilt inflexibility of enterprise bargaining agreements?

The factor coming into focus that offers hope for the sector is the productivity story.  Though productivity is technically about labour efficiency, for miners with their capital and energy intensive operations, operational excellence is vital across all their inputs. Fortunately the challenge is quite easy to define – although more difficult to solve.

For your typical Australian mine in 2013, the key to success is to drive up operating time for the key equipment that affects overall performance. While commodity prices have been high, inefficiencies at the operating level have been manageable. The focus instead has been on bringing increased capacity on line to meet volume demand.

Now that the music has stopped for the time being regarding investment, it is logical and necessary for the miners to make the existing operating assets operate very well to achieve profitability in today’s difficult times.

One thing going for miners is that the skills shortage has all but disappeared.  The report indicates that the chronic problem of an inexperienced workforce has dissipated as the resources market takes a breather.

In summary, it is not all doom and gloom for the sector. The glass is half full and miners have an opportunity to make the capital and labour they have sought over the last few years now work well and effectively, delivering the returns to their shareholders that their own forecasts have promised.

David Hand is managing director of Newport Consulting.