Miners need to dig themselves out of a cost sinkhole

Why has the US sharemarket performed so much better than Australia in recent times? Obviously there are a number of reasons, but there is one overriding force: American managers worked out that future depressed economic growth was not going to provide their shareholders with a good living. They would need to be a lot more efficient.

In Australia, we looked at the booming iron ore and coal prices and the new investment in gas and said: "She’ll be right, mate." And instead of setting about making our enterprises more productive, too many listed companies bemoaned the industrial relations legislation which, while it was a factor, covered up the fact that managers had bad human resources departments that did not know how to use independent contracting to solve the problem.

Mining, commercial construction and the public service are among the worst areas, but the problem is widespread. The supermarket price war forced large areas of the food industry to lift their management game. The tough federal budget is having a similar effect, which is good news for the sharemarket.

The problem is illustrated by mining. The Boston Consulting Group has released a report on Australian mining industry productivity and has found that our mines, on a cost basis, are among the worst managed in the world.

Boston Consulting says that in Australia, mining costs jumped by 312 per cent between 2002 and 2012. This outpaced Chile (256 per cent), Canada (192 per cent) and the US (149 per cent).

Boston says: “Australia is now at the top of the cost table and would need to slash a third from its cost base to match its next nearest competitor.”

In fairness, the Boston report concentrates on copper. We are better in iron ore, but coal is a mess.

Boston says: “Virtually every (global) mining company has some type of productivity improvement program in place, but such programs achieve mixed results. Often, improvements quickly fizzle because executives lack a long-term productivity vision, they are unable to instill the necessary new behaviours in line management and operators, or they can’t overcome the organisational silos and ingrained culture that so often impede learning and change.”

In Australia, bad management often causes coal mines to shut given the low coal prices. In iron ore, Rio Tinto and BHP are at the lower end of the cost curve but the fall in iron ore prices will ravage their profitability unless they embrace better management.  

Rio Tinto believes it can overcome its problems by automating its mines. This is a high-capital cost way of overcoming labour management problems.

But the problem is serious.