The mining industry is battling a productivity nightmare, and as commodity prices tumble, solving that problem has become a race against the clock. But a new report suggests the miners are still favouring a quick fix over a long-term strategy.
Across the globe miners, including BHP Billiton, Rio Tinto and Fortescue, have managed to deliver substantial cost efficiencies after embarking on ‘productivity drives’ over the past year or so.
But cost-cutting is the easy part, the low-hanging fruit. And according to Ernst & Young’s latest mining productivity report, Productivity in mining: now comes the hard part, there’s not much of it left.
So what do you do once you’ve picked all the low-hanging fruit? After a period of battening down the hatches and turning off the money tap, that’s the question our miners must now ask themselves.
The productivity slump isn’t anything new, and nor is the criticism Australia’s miners have faced in addressing it. In fact, PricewaterhouseCoopers recently named Australia as the second least productive mining region in the world after Africa. But for the first time, mining chief executives this year listed productivity as the number one challenge facing the sector. As we transition from the mining investment boom to a rapid rise in production, miners will be paying very close attention to all things productivity.
Labour, capital and materials are the usual suspects credited for eroding the sector’s productivity over the past decade, but in Ernst & Young’s report, ‘diseconomies of scale’ also made the list.
These ‘diseconomies of scale’ are as a result of the big miners expanding as quickly as possible during the boom times without properly considering how to manage the increased complexities that would arise from larger mines.
You would assume that bigger mines would be more productive due to economies of scale -- that increasing output would lower the per-unit fixed costs, since the costs would be spread over the larger output. But this wasn’t the case. Now the miners must backtrack to figure out exactly what they need to do to make these mines more productive.
The way to go about this, Ernst & Young says, is to take a more holistic view of how all the parts and processes fit together to ensure more effective systems that will increase productivity. But end-to-end transformation that integrates different aspects of the business to make departments work together will most likely be met with internal resistance, partly because it could lead to more job cuts. And judging by the intense push toward automation, workers are understandably concerned.
Rio, BHP and Fortescue are leading the way in the move toward automated ‘pit to port’ operations as they look to cut costs and improve capital and labour productivity.
As I wrote recently, BHP is currently trialling nine driverless trucks in its Jimblebar mine and one autonomous drill rig at Yandi. Driverless trains are still to come, but the miner is likely to trial these before too long (BHP's robot army will cut costs, October 6).
BHP has already seen benefits from the robot drill rig, with the miner seeing a 10 per cent increase in metres drilled per shift. Once more robot drill rigs are brought in, the productivity gains should be significant -- as will the job losses.
This year, BHP expects that a little over 10 per cent of the 245 million tonnes of iron ore it digs up will be hauled by driverless trucks. In four years, the miner expects that to rise to 40 per cent. That means a lot more miners out of work and a much more productive BHP.
Rio is even further ahead, having begun its automation program back in 2008. It currently boasts largest fleet of driverless trucks in the world, with 53 Komatsu trucks. By the end of 2015 we should see that fleet grow to 150 trucks. And after a period of trials, Rio is now preparing to send a driverless train from the Pilbara to the port of Dampier as part of its Mine of the Future automation program.
But all of this automation isn’t actually as innovative as it sounds. In fact, Ernst & Young found that the lack of innovation is another area where the mining industry has fallen down. While Rio has 53 trucks on the go at the moment, the miner was actually trialling driverless trucks 20 years ago. Hardly rapid deployment.
In comparison, the oil and gas sector has been transformed due to spending on innovation, putting the miners to shame. According to Ernst & Young, the mining industry’s spending on innovation is just a tenth of what the petroleum industry forks out.
The problem is our miners are still focused on short-term productivity gains to offset falling commodity prices. But this can only take them so far. Looking to the long term must become the focus. Just as it took a decade for the mining boom to peak, the substantial decline in productivity can’t be reversed in a year or two. And that will become a bigger problem if commodity prices continue to decline.