Global mining productivity has been declining on a volume and cost basis since 2000 as miners have chased production growth during the commodity boom, said EY Global Mining & Metals Advisory Leader Paul Mitchell.
Mining productivity in Australia has declined about 50% since 2001. Despite massive investment in new equipment and automation, Australian mining capital productivity has declined by 45% compared to 22% in all industries, says a new EY report, Productivity in mining: A case for broad transformation.
Labor productivity in the U.S. coal sector has declined nearly 30% from 2009-2012, while in the South Africa gold sector, labor productivity is estimated to have declined 35% since 2007.
Many companies have been dealing with the plunge in productivity through a series of cost-cutting exercises or point solutions, observed the EY report. “However, the size of the problem is too large for point solutions to solve on their own and often they have the effect of simply moving the problem further down the supply chain.”
“Real and sustainable productivity gains will only come from broad business transformation,” EY stressed.
Productivity is needed to regain ground lost over the commodity super cycle, EY and the University of Queensland in Australia determined during in-depth interviews with senior mining executives. “Behavioral change is critical given that many mine managers, frontline engineers and operations supervisors appointed to these positions during the super cycle have never operated under a marginal environment,” the report advised.
EY found that many mining economies relied on currency movements to retain their competitive advantage. “With lower prices and stubbornly sticky exchange rates, producer countries have begun losing their competitive advantage, and hence producers in these countries need to innovative in order to become more competitive and reach new levels of productivity,” said the study.
“Given the right levels of investment, significant gains should be possible through innovating mining and processing methods, perhaps in conjunction with original equipment manufacturers (OEMs),” EY suggested.
To boost productivity, mining companies also need to counteract rising real wages, the study advised.
“For many developing economies, low-cost labor was used as a means of comparative advantage. …However, many of the economies have been so successful in generating increases in growth that this has fed into increases in real wages (significantly above the rate of inflation),” said EY. “With commensurate increases in productivity, mine plans of many of these operations in these countries will not be sustainable.”
“Ultimately, more automation will be required, but this will create its own set of political challenges,” E&Y suggested.
As the length of the super cycle and the pursuit of growth led to substantial change in the organizational DNA of many mining companies, “their structures, processes, performance measures and culture have all drifted to favor growth over productivity,” the report noted. EY believes that real productivity gains will only come from broad transformation.
“Real and sustainable productivity requires a holistic and top-down approach that aligns productivity activities to their strategic value and contribution, and they need to be planned and executed in a coordinated way across the value chain,” EY asserted.
Among the significant adjustments required from mining companies include: changing mine plans; reassessing mining methods; making changes to equipment fleet and configuration; reducing production; and increasing or reducing automation. “Most of these have been untouched by cost-reduction exercises,” the report observed.
EY suggested mining executives consider key considerations to help deal with productivity challenge: 1) Are you improving or transforming? 2) Are your initiatives adding to the long-term bottom line or just moving the problem? 3) Are you thinking about the problem conventionally or with a value-chain view? 4) If you are considering achieving higher productivity with lower input, do not forget to consider the impact on cash flow and profit.