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Productivity to take centre stage in 2014

TOUGHER conditions at home and abroad look set to make 2014 another difficult year for the mining industry, with productivity and cost-cutting initiatives set to take centre stage.

Andrew Duffy
Productivity to take centre stage in 2014

The new focus represents a change in direction for most companies following the boom years, where higher volumes were chased at almost any cost.

With commodity prices now cooling, analysts at Deloitte say miners will need to make a “seismic shift” in order to protect their profitability and long-term survival.

Breaking these old habits won’t be easy, but there’s evidence that a change is already underway, with the big miners leading the way.

Deloitte mining leader Nicki Ivory told MiningNews.Net that while productivity and cost-cutting initiatives were now well underway across the sector, some of the more difficult reforms were yet to be made.

“We’ve seen companies do all the quick and obvious things,” she said.

“A lot of the bigger companies are now starting to move to phase two of this effort, which is more strategic, and those changes will play out over the next 12 to 18 months or more.”

While the wheels are moving, Ivory said many scrutineers of the industry were still waiting to see if companies were committed to the harder, long-term productivity improvements.

These advances will take many years, and require a rethink of the entire business model.

“People can see things are being done, but investors are still waiting to see if the industry truly gets itself in order,” Ivory said.

“We’ve seen these early improvements before, where the cycle swings down and miners cut costs.

“The problem has been that costs come straight back up again once the next upswing starts.”

In a recent report tracking mining trends for 2014, Deloitte said the mineral sector last posted a productivity increase in 2003.

Since then, the last decade has seen productivity fall 30%, with innovation the key to reversing these losses.

This focus on new technology and innovation has already made significant changes to Australia’s industry, particularly in the Pilbara, where the introduction of automation and remote control is making changes that would not have been dreamt of 20 years ago.

But while the voice from the investor community is almost unanimous, there’s still some debate on just how much of a problem productivity is for the mining industry.

Productivity is measured as the GDP value contribution an average employee makes in one hour, but the mining industry contains inherent factors that can skew those results.

Some of mining’s biggest productivity influencers come from resource depletion and the long lag time between realising the value of capital investment.

As projects move forward, these factors will negatively skew the figures, especially compared to other industries, but they are a natural part of doing business in the sector.

Nevertheless, there’s no doubt there are productivity improvements to be made in the mining industry, and tougher economic conditions mean these gains are more important than ever.

The flip side to all of this is the very real concern that the pendulum may swing too far, with another period of underinvestment failing to set miners up for the next turnaround.

Ivory said while this danger was real, it wasn’t likely to have a major impact over the short to medium term.

“The lack of investment in exploration will be a concern if that doesn’t turn around, but most of these problems are fairly long-term risks,” she said.

Taking stock of the wider industry, she said productivity was an industry-wide problem, and wasn’t confined to one part of the sector.

“Everyone’s having to take another look at their projects to work out whether the costs can work and they can make money,” she said.

“The big miners got a bit of a head start, and are probably halfway through this process. Some of the juniors have only just started.”

Ivory said this change had been evident at the executive level, with different skills, experience, and attitudes starting to filter through most boardrooms.

“We’ve seen all the big miners make changes at the management level to bring in people who are more focused on cost control,” she said.

“There’s been a clear signal from the big end of town, but it’s less clear at the junior end.

“Some companies have seen the writing on the wall, but it’s a bit of a mixed bag.”

Looking at other parts of the industry, Ivory said cost cuts in the gold sector would be among some of the most important, with gold continuing to be one of the most marginal sectors.

Just how far companies will go in chasing productivity, and whether they get the balance right in laying the groundwork for more growth, remains to be seen.

There is no doubt, however, that investors, commentators and miners themselves will spend most of the next 12 months focused on these improvements.

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