Productivity is the most significant business risk facing mining and metals companies today, according to a recent EY report.
Volume and cost basis productivity have been on the decline since 2000. EY noted that this has been a conscious decision by mining and metals companies to work toward production growth and headline revenue as commodity prices have seen historic price rises.
Point solutions or cost-cutting operations have often been the way companies have dealt with the productivity drop. However all this does, more often than not, is push the problem further down the supply chain. And productivity has continued to drop at various rates globally.
In Australia[,] mining labor productivity has dropped 50 percent since 2001; in the United States production saw a 30 percent decline between 2009 and 2012; and the South African gold sector has experienced a 35% drop since 2007.
"Boards and CEOs are now realizing that regaining lost productivity and gaining new ground is critical for long-term profitability and requires a whole-of-business response," said EY Global mining and Metals Leader Mike Elliot. "It's transformational and takes a lateral and broad-thinking management to pull it off successfully.
The issues that are dragging down productivity
However, mines have managed capital well recently, which is a positive sign for the future, noted MineWeb. If well disciplined capital can translate over to an increase in productivity, experts believe that ground lost over the super-cycle will be regained, a competitive advantage will be recovered through innovation and companies will better be able to cope with a rise in real wages.
EY explained that a large segment of experts think that no action is needed to right the mining and metals industry. However, the report noted that significant changes are needed in order to enhance productivity. Many executives told EY that they were working on sustaining profit over volume. It stated that this is not the right course of action, and that difficult, long term initiatives are needed in order to optimize productivity in the coming years.
This will require transitions in corporate culture, organizational structure and accountability, the report found.
"Creating sustainable change requires broad business model transformation," said Bruce Sprague, EY's Canadian mining and metals leader, according to Shanghai Metals Market.
"That means looking closely at mine plans, reassessing mining methods, making changes to equipment and considering opportunities for automation."
The issues have, for the most part, moved to the CEOs' tables, as the need for broad shifts is realized. The report notes several steps required in order to achieve long-term transformation of the industry.
Changes necessary include a concise strategy based on value drivers, standard work processes, cohesive operating models and strategies, alignment and integration through the value chain and aligned planning, performance and budget management.
Also noted as an issue in the industry is resource nationalism, which can have a detrimental impact on investment decisions. Balancing in-country benefits with investment has been difficult, and the report notes that mining and metals companies need to educate governments on the effects of resource nationalism on investment.
In-country issues that can alter a company's decision to invest include taxes, use-it-or-lose-it laws, and processing requirements.
"Companies need to continue to demonstrate effectively the benefits of mining and metals to the broader community and enhance the understanding that raising the cost of doing business may scare away investment and jeopardize those benefits for the government and the community," the report noted.
Other top issues facing the industry noted by EY include capital allocation and access to capital at number two and social license at three. Access to water and energy is a new entry to EY's annual list, coming in at 10.