June 2017

Innovation: State of Play – iron ore insights

  • By Graeme Stanway, Founding Partner; Corinna Griebel, Consultant; and Paul Mahoney, Senior Consultant, VCI

This is an excerpt from a paper to be presented at Iron Ore 2017, which will be held in Perth from 24-26 July. Visit the Iron Ore 2017 website for more details on the conference program and registration.

Innovation: State of Play was initiated three years ago by VCI in partnership with the University of Western Australia. The ambition was to create a ‘think tank’ type platform to support industry discussion on performance in terms of innovation at a strategic level, what needs to change in the industry ‘ecosystem’ and how businesses may more effectively develop their strategy and architecture to innovate for competitive advantage.

The drivers for this ambition were straightforward. The industry recognises itself as being conservative with respect to innovation and it knows the business and community endowment dividend from getting better at innovation is large. However, much of the material that seeks to provide insight on innovation tends to be drawn from industries that do not have the same high capital, long lifecycle and market uncertainty characteristics faced by mining. Material that does focus on mining innovation is orientated towards technical innovation, not innovation strategy. There exists a significant knowledge gap, and filling it is valuable to both mining businesses and communities.

The 2014 Innovation: State of Play report, based on a survey of over 230 mining executives, uncovered a range of insights but left several questions unresolved. The people with the best perspective on these questions are CEOs. They can see the business issues with sufficient clarity and have the influence to shape both the industry and its organisations. Discussing these questions with the view to progressing our collective understanding was the primary reason the Innovation: State of Play, CEO Insights 2016 report was conducted.

Unsurprisingly, interviewing 15 CEOs and chairpeople from different industries and commodities across the globe resulted in a broad range of views. The discussions were frank and often blunt in assessing the shortcomings in the industry and suggestions for improvement. This degree of candour is hugely valuable.

Seeing and positioning for big shifts and future drivers

The mining industry considers itself to be conservative with respect to innovation and acknowledges that, in comparison with other industries, its core process has changed little over previous decades. However, there are exceptions, including large changes in scale, processing breakthroughs in response to orebody challenges and the emergence of new extraction technology such as block caving. The industry has also seen dramatic progress applying a risk-based approach to safety and environmental impact. Some CEOs noted that the biggest shift has been the recent emergence of remote operations, automation and analytics, which is fundamentally changing operating models.

The CEOs were consistent in their expectation of future drivers that would shape their industry. Social expectations, coupled with technology enabling transparency, will demand a step change in their businesses. Zero tolerance of environmental and safety impacts, coupled with broader value chain custodianship and closed loop management of environmental systems, will dramatically raise the bar. It will also be a strong driver for innovation and productivity improvement. Analytics and automation will accelerate the removal of people from site, dramatically change decision support and transform the human and machine interface. It will change businesses in a way that we cannot imagine at present.

Leadership and architecture

Proactively adapting to the drivers of change through innovation requires time and space to breathe and the protection that visible leadership provides. CEOs, supported by their boards, need to actively create the conditions for this to happen. This means persuading investors of the imperative to innovate and presenting a convincing innovation strategy. It also means carefully balancing top-down strategy with bottom-up ad hoc innovation. These two forces are in natural tension and CEOs need to be comfortable with this dynamic to be productive managers.

‘Unlocking the potential of people’ was a consistent theme, with recognition that this has lagged over the last decade with the relentless pressure to expand. Innovation was acknowledged as being dependent on the right culture, with CEOs consequently focused on the leadership task of embedding values, particularly those enabling diversity, thinking and collaboration. The values conversation often turned to supplier relationships, which is a positive sign given the opportunities for improving innovation in that space.

Strategy and innovation

Strategy and innovation are in many ways inseparable. Strategy exists to sustainably create and exploit advantage over competitors. The innovation challenge lies in finding the most effective way to achieve this. Every company exists in their own context and this will define how they use innovation to drive their competitiveness. Some will focus on people, some on technology and others on their role in the community. Articulating the link between strategy and innovation is vital to sustaining innovation programs, particularly through downturns when they are most vulnerable. As one CEO suggested, ‘to continue to innovate is a survival imperative for our company in the medium- to long-term and so is central to everything the business is trying to achieve’ (Stanway, Griebel and Mahoney, 2016).

CEOs recognised that innovation in mining is often not seen as central to strategy. Identified causes of this disconnect were ‘risk exhaustion’, where after taking on exploration, large capital project and market uncertainty risks, further innovation risk was seen as too much. To change this, investor perspectives in mining need to shift in order to recognise that the threat to returns is not from the risk of innovation, but the risk of not innovating and being left behind. CEOs acknowledged that miners need to better educate investors and that they need to find ways to reduce risk when making change to capital infrastructure.

Finally, strategy – and therefore innovation – is dependent on seeing change coming, but this is of little use if the insight isn’t acted on. The move to action is perhaps the biggest challenge being faced (Stanway, Griebel and Mahoney, 2016).

Innovation as a basis for change

To the casual observer, the mining industry today looks much like it did decades ago. However, the enduring images of large excavators, trucks and trains in remote areas belies many large changes experienced over the past 50 years. There are clear signs that we are at the start of a completely new understanding of how we will mine in the future. Different visions are emerging – will mining be based on the goal of minimising footprint and maximising productivity through harnessing low-impact extraction techniques and micro-automation? Or ‘resources on tap’ based on integration with customer demand-driven operating models? Or maybe even waste free closed loop extraction mining based on highly accurate geological modelling, extensive sensing and full integration with industrial value chains?

Understanding the implications of potential future shifts is a central goal of all business leaders, because doing so successfully enables companies to be well-positioned to exploit the changes, and to survive them. As any historian or futurist will tell you, the clues to the future are often found in the past – so we asked our interviewees their views on the biggest past and future shifts in the mining industry. We also asked them directly what they believed the biggest shifts would be in the future. The responses identified four broad trends that had precipitated change in the past and are likely to do so in the future:

  1. data, automation and analysis
  2. value chain integration and evolving business models
  3. relative value of orebodies
  4. social expectations.

The world is going through a period of enormous change socially and technologically, two forces that are increasingly mutually reinforcing, both in terms of raising expectations and in meeting them. The CEOs we spoke to throughout this process were unanimous on this point and many suggested the rate of change is still accelerating. One predicted that those joining the workforce today will experience more technology change in ten years than they had witnessed throughout their whole career.

Changing global societal expectations for all businesses is forcing an increasing number of investors to divest from companies and in some cases, entire industries. At a local level, communities can effect change in the way companies operate through protests organised through social media and campaigns waged from the ubiquitous mobile phone.

The exponential advances in the performance and cost of digital technology has the potential to revolutionise the mining industry in ways not seen since the adoption of rubber tyres on site. Companies are already integrating sensors, positioning, fibre optics, distributed energy and simulation and optimisation engines in discrete areas. No one can be sure what mine sites will look like as these technologies are pushed to their potential with next generation digital mine designs.

Seeing these changes and acting on them are two different things. Doing both requires clear strategic design exploiting a well-articulated competitive advantage, and using innovation as the vehicle for making it happen. When innovation is isolated, it is strategically handicapped, as is the business; a clear link between strategy and innovation drives competitive advantage, performance, focus and the creation of an agile business.

Looking outside the business is an integral aspect of innovation that the CEOs often cited as a skill that is underutilised in the mining industry. However, they identified several opportunities for miners to exploit in this area. Creative partnering between mining companies, less transactional partnerships with suppliers and cultivating new and lasting partnerships with other industries each have the potential to reap significant rewards for those companies who take the chance. These relationships are not static over time and are subject to economic and technological trends, in particular with the quickly changing business models that globalisation and digital technology is catalysing.

Throughout this interview process, a theme emerged with regards to who is responsible for improving the innovation performance of the mining industry. Governments can do a little less or a little more in some areas, but CEOs did not see them as a key player. Regardless, many governments are looking elsewhere now that the mining boom is receding. The actors who have the best capacity to improve innovation outcomes in the industry lie with mining companies themselves. The CEOs pushed the idea of self-determination and accountability, and they are right. As the only people in the mining industry who can move whole corporations and shape the views of investors, it is ultimately the job of mining CEOs to drive and take responsibility for innovation in the industry.

Implications for iron ore

Following several years of cost cutting, operating costs in the iron ore industry have returned to historical lows. Producers in Australia and Brazil have benefited from recent technological advances, specifically Vale, which has just commenced ramp up output from its automated S11D mine. The industry is looking resilient in the short term, but changing market conditions will require incumbent companies to rethink their strategy and use of technologies to retain their margin position in the future.

Over the next five to ten years, the world’s biggest miners need new production to replace almost 170 million tonnes of capacity that will be lost as exhausted pits are closed and grades decline at ageing operations. A return of Chinese, or other low-cost, supply poses a price risk to these projects.

In parallel to this, Indian companies are investing a disproportionate amount of innovation expenditure on social issues ‘outside the fence’, including training, resettlement, and development of parallel industries. As Indian miners operate in a far more densely populated environment, communicating through social media is viewed as a core competency and non-negotiable. The development of these skills, inherently unique to the Indian context, forces us to consider the question of whether or not the next generation of large iron ore deposits in traditionally difficult jurisdictions such as West Africa will be developed and operated by Asian companies, with a distinct comparative advantage.

Amidst the current discussion on digitisation, many companies are finding that the best way to approach this is through systemic programs of automating their businesses. Over the past decade, iron ore has distinguished itself in the broader industry by achieving enormous efficiencies with its push towards value chain integration and automation. This was made possible because of its huge operating systems and relatively predictable orebodies. Progress is being made by other underground and base metals miners who are increasingly moving into this space, as can be seen by the increasing focus on automation and robotics in South Africa.

It’s not just mining companies that will be threatened. Services companies will find themselves increasingly disintermediated, as the Sinosphere – made up of Vietnam, China, Japan and South Korea – emerge from construction-fuelled sources of demand, to technology and innovation-driven services hubs that have the capability to rival Silicon Valley. Urbanisation and increasing wealth are raising standards and expectations of domestic industries, and local mining companies are not immune to this trend.

To remain competitive in the long term, companies must not only deploy new technologies and processes, but also reinvent their approach to collaboration and partnerships, particularly with emerging countries. By assuming a leadership position in innovation, the iron ore industry can not only play a key role in shaping and stabilising its operating ecosystem, but position itself, in advance, to lead a global mining industry where integrated operating systems will become a necessity, rather than a luxury.

Recommendations for iron ore mining companies

Below are seven guidelines for mining companies operating in iron ore:

  1. actively participate in shaping the iron ore industry and linking with the global mining ecosystem
  2. tightly integrate innovation within business strategy as it applies to market conditions
  3. create and regularly refresh your company’s innovation and technology vision and roadmap
  4. target and build long-term strategic development partnerships with global providers and with leading global mining centres of excellence
  5. build organisational architecture and culture to cultivate entrepreneurial bottom-up innovation.
  6. visibly lead, incentivise and communicate your innovation program across your business
  7. deploy specialist cross functional and cross cultural change management teams.

For more information please visit www.innovationstateofplay.com.

Reference
Stanway G, Griebel C and Mahoney P, 2016. Innovation State of Play, CEO Insights 2016 Report [online]. Available from: https://www.innovationstateofplay.com/buy-the-2016-report/.

Feature image: Alexandr Makarov/Shutterstock.com.

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