In April 2020, the AusIMM Bulletin published an article by Australian-based research group State of Play on how COVID-19 was impacting the resources sector. Now in August we can reflect on how the industry initially responded to the ever-changing pandemic, and what the long-term impacts might be.
COVID-19 has been a unique sort of disruption for the resources industry. The pandemic has lasted longer than most short-term shocks, such as major accidents or terrorist attacks, but has also moved faster and more abruptly than longer-term trends, such as a trade war or the development of step-change technology.
In March 2020, State of Play began conducting research into the immediate impact of COVID-19 and what it could mean for the resources sector in the medium to long-term. This particular research concluded in May 2020, giving three months of data to help track the critical initial response to the virus and give some indication of the longer-term impacts on the industry going forward in what remains a volatile time.
Gauging the initial response to the pandemic
The dynamic nature of the pandemic helps explain the significant monthly shifts in levels of concern among industry leaders with regards to COVID-19 from March to May. While extreme concern declined from 20 per cent in March to three per cent in May, the level of high concern remained persistent at around 50 per cent (Figure 1). Some of this shift is explained by differing experiences with the virus across geographies; however, it is also testament to the dynamic and volatile risk profile of the virus.
Our data from May was the most polarised since the research effort began. The dissonance demonstrates the differing experiences of different geographies and different businesses. Some businesses feel as though they overcame the operating model disruption (such as virtual work or service models), with 23 per cent saying they expected less than three months of significant impact from COVID-19. Others were still grappling with the crisis, as cases worldwide continue to rise and the longer-term economic impact remains unknown and potentially underestimated (despite global recessions).
In May, 37 per cent of the industry expected the significant impact of the pandemic to last for at least another year, either in the continuation of disruption to normal working conditions or in the medium-term economic impact (Figure 2).
In early August such sentiment appears to be well-founded, with the ongoing deadly outbreak of the virus in Victoria, and other states working hard to contain clusters. These ongoing outbreaks continue to create huge amounts of economic uncertainty, and are impacting businesses of all types and disrupting workforce mobility and supply chains. However, recent data from the MCA suggests that, based on job sector data, ‘the sector is holding its ground relatively well in the face of a global pandemic’ (MCA, 2020). This is particularly true in strong mining states of Queensland and Western Australia, who have also to date managed to contain an overwhelming outbreak of the virus.
What could the long-term look like?
COVID-19 has been too large an event and too pervasive in its impact for the industry to revert completely back to ‘normal’. Some changes will be a continuation of pandemic-enforced operating models, such as working from home (59 per cent) and virtual service models (38 per cent). In these cases, COVID-19 has operated as a catalyst to an already established trend. The development of better communications technology has enabled more remote work, yet the cultural inertia and invested capital in concentrated corporate offices has slowed the acceptance of these working conditions. Given no choice, there has been a widespread demonstration on the merits of working from home for many, and the industry expects this trend to accelerate as the crisis continues to play out.
But the increased acceptance of flexible work is unlikely to be a binary shift. We will likely see a mix of hybrid models, with some days at home, some in the office and a more flexible approach to work locations. The increased prevalence of working from home will also mean the burden of paying for office space is likely to shift from companies to employees. More permanent work from home models mean that employees need to rent or buy more space to dedicate to their work, while businesses pay less for office space. An increase in home-office allowances or tax concessions will be necessary to maintain real wages in this more flexible environment.
While many businesses will encourage people to come into the office, even if on a more flexible arrangement, one lasting change is that to the need for travel. As a global industry with geographically dispersed and often remote assets, travel has been seen as a necessity for collaboration between off-site and on-site teams, staffing remote areas and leadership engagement. The end result has been bloated travel budgets, an implicit cultural acceptance of the need for travel in many situations, and the physical and mental travel toll on many people.
No longer. Overwhelmingly, the industry expects a significant re-evaluation of the need for travel (Figure 3). Video calls, interconnected digital systems and the benefits of decentralised autonomy have compensated significantly for travel restrictions, leading to many in the industry to question the need for travel and its significant costs. Anecdotally, there are reports of companies applying stricter rules regarding travel costs as restrictions ease. Large numbers of road warriors jet-setting around the world could become an outdated construct in a virtual, interconnected world.
In the case of services businesses, many were forced to transition to different delivery models during the heights of initial lockdown, varying from transferring client interactions to video calls through to virtual asset management services. These models appear to have exceeded expectations, as the long-term sustainability of COVID-19 operating models for services companies steadily increased from 17 per cent in March to 33 per cent in May.
Other structural industry shifts will be a long-term consequence of the response to the virus, with government debt arising from stimulus policy seen as a worrying impact in the medium-term (52 per cent; Figure 4). As governments around the world collectively commit trillions of dollars to shoring up the economy during and after the pandemic, the resources industry is worried about the impact of the level of government debt on tax policy.
For all the discussion of the importance of industry collaboration in responding to the crisis, the data suggests this is overblown. Ultimately, competing businesses will look to use disruptive events to their advantage – ‘never waste a good crisis’ – rather than adopting a new form of capitalism. Industry collaboration has its place, in particular with regard to shaping government policy, but ultimately the market is competitive, and even a global pandemic is unlikely to change that.
Better luck next time?
As with any crisis, much of the discussion once the initial dust has settled centres around the ability to prepare for similar situations in the future. With developments of a vaccine still underway – and not a certainty – as of August 2020 the world continues to see outbreaks, with regions and even whole countries going back into lockdown. Understanding what enabled effective initial responses to the pandemic informs the design of future risk management structures regarding the ongoing crisis, and similar pandemics in the future.
Across operators and services companies, leadership and culture were the most important enablers of successful adaption (70 per cent for operators and 66 per cent for services companies; Figure 5). Those that had the right systems and technology in place to manage a virtual working environment had a natural head start – the ability to quickly transition to the new way of working was essential in maintaining business continuity for operators (50 per cent) and services companies (59 per cent). The other major bulwark against the COVID-19 disruption was a strong balance sheet, at 40 per cent for operators and 47 per cent for services companies. Capital was key in managing disrupted production capabilities and price fluctuations for operators and interrupted contracts and loss of revenue for services companies.
Interestingly, organisational structure was particularly important for services companies in adapting to new ways of working. Whether this was due to decentralised decision-making processes, flexible employment systems or flat organisational structures, the key lesson is the importance of building resilience into operating models.
Only 10 per cent of the industry were able to leverage foresight and planning in their COVID-19 response, which suggests that plans were either not in place or inadequate for dealing with the crisis. There may be a re-evaluation of the role of these processes in strategy and operating model design, with one potential outcome being the reincorporation of scenario development and planning in business decision-making.
As companies look to insure themselves against the next pandemic (or any crisis that impacts in a similar way), a focus on the right leadership and culture, well-established systems and technology and a strong balance sheet are likely to hold businesses in good stead. However, the opportunity to use more forecasting and planning processes and a robust operating model to manage disruption should not be understated. Hopefully, next time we’re better prepared.
State of Play is currently running a biennial survey on strategy and innovation in the mining industry. Have your say at https://stateofplay.org/survey-2020
MCA, 2020. ‘Australian mining jobs stay strong during pandemic’ [online]. Available from: https://minerals.org.au/news/australian-mining-jobs-stay-strong-during-pandemic