Minerals professionals are central to identifying and delivering sustainable improvements in the industry
Productivity is the word on everyone’s lips in the minerals sector at the moment. EY’s most recent annual Business risks facing mining and metals publication ranks productivity improvement as the most important industry risk factor (EY, 2014). The call for urgent action to improve productivity in the light of changed market conditions for mineral commodities is clear: ‘Companies need to adapt quickly to the changing environment or risk becoming non-competitive in an ever-competitive market’ (EY and SMI 2014A, p 6).
‘Productivity’ is a much used term that is often misunderstood and can easily be misleading, and apparently simple and straight-forward productivity statistics may disguise complex real-world dynamics.
The Oxford English Dictionary defines productivity as: ‘The effectiveness of productive effort, especially in industry, as measured in terms of the rate of output per unit of input’ (OED online 2015). In simple terms it means the ability to produce more product for the same input. Productivity can be measured against a single factor (eg product produced per unit of raw material, or per staff member), or as multi-factor productivity (eg the labour, raw materials, energy and other factors required to produce a unit of product). It is important therefore to be clear what factors are being used to measure productivity.
As EY and the Sustainable Minerals Institute (SMI) have recently stated, ‘… over the broad spectrum of different mining operations (geographic location, commodity focus and age), it is difficult to define the exact size of the productivity problem’ (EY and SMI 2014B, p 2). Nevertheless, there is a clear consensus amongst commentators that there has been a drop in productivity in the minerals industry in recent years.
The Australian Bureau of Statistics’ measure of Australian mining productivity is illustrated in Figure 1. These results show a stark decline in productivity against labour, capital and multi-factor measures.
The minerals sector productivity story has factors that are unique to the industry or rarely seen in other sectors. The most significant of these factors is the variability of resource quality. For some mines there is an ability to vary cut-off grades in order to improve the marginal profitability of an operation. While not true of all mining operations, the ability to select the grade of material being mined and processed to meet prevailing market conditions is an important element (or factor) of productivity in the mining industry.
For example, the gold mining sector has been criticised by some commentators for a drop in productivity during periods of high gold prices. There might be some truth to this, but it could also reflect the fact that with higher commodity prices, gold miners took the opportunity to profitably mine lower grade ore. There may be higher mineral processing costs to extract the precious metal, but if the prevailing price for gold is high enough to bear those costs and still derive a profit, then companies are being perfectly rational by mining that lower grade ore.
For other mines, part of the productivity story of recent years has been heavily influenced by the fact that the highest-grade and most easily accessed resource has been depleted, and those mines are now working resources that are harder to access, extract and/or refine.
The mining industry is very capital intensive. It involves considerable sunk costs in discovering and proving the viability of a deposit. It generally involves expensive and long-lived capital infrastructure. This capital intensity can be a brake on productivity improvements, as the cycle to take up new innovations in equipment can be slow as current equipment is unlikely to be replaced before the end of its life.
Another factor the minerals sector contends with is the significant volatility in the demand for mineral commodities and the prices they attract on the market. Other industries face similar challenges – for example agricultural products.
During the good times when prices are high, it is easy to lose focus on cost controls, and then find that when market prices drop again your business is no longer able to turn a profit at the lower price level.
Did the boom drive poor productivity?
In the case of the minerals industry, many analysts argue that a key element of declining productivity in recent years has been the result of a loss of leadership focus on minimising the costs of production. Strong commodity markets instead encouraged a focus on increasing output, combined with a lack of attention to production cost controls.
EY describes the genesis of the mining industry’s productivity decline very starkly as ‘a conscious choice by industry participants to pursue volume at any cost during an unprecedented boom in commodity prices’ (2014, p 9). Similarly, KPMG (2014, p 5) argues: ‘The inevitable response to a price boom is an overinvestment in capital goods, capacity and labour; and that is what many mining companies are facing now’.
EY and SMI’s analysis states that declining productivity has been driven by the increasing scale of mining operations that the recent boom created. Most readers would be aware of the ‘economies of scale’ concept which suggests that larger producers of goods and services will normally be more efficient as they are able to take advantage of factors such as the ability to negotiate lower prices and move towards 100 per cent utilisation of expensive capital equipment.
But economic theory recognises that this is not always the case, and that firms will sometimes face ‘diseconomies of scale’. The EY and SMI analysis explains that many larger mines find it ‘difficult to manage the complexity of these large operations, particularly given the additional challenge of high turnover and lack of staff experienced in focusing on driving efficiency. The growth in mining operations has resulted in inadequate functional collaboration.’ (EY and SMI 2014B, p 2).
Part of the story of declining productivity driven by the boom in the minerals industry is the story of demand for labour – with severe skills shortages and companies competing for employees.
What has been happening with labour productivity?
Everyone who has worked in the Australian minerals sector in recent years knows that the boom created a period of severe skills shortages. This has turned around rapidly in the last few years, and many skilled minerals industry employees have recently experienced redundancies and/or reduced contractual opportunities.
Nevertheless, the legacy of the very high demand for mining industry employees, and the scarcity of many skill sets during the boom years, is still being felt within the industry. Comments made by AusIMM members in our Professional Employment Surveys have reflected this, with many concerned at poor capability levels amongst some employees within the industry.
AusIMM’s remuneration surveys demonstrated significant increases in salaries for minerals professionals during the boom years. This trend reflected the demand for skilled staff during the period the industry struggled with skills shortages, and possibly also reflected a general lack of focus on cost control during the boom. The 2014 remuneration survey clearly showed this trend had reversed with a drop in average wages for minerals professionals, and a particularly large drop for the most senior and experienced minerals professionals. While relatively small in the overall cost structure of mining ventures, these cuts in average wages will have a minor positive impact on the industry’s productivity and international competiveness.
Mining industry employees are central to realising productivity improvement
Those who have worked in management and leadership roles know that a focus on people – the way they are working and whether they are working together towards a shared goal – can deliver significant gains.
PwC analysis has argued that mining employees are the key to the biggest productivity gains. ‘Productivity is heavily dependent on the way people act. A better-rated piece of equipment might deliver 5-10 per cent output improvement, and require additional capital, but changes in the work practices can, in our experience, deliver 20 per cent + gains, often at little or no cost.’ (PwC 2014, p 2). The PwC analysis puts a lot of emphasis on mines recruiting people with the right core skills and providing them with targeted training to enable them to effectively deliver in their role (PwC 2014, pp 11-12).
PwC’s earlier report Mind the gap was published as the downturn in mining employment opportunities was emerging. It highlighted the negative impact that turnover of staff and loss of experience can have on productivity at a mine (PwC 2012, pp 7, 9, 17), and those messages apply today to mine sites that are losing experienced staff through redundancy decisions.
Recent mining industry productivity analysis focuses on the central importance of people in connecting the various elements of mining activity so that potential productivity improvements are realised. KPMG analysis notes the opportunities in integration of mining and mineral processing activities. It argues: ‘Integrated production planning brings together the mining and processing functions to create greater efficiency through better governance, planning, communication and execution, viewing the mine’s value chain as a single system’ (KPMG 2013, p 11). It discusses the central role of careful planning and the development of performance measures and performance monitoring to achieve the desired behaviours on the ground.
Has the recent focus on productivity driven sustainable outcomes?
Mining industry analysts have been expressing clear doubts about the ability of much of the recent effort in productivity improvement to deliver sustainable benefit to the companies.
PwC has commented that for many companies in the sector, the focus has been on short term cost-cutting rather than real productivity improvements. ‘Mining companies understand implicitly that productivity carries a value, but are not armed with the right data to make informed choices on the risks/rewards involved. Costs deferred or eliminated, as well as volume increases, have become the proxy for productivity gains’ (PwC 2014, p 3).
EY and SMI (2014A and 2014B) note that to gain significant and sustainable productivity improvements takes concerted effort over a number of years. Their analysis highlights that significant gains can be achieved through a focus on productivity through the ‘human technology interface’ and redeveloping mine plans: two strategies that will generally take two or more years to effectively plan and implement. They argue that much of the ‘productivity’ activity of recent times has actually been cost-cutting that is doing little to address the underlying drivers of inefficient production (EY and SMI 2014B, p 7).
One recent analysis by EY argues that the ‘war for talent’ in the minerals sector will continue with the current drop in employment opportunity for minerals professionals being only a short-medium term response to rapid changes in market conditions. EY argues that mining businesses that have taken action to substantially cut employment levels will face significant risks in the future. The report highlights a range of negative implications for future business success including ‘shortages of critical skills to raise productivity in the downturn or an inability to procure talent to meet future demand upturns’ (EY 2014, p 10).
Implications for minerals professionals
The good news for minerals professionals is that the focus on productivity is not going to go away – the ongoing productivity challenge will remain.
Key industry analysts such as those referenced in this article seem to have developed a consensus that the focus on productivity will inevitably shift to the more challenging business improvements that can deliver sustainable gains.
In the search for sustainable improvements, the capabilities of mining professionals to understand their work environments, draw on their professional networks and to plan and execute improvement strategies are crucial. In an environment where people are central to the successful implementation of sustainable productivity improvements, minerals professionals with a combination of strong technical skills and the ability to engage and lead people will be much in demand.
The AusIMM remains focussed on supporting members in their professional development, and a strong focus on innovation to drive productivity improvement is central to the Institute’s professional development activities – from Branch technical talks, workshops and seminars to technical publications and major conferences.
EY 2014, It is only a ceasefire — the war for talent will continue. Productivity in labor: mining and metals.
EY and SMI (Sustainable Minerals Institute, University of Queensland) 2014A, Productivity in mining. A case for broad transformation.
EY and SMI (Sustainable Minerals Institute, University of Queensland) 2014B, Productivity in mining: now comes the hard part. A global survey.
KPMG 2013, MINING: From volume to value. Cost optimization in the mining sector.
KPMG 2014, Aussie Mine 2014, Productivity – Projects, operations and technology.
‘Productivity’ 2015, Oxford English dictionary online, viewed 27 April 2015. www.oed.com.
PwC 2012, Mind the gap: Solving the skills shortages in resources.
PwC 2014, Mining for efficiency.