EY - Productivity in mining

Productivity in mining

A case for broad transformation

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Productivity, on both a volume and cost basis, has been declining significantly in the mining industry since 2000. This has been a conscious choice by industry participants to pursue production growth and headline revenue during an unprecedented boom in commodity prices.

Many companies have been dealing with this substantial drop-off in productivity through a series of cost-cutting exercises or point solutions. However, the size of the problem is too large for point solutions to solve on their own and often they have the effect of simply moving the problem further down the supply chain. Real and sustainable productivity gains will only come from broad business transformation.

Why the need to boost productivity?

  • To regain ground lost over the super-cycle

    In collaboration with the University of Queensland in Australia, we have undertaken over 30 hours of in-depth interviews with senior mining executives. All of them recognize that the focus on volume at any cost has led to inefficient practices in terms of productivity.

    Behavioral change is critical given that many mine managers, front-line engineers and operations supervisors appointed to these positions during the super-cycle have never operated under a marginal environment.

  • To continue to innovate to recover lost competitive advantage

    Many mining economies have relied on currency movements to retain comparative advantage as exchange rates have generally been positively correlated to metals and mineral prices. With lower prices and sticky exchange rates, producers in these countries need to innovate to become more competitive and to reach new levels of productivity.

    The sector spends very little on research and development for innovation compared to other industries; especially on mining and processing methods. Given the right levels of investment, there should be significant gains possible through innovating mining and processing methods, perhaps in conjunction with OEMs (original equipment manufacturers).

  • To counteract rising real wages

    For many developing economies, low cost labor was used as a means of comparative advantage. However, many of these economies have been so successful in generating increases in growth that this has fed into increases in real wages (significantly above the rate of inflation).

    Without commensurate increases in productivity, mine plans of many of these operations in these countries will not be sustainable. Ultimately, more automation will be required but this will create its own set of political challenges.

Labor productivity — a major contributor to the decline

EY – mining productivity in Australia since 2001

Mining labor productivity in Australia has declined by about 50% since 2001, by nearly 30% from 2009 to 2012 in the US coal sector and by an estimated 35% since 2007 in the South African gold sector.

Industry response

Many economists believe the issue will resolve itself and no action is required. However, to be competitive and focused, action is required over a significant period to address the productivity opportunity at a company or microeconomic level.

Many of the executives interviewed said that through cost cutting exercises, they are now much more focused on attaining and sustaining profitable growth rather than volume. However, there needs to be a focus on longer term initiatives, which while harder to execute, will have more impact on improving overall productivity.

Need for longer-term focus

EY – longer-term focus on mining productivity

There is growing realization that enabling fundamental improvements in the organization requires a shift in corporate culture, organizational structures and accountabilities. A refocus on business improvement across the organization is needed. Getting the right skills mix, the right culture and the right measures is key to long-term success.

Burning platform — a need for broader transformation

As efforts to improve productivity have failed to get the right results, the issue has rightly been escalated to the CEO’s agenda.

Making productivity gains isn’t as simple as further cost reduction efforts. The length of the super-cycle and the pursuit of growth led to the subversive change to the organizational DNA of many mining companies. Their structures, processes, performance measures and culture have all drifted to favor growth over productivity.

The size of the problem is too large for conventional solutions to work. We believe real productivity gains will only come from transformation. A narrow focus on point solutions or continuous improvement will not close the gap and could even be counter-productive.

What does broad transformation mean?

New ways of thinking need to be considered to analyze and assess the level of improvements the industry needs. This involves having one view of the world:

  • A clear strategy based on a broad set of value drivers
  • An operating model that is aligned with the strategy
  • Integration and alignment across the value chain through process integration
  • Standardization of work procedures
  • Aligned planning, budgeting and performance measurement

Real and sustainable productivity requires a holistic and top down approach that aligns productivity activities to their strategic value and contribution, and they need to be planned and executed in a coordinated way across the value chain.

This may require significant adjustments including:

  • Changes to mine plans
  • Reassessing mining methods
  • Making changes to equipment fleet and configuration
  • Reducing production
  • Increasing or reducing automation