Is increasing mining R&D the only hope for saving a stalling industry?
Anglo American chief executive Mark Cutifani recently warned that innovation in the mining industry is coming at too sluggish a pace, and that the rising costs of extraction and transportation need to be addressed with new ideas. We examine the rate of change and innovation in the mining sector, which Cutifani says spends one-tenth the amount on research and development when compared to the oil & gas industry, and find out whether enough is being done.
The mining industry needs to shape up. Years of sky high commodity prices and ever growing demand from the developing economies have lulled it into a false sense of security, enabling issues such as technological stagnation, cost overruns and political interference to grow unnoticed. While other industries have re-invested exorbitant profits to prepare for a more challenging operating environment, the mining industry has taken its foot off the gas.
Such a negative assessment would be expected of a grandstanding politician or an activist investor looking to pick holes for their own gain, but less so of the leader of one of the sector's biggest players. In an address to industry, Anglo American chief executive Mark Cutifani said: "We need to do it differently. We need a better way. We need to innovate."
The Australian, who joined the firm last year, believes that mining, as an industry, has been slow when compared with others. "Our industry is damned by the fact that our spending on innovation, research and development is one-tenth that of the petroleum industry," he says. This perceived under-investment in new technologies and working practices was not a problem when prices were high and demand strong, but with volatility once again unsteadying the metal and mineral markets, and growth in developing countries stalling, the industry's failure to address slimming margins has come into focus.
Sleepwalking through the boom time
In a speech last year, Cutifani offered a startling statistic that illustrated an era of extreme complacency. "The multifactor productivity metric for mining in Australia has decreased by 40% over the past ten years," he said. "That is, it now takes 40% more inputs to generate a single unit of mineral product." That mining firms, both big and small, have been able to sleepwalk through a decade and still stand in relatively good health gives an indication of how kind the boom times had been to the industry.
"If we don't start to bring innovation back and do a hell of a lot better on our cost structures and deliver returns, the major diversified companies will be subsidiaries of General Electric or some other conglomerate that has still got innovation in their vocabulary," Cutifani warned.
With iron ore prices set to drop over an influx of low-cost supplies and stalling Chinese growth, London investment bank SP Angel is shifting focus.
While Cutifani's is the most notable voice to raise the alarm, there have been other warnings. In a report on the state of the Canadian mining sector, Deloitte proposed that with margins growing ever tighter, the time has come for the industry to rethink how it approaches development.
Glen Ives, who leads the firm's practice in the Americas, suggests that the days of a 'bigger is better' way of thinking may be over. "Mining has grown bigger over the past 200 years - bigger plants, bigger trucks, bigger blasts," he says "But the industry itself hasn't evolved much. Now is the time to make fundamental and dramatic changes."
Tinkering and tweaking won't suffice
Jürgen Beier, who heads up the Canadian team at Deloitte, agrees that strong action is needed. "Tweaking existing processes cannot deliver the massive shifts mining companies need in today's capital-constrained environment," he says. "To build true competitive advantage, companies must look beyond incremental performance improvement to determine how they can revise their systems to embrace the broad theme of innovation."
When it comes to turning things around, Clareo Partners' partner Peter Bryant argues that the industry must bring spending on research and development in line with other sectors. He says: "Based on benchmarking of R&D expenditures in other industries, mining companies should contemplate increasing their R&D investments to 2-4% of revenues. It would also be very beneficial for R&D investment by key suppliers in joint projects to increase spending from the current 1% to 3-4%. These levels of spending are consistent with approaches in the oil and gas industry."
Led by those at the top, and picked up by those further down the supply chain, increased investment in emerging technologies could bring significant cost and operational improvements to the sector. Supporting this idea is the success of one of the few innovations adopted by the industry over recent years. First launched by Rio Tinto at its East Pilbara operation in Western Australia, driverless trucks have opened up cost and time-saving opportunities, transporting tonnages 24 hours a day. The success of the initial trial has now seen the company employ the trucks more widely, while some other mining firms have followed closely behind.
Boosting R&D investment
Significantly increasing R&D investment through the supply chain would send a message that industry is 'open for business', energising the firms already selling into the sector and potentially attracting firms from other markets that believe their products or services could fulfil a requirement in the mining sector.
According to Dingo CEO Paul Higgins, innovation is already happening in the mining sector, just not at the top. "I would argue that innovation is happening with suppliers to the industry, and at a rapid rate, but not as fast in the mining companies themselves," he says. "Smaller companies, often who just don't know how it has always been done, are creating new innovative ways of doing things."
He adds: "The problem is that mining supply chains are designed around traditional equipment manufacturer-centric business models. This can stifle access by the mining companies to these smaller innovative companies and their innovative products and services. It also makes it difficult for small companies to access change agents within the mining companies, often C-level executives."
This issue would be addressed in part if the mining majors were to increase research spending; not least because of increased incentive for shareholders and senior executives to keep a closer eye on whether the investments prove their worth. But more would be required to fully address the issue. A recent study of small and medium firms operating in the mining sector found that 36% of firms found procurement processes to be challenging.
Metalysis hit the headlines in 2013 with a technology which professes to change low quality oxides, such as titanium, into high value powders.
Improving procurement processes
To maximise the pool of solutions on offer, companies must ensure that such processes are as accessible to smaller firms as possible. Failure to do so could result in a major firm missing out on a huge cost-saving opportunity because of overly prescriptive pre-qualification questionnaires.
Bryant also argues that the industry should stop being closed off to what others are doing. "Traditionally, the mining industry has had an unfortunate tendency to believe that its business has little in common with other sectors," he says. "But if other industries have applied technologies from other disciplines, why can't the mining industry do the same?"
Boosting investment and stripping out barriers of bureaucracy are crucial steps in enabling innovation to flourish, but they will not work unless there is also a change in mindset across the industry. As the high profit margins have receded, outdated processes and attitudes have been uncovered. In order to return to big profits, leaders will have to instil a more open and engaged outlook right through their organisation. As Cutifani concludes, "we either pick the ball up and innovate or somebody will do it for us."