Having emerged bullish from the recession, the mining industry faces fresh challenges in adapting to the complex patterns of global demand
Mining is an industry being fed today by a so called supercycle of demand for commodities across the globe. It was in a period of consolidation ahead of the 2008 financial crisis, but for the industry the fall-out of recession this time has been relatively short and sharp, according to mining analysts. China alone typically makes up 40 per cent of the demand for global metals, driven by rapid urbanisation and the need for copper for wiring and aluminium and iron ore for the general construction of homes.
There has been a surge across all commodity prices over the past 12 months of over 40 per cent, according to data from the International Monetary Fund (IMF). But changing patterns of global demand, in addition to new, multifaceted and costly challenges to greater supply, are making mining a more complicated market to be in than ever before. The real challenge of 2011 is to keep pace with this rapidly changing landscape to make the most of the opportunities.
By 2014, the share of developing and emerging economies in world GDP is likely to have overtaken that of the so-called developed economies. In addition to Chinese needs, there are greatly increased levels of demand from India and across Asia, Latin America and eastern Europe. Jon Lambert, director of the UK mining assurance practice at professional services firm Pricewaterhouse Coopers (PwC), says: “This is a new era – there is demand here that won’t just go away or disappear.”
Buoyant demand has resulted in strong cash reserves for leading players. Lambert says: “The industry has changed. It’s now all about growth. There’s lots of cash around and the question is what to do with it for the most effective use.” Investment is one answer: the top 40 global mining companies, according to PwC, plan to double spend on investment in 2011 from 2010 levels to $120 billion (£74 billion). Acquisitions are another answer with the number of mergers and acquisitions at an all-time high as big players gobble up less efficient competition.
In 2010, PwC counted nearly 2,700 global mining deals worth $113 billion (£70 billion). The industry looks set for a heightened pace of deal activity in 2011, especially in the five key resources of gold, copper, coal, fertiliser minerals and iron ore. But Debbie Thomas, UK head of mining at professional services firm Deloitte, points out that recent crises have highlighted both market weaknesses and the threat of volatility: “It takes events like, say, the floods in Queensland to show an over-dependence on coal from Australia or the tsunami in Japan and its knock-on effects to show us that, to be frank, nobody can really predict with certainty which way prices will go,” she says.
On the flipside of strong demand there are also very real and difficult challenges in increasing current levels of production. On the one hand, at a national level, countries are looking to safeguard their positions. China supplies the world with many of its natural resources, including rare earths, but took steps last year to safeguard its own supply by curbing its exports, something that made many other resource-hungry countries distinctly nervous. On the other hand, China cannot fulfil its own demand for resources, so is a net importer. To reduce the uncertainty that this creates, Chinese businesses are keen to acquire overseas players in the mining sector.
China has been a notable new presence in merger and acquisition activity with its businesses involved in acquisitions worth nearly $12 billion (£7.5 billion) in 2010 in mining. But few Chinese buyers have successfully secured major stakes in leading mining companies.
It’s now all about growth. There’s lots of cash around and the question is what to do with it for most effective use
Other economies are also flexing their muscles. Last year, India increased its export duty on iron ore and is seeking to secure more overseas acquisitions to secure a supply of resources.
Mining companies are also facing considerable tax challenges from governments all over the world. The imposition of government taxes and royalties on mining – whether on foreign or domestic players – is a trend which has come to be known as “resource nationalism”.
The Australian government has made much of its threat to introduce higher taxation on mining profits while Chile, Zambia, Tanzania, South Africa and Burkina Faso have introduced super tax, albeit with less fanfare.
The motive is not always financial but often a move to play for popular and nationalistic support. At the end of last year, for example, the Canadian government stopped BHP Billiton’s bid for Canada’s Potash Corporation.
Leading mining industry figures have expressed their frustration. Earlier this year Rio Tinto’s CEO, Tom Albanese, criticised politicians for the “curse of resource nationalism”. He claimed that the development of new global mining projects to meet booming demand was slowing significantly because of more state intervention. He said: “There are stronger profits, stronger margins for a sustained period [but] we see pressures for higher taxes, higher royalties, [and] governments taking a stake in the resources.”
Others see it differently. Driven by high prices, mining businesses are looking to new and/or unpredictable markets, such as Mongolia, Botswana and Mozambique’s says Debbie Thomas at Deloitte. “Governments are certainly making the most of the situation and in some ways you can’t blame them for that – they want their share of the spoils. But there are good examples of government and businesses working well together,” she says, citing a joint agreement between a mining business and the Zambian government, whereby the former pays royalties only when the price of the commodity mined goes above a certain level. “It is quite possible,” she says, “for government and business to find a good and sensible way forward.”
Mining companies are also facing a need to focus increasingly on their people. Today most mining companies are contending with a shortage of skilled workers. In Australia, the shortage is now acute (see box), but the problem is worldwide as many miners reach retirement age with no one with suitable experience to replace them. Thomas says the talent shortage is everywhere. Frankly, some retiring miners will stay on but in so doing they will charge a premium for their services – something which will increase the costs of production further.
As it moves into increasingly unpredictable, hostile geographical locations, the mining industry finds itself having to play an unfamiliar role, that of sustainability champion. Local communities, concerned with the impact of mining on the local environment, are becoming more demanding and more vocal. Understanding and managing political risk is likely to be increasingly critical to the success of such deals overseas.
In future, there will be a need for those in the industry to put far more thought into a range of social issues. The more remote the region in which an operation takes place, the more likely it is that mining companies will also find themselves helping to provide basic infrastructure and even education services.
One way to ease this transition has been to bring in representatives of non-governmental organisations and environmental groups into the boardroom. Jon Lambert at PwC says that all mining businesses “need to say to stakeholders, ‘Look, we will look after you and yes, we will fill in the holes we dig’. It’s a real cost for the industry but it’s also a fact of life in 2011”.
Safety and sustainability have become central to the reputation of the international mining industry.
Voting with their feet
Demand is up, but a lack of skilled people could see industry growth stall
A sudden lurch from recession to strong demand for commodities over the past year has left the mining industry facing acute skills shortages across the world. ”frankly, there are talent problems for this industry everywhere,” admits Debbie Thomas, UK head of mining at deloitte. The battle against demographics is the major driver. but the reputation of mining as a profession is another major challenge. both problems have become more exposed as demand accelerates.
While difficulty of finding skilled labour is worldwide, it is most immediately obvious in Australia. a lack of suitably experienced staff in an inherently dangerous profession, even before the current upsurge in demand, was proving difficult to handle. Now, however, there is a shortage of engineering and production managers, mining engineers and geologists to take the place of older miners nearing retirement age. figures from the minerals Council of Australia suggest that by the year 2020 an additional 58,000 members of the labour force will be needed simply to keep production at current levels.
Other resource-rich countries such as south Africa and Canada are facing comparable problems. A report released last year, from executive search firm Landelahni, reported that south Africa will experience an acute shortage of suitable mining industry staff over the next ten to 15 years, with the average age of mining professionals currently well over 50 years. And in Canada, 40 per cent of the mining workforce will retire in the next ten years, meaning an extra 81,000 skilled professionals will be required. In China, information is less prevalent, but key skills are known to be in short supply.
Even in good times, it has been difficult to paint mining as an attractive profession. India and Russia, as well as many of the OECD’s so-called developed nations, have high proportions of engineering graduates choosing careers in information technology careers ahead of those in mining. it’s no real surprise says Brian Gordon, a partner at Holman Fenwick Willan (HFW): “many mines are located in really hostile conditions. There’s lots of isolation and life is really tough if you’re away from the family.” While young ambitious workers seem likely to be attracted by increasing salaries, interest is lacking among experienced middle-aged and mid-career managers.
It’s against this unpromising backcloth that the battle for skilled labour is being fought and the surge in global demand is making shortages more obvious. As Gordon says: “rapid expansion globally hasn’t allowed the industry to keep up with enough physical boots on the ground.” The pairs of boots already in situ seem likely to keep on walking: in spite of a chance to charge a premium for their services, many older miners are