EY Report: Productivity is Top Risk Facing Mining and Minerals

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Written by Richard Finlayson, Senior International Editor for Industrial Info Resources (Sugar Land, Texas)--Productivity is now the top risk faced by mining and metals companies globally, according to a new report by professional services firm EY (Ernst & Young) Africa (Johannesburg, South Africa).

"Productivity has declined across the sector globally and across emerging markets and will require complete business transformations to fully recover. A contributing factor to this has been that nearly all cost categories in the South African mining and metals industry increased at rates substantially higher than consumer and producer inflation indexes. Many of the input costs were driven by administered prices, such as electricity and water or by international pricing of steel, oil and rubber," according to the 2014/15 annual report, Business Risks Facing Mining and Metals, by Wickus Botha, sector leader for EY.

Productivity ranked at No. 2 in last year's risk list and at No. 4 in 2012.

"Boards and ceos [chief executive officers] are now realizing that regaining lost productivity and gaining new ground is critical for long-term profitability and requires a whole-of-business response.

"Cost cutting measures alone will not achieve the longer term productivity gains required. The super-cycle altered the DNA of mining companies to adapt the processes, performance measures and culture solely toward growth. The transformation has occurred by stealth and the counter-transformation will need to be far more radical," said Botha.

Capital allocation and access to capital, which was top of the risk list a year ago, remains a key issue at No. 2, while social license to operate moved up from No. 4 to No. 3. Access to water and energy is a new entry in the top rankings at No. 10.

The 2014 top 10 business risks in the sector (with 2013 rankings in parenthesis) are:

1. Productivity (2)
2. Capital dilemmas--allocation and access (1)
3. Social license to operate (4)
4. Resource nationalism (3)
5. Capital projects (7)
6. Price and currency volatility (6)
7. Infrastructure access (9)
8. Sharing the benefits (8)
9. Balancing talent needs (5)
10. Access to water and energy (new)

"South Africa and other countries, such as Zimbabwe and Indonesia, have introduced mandated beneficiation and increased state ownership, but they must continue to demonstrate the benefits of mining to the community and that raising the cost of doing business may jeopardize those benefits," said Botha.

Mining companies do not want to make the same mistakes they made during the super-cycle, and governing boards will be demanding much more robust capital management to avoid the failures of the past. As supply shortages for many commodities star to come through and the investments get the green light, this risk will be high on ceo and board agendas.

The report said that even though sharing the benefits remained No. 8 globally, it has moved up on the agendas of South African miners.

"We need to make sure we understand the various stakeholders--workforce and organized labor are two different constituents and need to be handled differently. Companies need to make sure that they engage with their employees and not just the labor unions. This will ensure loyalty, alignment of thinking and elimination of perception and communication gaps," Botha concluded.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.