A report released by PwC this morning suggests Australia’s miners are hugely unproductive.
Despite the hyperbole from miners about pursuing a productivity agenda and an self centred view that Australian miners are some of the most efficient in the world, Australia does even worse than global peers. Globally, productivity of equipment on open cut mines has declined 20% over the last 7 years. The increase in equipment investment from 2003 to 2012 has been nearly eight times the growth in actual commodity production.
Most of the issues are operational, according to PwC, and the recent austerity measures across the industry fail to address the main issues. Despite headcount reductions and cost-cutting, labour productivity increased only 3% during 2013 and equipment productivity fell by 7%.
What is required is a granular and detailed effort from mine site managers to analyse data better and improve labour output and equipment coordination. Slashing staff and squeezing suppliers make for only short term gains. Then the hard slog of numerous small, incremental improvements has to commence if permanent gains are to be made.
It may take time for this transition in productivity to occur. After years of tight supply Australia now has a huge glut of mining equipment and you can’t give it away (just ask Emeco). The priority is for cash flow, and equipment is a sunk cost. Its efficient usage won’t become critical until the overhang is consumed and new equipment is required.
Only over the longer term is the productivity drive likely to emerge. But though the better miners will gain advantage over the laggards, the bulk of the gains won’t be captured by miners, rather they will be passed on to customers and consumers through lower pricing.
A bit like we’ve seen in oil and gas, the real winners will be the higher technology service providers who can find and sell ways to analyse data and improve performance. And the obvious losers? I’d suggest the equipment manufacturers, who have to watch the miners do more with what they’ve got.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.