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Deloitte tracks the trends in the mining industry – Part 2

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World Coal,

Deloitte has released its 6th annual Tracking the Trends report, examining the top ten issues affecting mining companies around the world. Topping the list for the third year in a row was the rising cost of mining, followed by low commodity prices caused by a supply/demand imbalance. The need for innovation to solve the industry’s challenges rounds off the top three, while at number six – but set to have a much bigger impact for the coal sector – is increased regulatory and environmental pressure being put on the mining sector from local communities.

The second part of this article considers the challenge posed by oversupply and the need for the mining industry to look beyond traditional ways of doing things and embrace innovation.

Matching supply to demand
The mining industry is having to come to terms with a change in one long-held belief: that China would provide an insatiable appetite for whatever could be dug out of the ground. “Higher domestic production of commodities such as gold and coal could ultimately enable China to reduce its out-sized reliance on global exports,” notes Deloitte. “This is particularly the case as China transitions from the investment-driven growth that fueled demand for commodities used in construction and power (e.g. iron ore, coal, natural gas and coppar.”

The threat to coal is more than just a change in economic focus in the Chinese economy: China is also deliberately targeting a reduction in its reliance on the fuel from 70% to less than 65% in 2017. “Should the country be able to execute this plan while maintaining its pace of growth, added burdens would be placed on a thermal coal industry already facing endemic challenges, such as the shale gas boom in the US and the growing availability of coal substitutes in countries like Indonesia and South Africa.”

A silver lining
Not all at that gloomy. Speaking to World Coal, Reuben Saayman, national mining leader – East Coast at Deloitte Australia, argued that a market rebalance may be closer than some expect: “Demand has a long way to grow given the level of expansion and the base from which China is growing – and that is not even considering India as the next area of significant demand growth. If this is matched by a supply side contraction – as projects are shelved, some players find it unsustainable to continue making losses to meet take-or-pay commitments and some planned infrastructure projects are not followed through – supply will simply not keep track and we will see prices rise in the medium term.” As a result Saayman believes that demand will significantly exceed supply much earlier than 2020 – the date suggested in a recent report by Wood Mackenzie.

Demand for metallurgical coal will also continue as China continues its relentless urbanisation, while Southeast Asia and India continue to grow with potentially important results for demand for thermal coal.

Exploring the innovation imperative
The mining industry is facing an increasing array of challenges that may not be solved using traditional thinking. As Jürgen Beier, Deloitte’s mining leader – Canada, notes: “Tweaking exciting processes cannot deliver the massive shifts mining companies need in today’s capital-constrained environment. To build true competitive performance must look beyond incremental improvement to determine how they can revise their systems to embrace the broad theme of innovation.”

Deloitte suggest a number of innovation strategies to help mining companies buck the trend:

  • Rethink energy management: for example, considering renewable energy sources in regions where they offer predictable output. “By understanding the real-time local availability of alternative energy, companies can optimise their systems to operate during time of greatest energy availability, ultimately accessing reliable sources of renewable energy in real time, without resorting to storage.”
  • Electrify processes: using conveyors rather than trucks to move ore can reduce a companies energy requirement by more than 80%.
  • Build shared infrastructure: collaboration between mining companies on key infrastructure (pipelines, water plants, power plants etc.) can reduce costs while strengthening community relations.

This article concludes here with a discussion of increased regulatory and environmental pressure. The first part of the article, discussing the push for productivity in mining, can be read here.

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