FLSmidth will realign the global group from July, with focus on the mining and cement industries.
The organisation announced last week it would focus on the two industries, supported by a regional setup that would aim to strengthen customer focus and lifecycle solutions, combined with a new central digital organisation.
FLSmidth’s plan will realign the organisation from four divisions into the two aforementioned industries. From a country perspective, it will deliver an agile regional structure, according to FLSmidth.
With end markets recovering, group chief executive Thomas Schulz said FLSmidth’s customers were accelerating to invest in productivity enhancing and digital solutions.
“To support our customers’ growth, the two industries, cement and mining, will deliver integrated productivity offerings through the regions,” Schulz said.
“Our decentralised organisation will give us a strong point of entry to offer our customers key products, shorter delivery times and a strong service setup.”
The two industries will be supported by seven regions: Australia, North America, South America, Europe, Russia and North Africa, Sub-Saharan Africa and Middle East, Asia, and Subcontinental India.
According to FLSmidth, the regions will drive customer relations, sales and service for both industries. A central digital organisation will drive an enhanced, unified approach to digitalisation.
Schulz said this new way of working was a natural step forward for FLSmidth.
“We already have one of the strongest brands in the cement and mining industries. By enhancing our service level, investing in digitalisation and bringing stronger life-cycle offerings to the market, we will expand and grow our wallet share with targeted customers,” Schulz said.
According to Gartner Research, by 2020 85% of interactions between businesses will be executed without human interaction.
Automation has already diminished the number of people required for blue collar manufacturing roles; however, with the advent of AI (artificial intelligence), big data and algorithms, we are beginning to see sweeping changes happening across the once untouchable white collar sector, including the very people-oriented roles of sales, as many buyers shift part or all of their buying journey online.
This is really worrying people and creating lots of uncertainty, and the reality is that people are at risk of losing their current roles.
This sales trend is focused on how buyers’ behaviours are changing with the rise of digital engagement and purchasing, and the impact this is having on sales roles across both B2B (business-to-business) and B2C (business-to-consumer) channels. But before we get into the details, not all is lost.
As this sales trend highlights, there is light at the end of the tunnel and not all roles are doomed. But these dramatic changes do require many of us to step up and really bring to the fore our very best human skills in communication, empathy, kindness, ideas generation, problem solving, creativity and delivering real value.
Remember, digital is still human powered
The irony is that everybody needs to know how to sell themselves to their colleagues, clients and suppliers. The skills excellent sales people possess and cultivate are the very meta-skills everybody needs today.
Professor Bronwyn Fox, director of Swinburne University of Technology’s Manufacturing Futures Research Institute, talks about the vital need for STEM (science, technology, engineering, maths) students and graduates to also be proficient in meta-skills (soft skills). This includes effective communication and the engagement of others to generate and share new ideas; the ability to bring innovations to market and actively engage; work with each other more effectively; and to sell themselves, their concepts and the future.
However, we are seeing a polarising of sales roles and we need to be ready to adapt.
When it comes to simple transactions, buyers expect to be able to do this type of purchasing online, free from human contact. However, as soon as the sales becomes complex, or less straightforward, buyers want access to real humans.
When it comes to human-to-human interaction, whether it be B2C or B2B sales, buyers are expecting a much more sophisticated response from organisations’ sales and customer care people.
Buyers want to deal with subject matter experts (SMEs), not sales people. So sales people need to become domain experts or work with their own SMEs to help buyers move forward toward their goal.
SMEs also need to learn how to sell. How do we make domain experts sales savvy? Back to the comments by Professor Fox, we need everyone to learn how to communicate and sell themselves effectively and ethically.
Let’s take a closer look at the trends and changes in the B2B and B2C channels.
Changes to the B2B buying and selling landscape
According to Andy Hoar at Forrester Research’s “Death of a (B2B) Salesman, April 2015”, 1 million sales people (22%) will lose their jobs in the US alone and one third of B2B order-taking sales jobs will cease to exist worldwide.
B2B sales job losses predicted by 2020:
Order takers (transactional, socialiser, visitor): 33% job loss
Explainers (tactical, hunter, warrior): 25% job loss
Navigators (relationship, gatherer): 15% job loss
Consultants (trusted advisor, politically aligned, add compelling business value): 10% job gain
B2B sales people must elevate to a higher plain if they are to survive. We are seeing a distinct shift away from generalist sales people to sales people becoming business and domain experts. Businesses are now needing their sales teams to transform into ‘domain experts’, or the hackneyed phrase ‘trusted advisor’, if they are to add any genuine value. This is now very evident across almost all types of business, having started with technical types companies first.
In B2B buying and selling situations, we are also seeing more and more stakeholders involved with the buying process, which is adding more complexity and time to each sales process. Coupled with this, we are seeing buyers buying in smaller amounts, adding further cost to the sales process and eroding margin.
The B2B buying and selling paradox
Buyers have never been easier to identify but harder to engage and sell to;
No one is lonely or bored, yet the value of genuine relationships is critical to effective buyer seller relationships;
The average transaction is getting smaller but is taking longer to sell in; and
82% of sellers fail to differentiate themselves.
B2B buyers, like B2C buyers, are using omni-channels to research and make buying decisions. According to Forrester Research, 74% of business buyers conduct more than half of their research online before making an offline purchase. However, this does not mean they have not been in contact with sales people or that they have made a purchasing decision, especially if that decision is complicated and involves a range of people or processes. This is where effective B2B sales professionals can shine.
B2B sales people need to learn how to anticipate buyers’ needs and move beyond product and service. Smart companies are investing in their B2B sales people by helping them transition to human centred selling and business consulting.
Changes to the B2C buying and selling landscape
How are B2C buyers behaving?
British Telecom’s head of customer insight and futures in the BT Global Services Innovation Team, Dr Nicola J. Millard and her team, have been conducting extensive research over many years in B2C buyer behaviours and customer experience. Her latest findings reveal the following:
Making digital experiences easy for customers delivers business growth; move over net promoter score (NPS) and bring on net easy score (NES);
Businesses need to make it easier to do simple transactions, but as soon as it gets complicated they need to give their customers someone competent to talk to; there should always be a phone number so people can speak to a human being;
Interestingly, autonomous customers rely on other consumers (not brands) for product advice;
Chatbots have appeal – but with human agents checking on more complicated responses;
Proactive service expected by digital customers;
Smartphones are becoming more important in digital experience; and
Providing security for phone transactions will drive revenue growth;
But beware the omni-channel
Omni-channels shift human channels towards complexity;
In times of flux people want simple, easy, straight forward. If it gets complicated they want to talk to a human being. Customers want “immediate access to a well-trained employee e.g. someone to talk to on the phone or face to face ….”, especially if there is a crisis and you need a solution to a problem with a product or service;
Customers make decisions at each stage in the omni-channel journey based on their motivation, context and attitude; and
In digital channels, it’s not so much about demographics anymore it’s about context
Context is driving omni-channel behaviours
Here are the new buyer profiles that are appearing online:
Visionary: They are looking to improve their lifestyle by the purchase of a product or service (e.g. moving house or booking a holiday). They are in a positive and motivated state of mind and willing to invest time. They may even enjoy the experience. They want businesses to let them explore, research and get advice using a wide range of resources (e.g. online, webchat, face-to-face/ in-store assistance).
Utilitarian: They want to complete a routine, mundane task (e.g. paying a bill or buying everyday products and services). It is low value in terms of their time, they are not looking for the ‘wow’ factor or enjoyment. Businesses need to make the transaction fast and easy (e.g. an app or online self-service technology).
Customer in crisis: There is a crisis and they need a solution to a problem with a product or service (e.g. reporting a fault or getting advice). They might be frustrated, angry or worried. Businesses need to give them immediate and straight forward access to a well-trained employee (e.g. someone to talk to on the phone or face-to-face who can sort the problem).
Finally, the phone is not dead
The telephone has been around since 1876 and is still as vital as ever. The telephone today supports the digital experience but it does need strategic attention.
When people cannot complete simple tasks online, when things get more complex, they want to talk to a person who doesn’t leave them stranded ‘on hold’ and has the smarts to be able to deal with their issues and questions. This is relevant for both B2B and B2C sales channels more than ever before.
In previous sales trends over the last few years, we have reported on the rise of, and need for, higher levels of complex sales and service capability on the telephone, with the move away from simple transactions and service outcomes.
The telephone needs to be staffed by subject matter experts who are well paid and capable of ensuring buyers have a great experience with our businesses. No longer the graveyard for expired field sales people or ‘pleasant’ customer service people, call centres are becoming ‘expert hubs’ working in concert with the field sales teams of domain experts and SMEs.
There is a great future for sales with selling moving to a high-order function that involves all, and buyers will be getting what they want too. Expert care and attention that builds trust and, hopefully, loyalty.
Smart companies will allow the buyer and selling pendulum to find its equilibrium.
Weir has entered into an agreement to purchase US ground engaging tools (GET) specialist ESCO for $US1.28 billion ($1.67 billion).
The transaction has been approved by Weir’s board of directors and is not subject to shareholder approval.
As part of the acquisition, Weir will gain access to ESCO’s 10 manufacturing facilities, six foundries and 22 service and supply centres, in 19 countries.
Weir hopes it can leverage ESCO strong position in the GET sector to prioritise upstream growth opportunities in the minerals and oil and gas sectors; around 40 per cent of large primary mover machines across the globe utilise ESCO product.
ESCO chairman and chief executive officer Cal Collins called the merger exciting, stating: “[It] combined two premium brands and positions us to better serve our customers around the world. The merger of ESCO into Weir is also a great fit, both culturally and strategically.”
GET parts include the likes of teeth (usually for shovels and drag lines), blades, shrouds, locking systems and other edge wear parts. ESCO brands include the Nemisys lip system and Ultralok mining tooth system, which Weir intends to bring to new territories via its extensive global network.
Weir Group chief executive officer Jon Stanton called ESCO a “leading global brand” that would allow Weir to pursue new revenue opportunities.
“Together, Weir Minerals and ESCO will create a unique customer proposition as the premium provider of mission critical surface mining solutions from extraction to concentration, built on proprietary technology superior wear life and supported by an unrivalled service network.”
Fields results show that the new Vulco R67 mill lining rubber compound from Weir Minerals delivers an increase in wear life of 20 per cent.
With a liner that can run significantly longer, operators will experience a measurable reduction in mill downtime, installation and maintenance costs.
“This is a breakthrough in the industry; a rubber mill liner that in extensive global trials delivered on average 20 per cent longer life than comparable composite lifter bars,” Weir Minerals global product manager for mill lining systems Mathias Kuhrke states.
“This means less shut-down time for maintenance, which in this highly competitive environment represents a measurable outcome to our customers’ productivity and bottom line.”
The innovative premium rubber compound is the most wear resistant Weir Minerals has ever formulated. Operators using R67 lifter bars within their mill will not only benefit from the increase in wear life, but they will notice a measurable reduction in installation and maintenance costs as a result of a longer run schedule, according to Weir Minerals.
The making of R67 compound
Weir Minerals has been supplying the Vulco R63 rubber compound to mill lining applications across the globe for over 50 years.
While this technology performs well in most grinding applications, many suppliers are perceived by the market to offer similar rubber compounds with no real differentiation. Weir Minerals identified a gap in the market for a rubber compound that could increase the wear life of its mill liners and outlast the rest.
After extensive field research on the current rubber compounds available to the market, Weir Minerals expert engineers and material scientists developed the unique patented material that forms the R67 compound.
“Using our extensive in-house knowledge, experience and expertise, we were able to develop a new Weir proprietary elastomer that is able to withstand the severe abrasion typical in mill systems applications,” Weir Minerals materials and elastomer development manager Michael Lum says.
“Our Vulco R67 compound utilises new technology and chemistry in elastomer formulary which overcomes the limitations of more traditional elastomer compounds used in the market today.”
The Vulco R67 rubber compound is visually different from others in the market place, with green capped ends on the lifter bars.
“During the product development process we added a green pigmentation to the formulation to visually set our lifter bars apart from the competitors. Now when a mill operator sees the distinct green strip on the lifter bar, they will know they have a premium product,” Dr Lum says.
What customers think
More than 10 trials spanning four continents have shown significant wear life improvements, in some cases exceeding a 50 per cent increase in wear life.
Weir Minerals is confident the latest R67 rubber technology will help operators across the globe get the most out of their mill.
“Our customers were at the heart of this new compound development and we worked closely with them throughout the field trials. During this time, we encouraged them to provide honest feedback on the R67 rubber compound,” Weir Minerals mill lining product manager Hayden McLean says.
“There’s tremendous value in having a trial partner that documents the downsides as well as the positive benefits. This allowed us to note which applications the new compound is best suited for, or make further improvements to the compound.”
One operation to reap the benefits of the premium R67 rubber compound is Simplot Phosphates. Operating a phosphate mine in Utah, United States, this long-standing customer of Weir Minerals agreed to trial the liner with R67 rubber.
After a nine-month trial, the liner achieved a 29 per cent improvement in wear life and had 20 per cent service life remaining when it was removed. The trial also achieved an estimated 25 per cent reduction in maintenance and reline costs.
Simplot mill maintenance supervisor Bart Smuin comments: “R67 lasts longer, which delivers less downtime and less time in the mill. That is the biggest advantage.”
Weir Minerals’ new Vulco R67 premium rubber compound is setting a benchmark for mill liners worldwide.
Rail operator Aurizon has received a newly-built batch of coal wagons at the Port of Newcastle in New South Wales.
Aurizon has described the development as a clear symbol of the continuing growth in coal exports and Hunter Valley’s coal industry employment.
Catherine Baxter, Aurizon’s general manager in NSW, said the 32 wagons in the consignment were only one part of a 284-wagon order, with each wagon having capacity to carry up to 97.8t of coal.
“These wagons will enter service for our newest customers, AGL Macquarie and MACH Energy, demonstrating the strong growth we have seen in our New South Wales Coal haulage operations since we started in 2005,” Baxter said.
“Our coal haulage has increased from 180,000t in 2005 to 48Mt in 2017, underlining the broader opportunities in the coal sector for regional employment and income generated in, and for the local community.”
The Minerals Council of NSW revealed last month that stronger coal prices have added more than 1000 mining jobs in the Hunter Valley over the past year.
“When we started out in the Hunter Valley, we had less than 10 employees and we now proudly employ more than 450 people across our operations,” Baxter said.
Australian coal exports have also continued to grow in value, with 2017 exports valued at $56.5 billion or 35 per cent higher than in 2016, according to Department of Trade and Foreign Affairs’ data.
Mineral Resources (MinRes) has secured a deal to acquire iron ore company Atlas Iron through a scheme of arrangement that values the target at around $280 million.
The amalgamation of MinRes’ Pilbara iron ore assets with those owned by Atlas would deliver greater synergies and economies of scale, a MinRes announcement explained.
MinRes stated that a combined entity would drive down operating costs to ensure the consolidated iron ore business would be sustainable in the new environment of lower global prices for low-grade iron ore.
Under the proposal, Atlas shareholders will receive one new MinRes share for every 571 shares they hold. Based on the closing prices of both companies on April 4, this is a 59 per cent premium on Atlas’ value.
Atlas’ board has unanimously recommended that its shareholders vote in favour of the agreement and intends to back the deal in the absence of a superior proposal.
MinRes managing director Chris Ellison said the acquisition of Atlas, which would include a portfolio of iron ore assets and export capacity allocation at Utah Point, was on strategy for the company.
“The culture that has been developed within Atlas is an exceptionally good fit with that which has been fostered in MinRes,” Ellison said.
“The majority of the Atlas senior leadership team have been running the business for many years and their skillset, experience and intimate knowledge of the Atlas business will be an extremely valuable asset within the consolidated Atlas-MinRes business.”
Atlas’ key assets include the Abydos and Mt Webber mines in the Pilbara region. The company also owns the Corunna Downs project, which it approved for development last year until a fall in iron ore prices.
Cliff Lawrenson, Atlas managing director, said the combination with MinRes would not only protect, but also enhance the company’s business.
“The combined organisation will have the scale and financial security to support current operations, as well as providing access to capital to contemplate further development opportunities,” Lawrenson said.
“The scrip nature of the scheme also delivers a number of key benefits to Atlas shareholders, including; retained exposure to Atlas, the opportunity to benefit from potential synergies driven by the combination and greater diversification of revenue and commodity exposure.”
MinRes expects the acquisition will be completed by August this year.
In addition to the deal, MinRes and Atlas have created an alliance after they identified a range of opportunities they could progress together.
The companies will pursue several existing and potential future commodity opportunities. They will create a new vehicle, to be controlled by Atlas, that will be responsible for managing lithium and manganese operations.
MinRes will provide the initial working capital for these operations, before Atlas funds the initiative moving forward.
Gascoyne Resources is two months away from producing first gold at the Dalgaranga gold project in Western Australia.
The company today reported that process plant construction is 90 per cent complete and it is on schedule for wet ore commissioning and first gold in May.
Installation of the SAG mill, crusher and mechanical equipment are “well advanced”, according to Gascoyne, while electrical installation is under way and water services have been commissioned and handed over to the operations team.
“GR Engineering has progressed significantly with the design, engineering and construction of the 2.5 million tonne per annum Dalgaranga processing plant,” The company said in an ASX announcement.
“Design and engineering is complete and construction over 90 per cent complete with completion expected in around two months, approximately one month ahead of schedule.”
Dalgaranga’s mining contractor, NRW Holdings, has launched mining at the Sly Fox, Golden Wings and Gilbey deposits, with a fleet of four excavators and 18 trucks mobilised to site.
Construction of the mining workshops and associated facilities is continuing and expected to be operational by the end of this month.
With the construction phase of Australia’s mining boom largely complete, this article investigates the outlook for mining investment over the next decade or so. Using two complementary approaches, our analysis suggests that mining investment will likely make up a larger share of GDP than it did before the boom.
Introduction
Resource companies have undertaken large-scale capital expenditure (capex) to increase the productive capacity of the Australian resources sector over the past decade, incentivised by an increase in global demand for coal, iron ore and liquefied natural gas (LNG), and an expectation that commodity prices would remain elevated for some time. This period of ‘expansionary capex’ saw total mining investment increase from an average of around 2 per cent of GDP in the decade or so before the boom to a peak of about 9 per cent in 2012/13 (Graph 1). The surge in investment saw the Australian mining sector roughly double its share of the economy’s capital stock and increase its share of total output.
Graph 1
With the wind-down of the mining investment boom largely complete, mining investment over the next few years is expected to be driven by firms seeking to maintain their existing level of productive capacity (‘sustaining capex’). Given the increase in the capital stock over the past decade, the level of sustaining capex is likely to be considerably higher than before the boom to ensure the new, higher level of production is maintained over time. At the same time, further large-scale expansions of coal, iron ore and LNG seem unlikely for at least the next few years, given the recent increases in productive capacity globally. In addition, growth in demand for iron ore and coal is expected to slow over time.[1] Nonetheless, as in the past, mining investment is likely to continue to fluctuate in any given year as expenditure in the sector is often lumpy.
This article investigates the outlook for mining investment in Australia over the next decade or so using two complementary approaches. First, we use a standard production function framework to estimate where the ratio of mining investment to GDP may settle over time based on long-run determinants of mining investment. We then take a bottom-up approach and consider the sustaining capex component of mining investment in more detail, focusing on the outlook for Australia’s three major commodity exports – coal, iron ore and LNG – over the next 5 years.
Long-run Determinants of Mining Investment
A production function defines how much output is produced from available inputs – in this case labour and capital. For firms in the mining sector, the accumulation of capital is particularly important because of the capital intensive nature of production. Since firms accumulate capital through investment, a production function provides a useful starting point to investigate the long-run determinants of mining investment. We use a Cobb-Douglas production function, which is commonly used in the economic growth literature:
Where Y is mining output, K is capital, L is labour, A is multifactor productivity and α is the capital share of income.
This production-based framework implies that, in the long run, mining investment will be determined by: (i) the capital share of income; (ii) the rate of return on capital; (iii) the growth rate of mining output; and (iv) the depreciation rate. Long-run estimates of these variables allow us to determine the long-run values of some key economic ratios, such as the ratio of capital-to-output and investment-to-output. These ratios, along with the mining sector’s share of total output, allow us to consider where mining investment’s share of GDP is likely to settle in the long run.
The key result of our analysis is that, based on a set of simple assumptions, mining investment’s share of GDP is likely to be between 2½ and 4 per cent in the long run. This is higher than the 2 per cent average recorded over the decades preceding the mining boom; mining investment has risen to above 2½ per cent of GDP on only a handful of occasions over this period (Graph 2). We discuss our estimation of the long-run determinants of mining investment below.
Graph 2
Estimating the capital-to-output ratio
The capital-to-output ratio is a measure of the amount of capital that is used to produce a single unit of output. In the mining sector, capital includes machinery and equipment, as well as associated infrastructure (for example, railways, gas pipelines and ore processing facilities).
The Cobb-Douglas production function we have chosen to use implies that the long-run capital-to-output ratio (K/Y) depends on the capital share of income (α) and the return on capital (r):
The capital share of income (α) reflects the percentage of income generated in the mining sector that accrues to the firms’ owners, as opposed to the share paid as wages to employees. The capital share of income in the Australian mining sector tends to fluctuate between 70 and 80 per cent (we assume a capital share of income of 76 per cent), and is much higher than the capital share of income in other goods-producing industries. The capital share in the mining sector may increase a little further over the next few years, as LNG is expected to account for a larger proportion of total mining production and LNG production is relatively more capital intensive than other commodities.
The rate of return on capital (r) is the income accruing to a firm for each dollar invested in the capital stock. Liaison and survey evidence suggests that firms across a range of sectors use a required rate of return (or ‘hurdle rate’) of around 15 per cent when assessing the viability of investment projects (Lane and Rosewall 2015); we use this rate in our calculations. Firms’ hurdle rates are reported to be relatively constant over time and insensitive to changes in the cost of capital (for example, interest rates charged on debt). However, these rates vary substantially across firms, with Lane and Rosewall reporting a range of between 10 and 30 per cent. Variation in the realised return on capital should partly reflect differences in the productivity of firms’ machinery and equipment. For example, a firm with more productive drilling equipment will require fewer capital inputs to produce a given amount of output. For this reason, a higher return on capital is associated with a lower long-run capital-to-output ratio.
The capital-to-output ratio is currently well above our estimate of its long-run value of 5.1, although the gap has closed somewhat recently as production from the new additions to capacity has increased (Graph 3). Further declines are likely to occur over the next few years as production from the remaining LNG construction projects ramps up and few new major additions are made to the capital stock.
Graph 3
Estimating the investment-to-output ratio
The investment-to-output ratio is defined as the value of investment required to support a given level of production. Our approach implies that the long-run value of this ratio is determined by: (i) the long-run capital-to-output ratio (K/Y); (ii) the long-run growth rate of mining output (ΔY*); and (iii) the depreciation rate (δ). This ensures that there is sufficient investment to expand the capital stock to support growth in production, as well as to replace worn-out machinery and equipment.
There is a close relationship between mining production and investment. To increase output, firms must first invest in expanding mining capital. We have assumed that the capital required to produce one dollar of output is constant in the long run, implying that changes in production and capital match each other. Therefore, the faster firms wish to expand output, the more investment will be required to increase the stock of available capital.
Theory suggests that the long-run growth rate of output is driven by changes in productivity and the supply of labour. In practice, this calculation is complicated by difficulties with the measurement of productivity for the mining sector (Topp et al 2008). To avoid this complication, and to ensure that mining output settles at a stable share of total production, we assume that both nominal mining output and nominal GDP grow at 5 per cent in the long-run.
The depreciation rate, which measures the amount of firms’ capital that is ‘consumed’ or worn out in a given period, is also an important driver of the long-run investment-to-output ratio. Within our framework, this means that some investment is required simply to offset depreciation and maintain the value of the existing stock of capital. It follows that a higher depreciation rate will require firms to invest more to maintain their existing capital. This is similar to the concept of ‘sustaining capex’ that we discuss in the next section.
The Australian Bureau of Statistics (ABS) measure of the mining sector depreciation rate has fallen substantially over the past decade. This is likely explained by a compositional shift of the mining capital stock towards longer-lived assets, as well as a decline in the average age of the mining capital stock over this period (Graph 4).[2] As this capital ages, we might expect the depreciation rate to rise from its current level, increasing the amount of investment required to maintain the sector’s existing productive capacity. For simplicity, we assume that the depreciation rate is unchanged from its current level of 5.6 per cent.
Graph 4
Bringing these variables together gives a long-run estimate of the mining investment-to-output ratio of 0.54, which is a bit above its current level (Graph 5). The investment-to-output ratio may remain below its long-run value in the near term as mining output continues to increase (led by the completion of LNG projects) and investment in capacity expanding projects remains subdued.
Graph 5
Mining investment as a share of GDP
We are interested in calculating the long-run value of mining investment as a share of total output, or GDP. So far we have estimated the long-run values for mining capital and investment as a share of mining output. To calculate the mining investment share of GDP, we need to estimate a long-run value for the mining sector’s share of total output (Y/GDP). This will ensure that our results are consistent with the mining sector’s relative importance in the economy.
There is uncertainty around where the mining sector’s share of total output will settle in the long run. It is unlikely to decline to its pre-boom level (around 4½ per cent), although this provides a useful lower bound for our estimates (see Graph 1). The share that prevailed at the peak of the terms of trade is likely to be too high – even as an upper bound – given expectations of further declines in commodity prices, related to a moderation in demand and further increases in global supply. Instead, we consider an upper bound that is close to the mining sector’s current share of output (7½ per cent). This range balances the possibility of further declines in commodity prices with expectations of continued growth in mining output as the final LNG projects are completed. This range of estimates for the mining sector’s share of total output implies a long-run mining investment share of GDP of between 2½ and 4 per cent. Appendix A tests the sensitivity of this result.
The Outlook for Sustaining Capex
In this section we explore the outlook for sustaining capex – investment required to maintain firms’ existing productive capacity – across Australia’s three major commodities (coal, iron ore and LNG).[3] The analysis uses information from company reports, the Bank’s liaison program and other data providers, allowing for a more detailed investigation of sustaining capex than is offered in the production function framework. The focus on sustaining capex is relevant as this type of expenditure is expected to make up the bulk of mining investment for the major commodities over the next few years. Only a small number of new expansionary projects are expected to be undertaken in the near term given few projects have been announced in recent years and exploration activity is at a low level.
Separate estimates of sustaining capex are made for each commodity to account for differences in the scale, nature and timing of investment across industries. In doing so, capex is separated into that related to ‘resource replacement’ and that for ‘asset-sustaining’ capex.
Resource-replacement capex includes expenditure on new replacement mines or gas wells and associated infrastructure to maintain a given level of output.[4] Such expenditure is significant in resource industries because of the finite nature of natural resource deposits. It is typically less than capex for expansionary projects, because existing infrastructure and equipment from the depleted deposit is redeployed to the new mining area or gas field where possible. For example, haul trucks and ore processing facilities from depleted mines can be relocated to replacement sites in the iron ore or coal sectors, while replacement gas wells can be designed to connect to existing offshore pipelines and onshore LNG plants. Resource-replacement capex tends to occur infrequently; the timing and size of expenditure depends on the size of existing resource deposits, production (depletion) rates and market conditions.
Asset-sustaining capex includes spending to repair, maintain or replace assets used for extraction and production (e.g. trucks, trains and LNG plants).[5] Unlike resource-replacement capex, asset-sustaining capex is more likely to be undertaken on an ongoing basis and is less dependent on changes in market conditions. However, a number of factors still influence the level and timing of asset-sustaining capex. A larger capital stock and higher equipment utilisation rates will increase the required amount of capex, consistent with spending to offset depreciation described in the production function approach. Asset-sustaining capex also tends to be higher in the middle years of an asset’s life-span, because little spending should be required in the early years and firms generally try to minimise expenditure as an asset nears the end of its effective life. Technological and process improvements have reduced maintenance spending in recent years, which is expected to have resulted in a somewhat lower level of asset-sustaining capex than would otherwise have been the case.[6] There is generally limited ability to defer asset-sustaining capex.
Sustaining capex for Australia’s three major resource commodities is expected to increase noticeably over the next five years, making a modest contribution to nominal GDP growth over that period (around 0.2 percentage points per annum; Graph 6). It is estimated that around $100 billion will be spent on sustaining capex for these commodities over the next five years. Even so, the amount in dollar terms is quite small compared to the boom. Total mining investment will be higher than estimates of sustaining capex due to investment in Australia’s other resource commodities and any expansionary capex for coal, iron ore and LNG.
Graph 6
Around half of the estimated sustaining capex reflects spending by the LNG sector, as replacement gas fields are being considered at the two oldest Australian offshore LNG operations. These resource-replacement projects account for almost half of estimated LNG sustaining capex over the next five years because offshore LNG projects tend to involve the infrequent development of very large offshore gas fields with long production lives. Onshore coal seam gas (CSG) LNG projects, on the other hand, require the ongoing development of gas wells to maintain production volumes. Accordingly, resource-replacement capex for these projects is generally smaller and less volatile than for offshore projects.
In contrast, asset-sustaining capex by the LNG industry is expected to be relatively small and fairly stable on an annual basis for the next five years or so, partly reflecting that much of the existing capital stock was only purchased or built in the past few years.
Sustaining capex in the coal and iron ore sectors is expected to increase from a low level in coming years as assets age and replacement mine activity rises, particularly from around 2020. Estimates for the coal sector are somewhat more uncertain relative to other sectors, given the large number of mines in the coal sector and that extraction methods are relatively more heterogeneous than in other sectors.[7]
Resource-replacement capex by iron ore and coal producers is expected to be around $10 billion between 2018 and 2022. This largely reflects plans by major iron ore miners to build large replacement mines, with spending on front-end planning and engineering work for a number of these mines beginning in 2017. The majority of sustaining capex in the coal and iron ore sectors over the next few years is likely to be on asset-sustaining capex. Asset-sustaining capex in both the iron ore and coal sectors picked up in 2017, partly reflecting a catch-up in spending as revenues improved alongside higher prices for both commodities. This follows reportedly low levels of expenditure in 2015 and 2016, both as equipment purchased for expansionary investment during the mining boom was still relatively new and firms sought to reduce costs in light of lower coal and iron ore prices. This catch-up in spending is expected to provide a modest boost to mining sector capex over the next year or so. Asset-sustaining capex across the two commodities is expected to be similar in magnitude and increase gradually over coming years as assets reach a more mature stage of their life-cycle.
Conclusion
The mining sector’s share of the capital stock has doubled since the early 2000s, driven by large-scale investment geared towards expanding the sector’s productive capacity. Based on a set of simple assumptions, mining investment’s share of GDP is likely to converge to between 2½ and 4 per cent in the long run, which is above the share that prevailed prior to the boom. Mining investment is expected to be relatively subdued over the next few years, because firms have limited appetite for further expansion. Instead, sustaining capex is likely to take on more importance as firms look to maintain their newly expanded productive capacity. Analysis based on company reports, the Bank’s liaison program and information from other data providers suggests that sustaining capex for Australia’s three major resource commodities will make a modest contribution to nominal GDP growth over the next five years, contributing around 0.2 percentage points per annum on average.
Appendix A: Sensitivity Analysis
The estimate for the long-run mining investment share of GDP is sensitive to the values chosen for the key variables: the capital share of income, rate of return on capital, potential output growth and the depreciation rate. Given the substantial uncertainty around the values for each of these variables, we test the sensitivity of our results to plausible variations in their long-run values. Specifically, we check to see how the mining investment share of GDP changes under the following four scenarios, where all other variables are held constant:
The capital share of mining income (assumed to be 76 per cent) increases to 90 per cent, based on LNG (which is more capital intensive than both iron ore and coal) making up a larger share of mining output than it has in the past.
The rate of return on capital (assumed to be 15 per cent) falls to 10 per cent or increases to 30 per cent.
The long-run growth rate of output (assumed to be 5 per cent) decreases to 4 per cent or increases to 6 per cent per annum.
The depreciation rate (assumed to be 5.6 per cent) increases by 2 percentage points to 7.6 per cent.
A higher capital share and depreciation rate both lead to modest increases in our estimate of the long-run mining investment share of GDP, and changes to output growth only have a marginal impact on our results (Graph 7). However, variations in the return on capital have a substantial impact on our estimates of the long-run mining investment share. On balance, these scenarios provide some comfort around our initial conclusion that mining investment is unlikely to return to its peak, but should remain above its pre-boom level.
Graph 7
Footnotes
The authors are from Economic Analysis Department, and would like to thank Emily Poole, Daniel Rees, Jarkko Jääskelä and Michelle van der Merwe for their helpful comments and feedback. [*]
See Roberts, Saunders, Spence and Cassidy (2016) for a discussion of China’s evolving demand for commodities. [1]
Generally speaking, the assumptions made by the ABS imply that the rate of depreciation on assets increases as the asset ages. [2]
These three sectors have accounted for the vast majority of total mining investment over the past 10 years, and averaged around 65 per cent of total resource exports. [3]
Associated infrastructure could include new gas pipelines and compression platforms for LNG projects and new conveyers, ore processing facilities, power and water infrastructure, and rail and road extensions for coal and iron ore projects. [4]
The classification of expenditure as capex rather than operating expenditure is determined largely by accounting standards. In general, expenditure on an asset that is expected to have an ‘enduring benefit’ (e.g. last a year or more) is classified as capex. [5]
Further technological and process improvements pose a structural downside risk to the future level of mining investment, particularly for sustaining investment. [6]
For example, coal can be extracted using a range of techniques applicable to open-cut or underground mines. In general, information from liaison suggests that asset-sustaining capex tends to be somewhat higher for underground mines. [7]
Roberts I, T Saunders, G Spence and N Cassidy (2016), ‘China’s Evolving Demand for Commodities’, in I Day and J Simon (eds), Structural Change in China: Implications for Australia and the World, Proceedings of a Conference, Reserve Bank of Australia, Sydney, pp 107–158.
Topp V, L Soames, D Parham and H Bloch (2008), ‘Productivity in the Mining Industry: Measurement and Interpretation’, Productivity Commission Staff Working Paper, December.
After a tough couple of years, the recovery of the mining industry started in 2017, and now is the time to kick it into a higher gear and benefit from being an early mover. Digital investments and new charging models are a couple of the initiatives companies will be pioneering to leverage the industry turnaround in 2018. IoT in combination with digital twins and equipping users to service their own assets are also key trends, predicts Rob Stummer, managing director at IFS Australia and New Zealand.
Industry recovery will boost digital investments
The good news is that the cost cutting and downsizing of the past few years is now at an end, both for the mining companies themselves and their ecosystem of suppliers. Global demand for many commodities is growing. With the macro figures telling us this increase may last for the next few decades, industry players are ramping up their activity. However, many are playing catch-up in the digital space.
When talking to customers and prospects in the industry, I hear the need to tap into digital technologies including cloud, the Internet of Things (IoT), big data, automation, and advanced planning and scheduling to become smarter and more efficient at extracting resources. Part of this is being driven by the downsizing that has taken place over recent years; with fewer staff on site you need to maximise the human resources to hand. Thus, automating manual tasks becomes important.
Mining companies could learn from innovators in related industries, like oil and gas company Songa Offshore. The company has connected IoT sensors to 600 assets on each of their four oil rigs throughout the North Atlantic Basin. The IoT data is fed into the ERP system, IFS Applications, which forms the basis for reducing maintenance costs and increasing productivity by driving operational efficiencies. The main potential optimisation lies in the automation of work orders. If specific data points can trigger automated work orders, this will save significant time and costs.
Other potential investments may come in rolling out beacon technology to improve safety by alerting workers when they are in a restricted zone. Elsewhere, advanced visualisation and planning tools could help contractors speed up the license application process and maximise productivity by being able to better delineate which areas they are already cleared to operate in.
Mining companies will adopt a more service-centric business model
Another key evolution in the industry, driving the push to become faster and more efficient at extraction, involves a change in the way mining companies pay their suppliers and contractors. The traditional “day rate” – the flat-fee rate a contractor is paid per day is increasingly moving to a performance-based system.
Thus, where a mining company might have agreed a contract of $300,000 per day for 100 days, they may offer more or a bonus if the work can be completed in, say, 80 days. This creates new opportunities for those industry suppliers who can become more efficient. Again, the IoT and big data analytics are key enablers here, with sensors able to provide feedback on various environmental and other conditions to maximise productivity. However, technology alone will not produce the desired goals unless organisations can break down traditional siloes between teams which monitor equipment and those focused on other parts of the operation.
These trends can also be seen in terms of the gradual servitisation of the industry, with companies looking to add innovative service and asset management capabilities to their offerings to reduce their maintenance costs. Advanced planning and scheduling technologies in particular will become a game-changer for both mining companies and service providers, helping them better plan and document maintenance without the need to shut down assets as frequently. These are highly sophisticated systems, maximising the human resources on board and incorporating key risk assessments of equipment to ensure any maintenance work is done and recorded according to a strict timetable.
Companies will adopt IoT and digital twins to optimise service levels
The IoT and “digital twin” technologies are poised to have a huge impact on services; reducing costs, maximising data analytics and extending the lifespan of assets. Previously when, for example, a mining truck broke down, the company would have to schedule a service engineer reactively. This approach is highly inefficient as the individual engineer may have little idea what is wrong with the asset, leading to a low first time fix rate.
With IoT sensors, the asset or machine becomes “smart” and is placed at the centre, sending data back to the service centre enabling diagnostics to determine issues that may arise in a day, week or month’s time. It is no surprise that predictive maintenance is where the big benefits are first realised from IoT by asset-intensive companies wanting to optimise their service efforts. The Predictive Maintenance report forecasts a compound annual growth rate (CAGR) for predictive maintenance of 39 per cent over the time frame of 2016–2022, with annual technology spending reaching $US10.96 billion by 2022.
Now let us add in the concept of digital twins, which represents physical objects in the digital world. Previously, the manufacturer’s or engineer’s knowledge of an asset stopped once it was delivered. But now, via the feedback made possible through IoT, you can start to learn the usage, behaviour and performance of these assets in the real world, and even make engineering changes to improve them over time.
This is a hugely important shift that helps complete the feedback loop, leading to smarter asset design, more efficient service and better performing assets. Such an approach is already being applied in the automobile sector, where connected cars send back huge amounts of data to be analysed and used to engineer better machines going forward, as well as alerting when and where faults may start to appear.
The good news is that it can also be applied retrospectively to legacy products. Mining and construction machine manufacturer Caterpillar has plenty of equipment that is 10-20 years old. But it has been able to fit them with smart sensors to measure tyre pressure, temperature, oil levels and so on. It is a win-win for customer and service organisation alike; minimising equipment downtime and enhancing product development and improving service efficiency. The approach is said to have saved Caterpillar millions of dollars already.
Designed by engineers, operated by you: Self-servicing growing by 50 per cent by 2020
We will start seeing a lot more augmented reality (AR) experiences used to put the customer in control of operating or servicing their own assets. Just think of a Nespresso machine, or a Dyson vacuum cleaner. Both companies have invested significant sums in helping consumers – with the aid of their smartphone and a QR code – to access visually overlaid step-by-step instructions on usage and repair. The same kind of model could be applied to more complex systems within a mining environment, providing detailed and highly customised plans for users to work from – without any of the superfluous information usually found in manuals.
This AR vision shares many of the same benefits as the IoT and digital twin approaches listed above. It will help maximise the time of a limited pool of service engineers, but also create a better customer experience. We can’t underestimate the Apple effect here: with AR being built into iOS handsets, it’s only a matter of time before the firm democratises and monetises such capabilities via an intuitive, user-friendly platform. As well as downloading apps and music, think of downloading an AR experience.
How to get there in reality
There is clearly plenty of opportunity to drive better service delivery, but for mining companies to reap the benefits a few things need to happen. It is important not to think of innovative technology as an end goal in itself. First up, make a value-based business case for any new approaches. That might mean wanting to increase first-time fix rates, offer new outcome-based contract types or simply reducing costs by ensuring engineers are only dispatched when strictly necessary.
Once you have established the business case you might need to break down traditional organisational silos between engineering, design and service. An AR experience, for example, is only as good as the engineering data you are able to populate it with. It works two ways, though, as the feedback from product sensors will help engineering teams design and build better assets going forward.
It is much easier to ensure that data flows throughout the organisation if everyone is using the same enterprise system. The last thing you want is new technologies creating their own data silos. New technologies will deliver greater benefits if integrated with your ERP software, and those benefits will be easier to measure. Ideally, you should be able calculate the actual value delivered by new technology, and compare it with your business case, to maximise the value of future investments.
Ultimately, you need the people, processes, data and systems all optimised to capitalise on these emerging approaches and reap the full benefits.
About the author
Rob Stummer is the managing director, Australia and New Zealand for global enterprise applications company IFS. He has held this position for the past nine years, continually achieving significant growth annually in both revenues and EBIT. Rob holds several degrees, including a Masters from Melbourne University. See: www.ifsworld.com/au
Federal Government statistics have been released showing that Australia has the world’s largest identified resources in nine major mineral commodities.
The latest Australia’s Identified Mineral Resources(AIMR) report includes assessments of reserves and resources at operating mines and other deposits, evaluations of long-term trends for major commodities, and comparative world rankings for mineral resources.
It shows that Australia’s robust mining industry remains a world leader, keeping the country well placed as an attractive investment destination.
As at December 2016, Australia had the highest Economic Demonstrated Resources in the world for gold, iron ore, lead, nickel, rutile, tantalum, uranium, zinc and zircon. In 2017, Australia had 301 operating mines.
Australia is in the top five in the world as a producer of 20 out of 34 important commodities, including gold, bauxite, iron ore, rare earths, mineral sands, zinc, lead and coal.
“These commodities are essential for maintaining and powering our modern lifestyles and for building a high-tech future,” according to Geoscience Australia.
In 2016, Australia’s mineral exports (excluding petroleum) amounted to a value of more than $151 billion, the report stated.
This was almost 46 per cent of the value of all exported goods and services. In the 2016-17 financial year, mining accounted for 7.4 per cent of Australia’s gross domestic product.
