Miners' productivity battle with ‘diseconomies of scale’

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Monday, 20 October 2014 - The size and complexity of mining operations have created "diseconomies of scale" and are a significant factor in diminished productivity in the global mining sector, according to a new research report by EY and the University of Queensland (UQ), released today.

Productivity in mining: now comes the hard part is based on more than 60 in-depth interviews with senior mining executives around the world. The report assesses the key productivity challenges, initiatives being developed to overcome these challenges and opportunities to better focus productivity improvement initiatives in the post-supercycle environment.

EY Global Mining & Metals Advisory Leader Paul Mitchell says the research confirms the factors that have eroded mining sector productivity globally are wide and varied, covering labour, capital and materials, largely a legacy of the "production-at-any-cost" approach during the boom.

"We also found a very strong theme around the challenge of operating larger, more complex mining operations and it is clear this requires a new approach to increase connectivity, promote collaboration and foster productivity.," says Mitchell.

"One miner aptly referred to the problem as the 'diseconomies of scale'.

"The focus on increasing output meant mines had to be larger, but simply scaling up existing structures has made them much more complex to run and resulted in silos and diminished connectivity within operations – it's created an integration gap within businesses and dealing with it requires an end-to-end approach.

"The productivity decline has been so large that cost cutting and point solutions are not enough. Significant costs have been stripped out of the industry and good efficiency gains have been made, but it is now time to look at sustainable long-term solutions to the productivity problem."

Innovation is lagging

EY's research shows 55% of respondents have recently switched or have considered switching electricity providers in the past 12 months. Receiving an unexpected large bill was a significant trigger to consider switching providers for a quarter of those respondents.

"Compared with the oil and gas sector, there is an accumulated deficit of transformational innovation in the mining industry, and this is a problem recognised by the sector. With ore grades declining in mines around the world, the mining industry will have no choice but to embark on similar step-change innovation programs."

The problems behind productivity

Labour, capital, materials and economies of scale were identified as common causes behind the productivity decline in the global mining sector.

  • Labour: the inexperienced teams; high turnover in people; large numbers of skilled people at retirement age; and a focus on volume rather than efficiency have all contributed to declining labour productivity.
  • Capital: the desired standards for equipment availability and utilisation rates have fallen, and there is a lack of innovation in a sector that once prided itself on it.
  • Materials: the depleting reserves and declining ore grades require innovative ways to access more ore and recover more metal.
  • Economies of scale: the larger operations have created complexity, compounded by talent and skills challenges.

The way forward

Mitchell says miners need a strategy that addresses the critical issue of integration, addressing five key factors:

  1. Management of complexity: identifying the complexity within the business and developing alternative strategies to reduce and manage this complexity.
  2. End-to-end focus: breaking down silos that may have been created and involving each element of the value chain in driving and creating value.
  3. Culture: engaging the whole workforce in addressing the issue of productivity, and embedding a sense of discipline and focus around key business issues.
  4. Data: identifying opportunities to integrate data from both existing sources and big data into decision-making.
  5. Innovate: challenging the status quo or the way things were done before, and looking for new ways to operate.

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Notes to editors

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About the report
This survey was conducted by EY in association with the University of Queensland. Our research team undertook more than 60 in-depth interviews with senior mining executives from around the world to understand: the key productivity challenges the sector is facing; the key initiatives being developed to overcome these challenges, and; better practices to manage these initiatives in the post-supercycle environment.

Contact

Megan Ball
Ernst & Young Australia media relations
Tel: +61 2 8295 6427