5 minute read 11 May 2020
Loaded hematite iron ore train passing empty magnetite wagons

COVID-19: How mining companies can build more resilient supply chains

By

Paul Mitchell

EY Global Mining & Metals Leader

Experienced mining and metals leader. Contributing insightful points of view to the market around productivity and digital.

5 minute read 11 May 2020

Companies should act now to shore up existing supply chain structures while considering how to build future resilience. 

This is part of a series of articles relating to the impact of COVID-19 on the mining and metals value chain.

The remote locations of many mines mean that delays, cancellations and shortages are frequent supply chain challenges. But, while companies have become more adept at managing these disruptions, the impact of the COVID-19 crisis across several geographies simultaneously has put new pressure on traditional global supply chain structures. Resilience is simply not inherent in today’s lean, just-in-time supply chains, which are optimized for cost and concentrated around a few geographies and vendors.

Traditional supply chains

Priority actions to mitigate disruption now

While miners previously did not need to understand the complexities across their supply chains (and usually lacked the data, contingency plans and crisis incident management to do so), the impact of COVID-19 highlights the shortcomings. Navigating this and being ready for future events demands that mining and metals companies take steps now to mitigate disruption and develop a deeper understanding of supply chain risks:

  1. Conduct an end-to-end supply chain risk assessment to develop a calculated risks index. The assessment should include demand and supply risks, operational performance, global trade implications and the impact on customers and the workforce.

    Digital tools can map upstream supply chains to help companies visualize global trade flows and understand where input disruptions may lie. Current disruption hotspots are likely to be in the EU and the US rather than North Asia where manufacturing and logistics appear to be ramping back up. Identifying potential shortages can alert companies to possible difficulties in sourcing inputs and financing purchases, which may create business continuity issues for both companies and suppliers. In areas of ongoing disruption, suppliers may face deteriorating financial health.
  2. Identify supply chain gaps by developing crisis scenarios based on how long disruption may continue. Activating existing crisis management policies and protocols in each disruption scenario can identify gaps in the current supply chain model and show both the qualitative and quantitative impact.
  3. Prioritize critical focus areas that may have changed in light of current circumstances — for example, personal protective equipment, food and provisions, spares and equipment. Visibility across the entire inbound supply chain allows companies to identify where interventions should be made to increase inflow, particularly for these critical assets. Assessments of how much inventory will be required on-site should take into account anticipated disruption due to ongoing complexity around movement and transport. Considering alternative suppliers can ensure that a backup plan is in place.
  4. Invest in more collaborative, agile planning and fulfillment capabilities, which may include, for example, sharing inventory with other mining and metals companies in the same country. Collaboration can reap significant working capital benefits and help ensure business continuity.
  5. Ensure good visibility of commodity demand — and protection if it doesn’t eventuate. A clear view of demand helps companies direct stock to the most important work. Miners that control their outbound supply chains — i.e., the larger iron ore producers in Brazil and Australia that own rail and port logistics — also have a significant advantage. We may see some companies shift their strategies to mitigate the risks of being overleveraged to one or a few countries.
  6. Review contracts to determine whether the company and its suppliers, contractors or subcontractors have force majeure rights (generally determined by reference to the specific contractual term). Understanding finance facilities helps determine whether any requirements are at risk of being affected by economic uncertainty.

What will supply chains look like in the future?

Once the crisis has eased, companies can consider how to shift supply chains to ensure greater resilience. We anticipate several key features that may define mining and metals supply chains of the future:

  • Cloud-based networked ecosystems will create supply chains where disruptive events are visible to all stakeholders in real time and acted on simultaneously.
  • 3D and additive printing may gain more traction to manufacture essential components on-site.
  • Alternative and broader sources of supply could be explored to reduce reliance on overseas and/or a small number of vendors. Some governments are under pressure to consider localizing or re-onshoring critical input manufacturing capability. While mining is a global business, this may create issues from a license to operate perspective. Even as alternative sources are considered, companies must maintain good relationships with current suppliers that are critical stakeholders in the business.
  • Financial covenants and credit terms need to be built into longer-term scenarios to ensure adequate protection in the case of future disruption.  
  • Collaboration on supply chain hubs may help to secure supplies. However, in a recent EY mining industry webcast, surprisingly, only 3.6% of participants said they would implement supply chain hubs designed around collaboration as a result of the crisis. This was a concept attracting more interest before COVID-19, and we expect that companies may reconsider it in time.
How will the crisis affect your decisions on inbound supply chain

Source: EY M&M webcast, 9 April 2020

Focus on building resilience

For mining and metals companies, protecting the supply chain through this crisis is the priority. Taking action now to mitigate further impact, including mapping supply chains and stress-testing under multiple scenarios, can help companies understand and address the impact of ongoing and future disruptions, and see where major weaknesses lie. When supply chain structures are no longer fit for purpose, companies will need to act fast — first, to ensure continued inbound and outbound flows of products now and, second, to build a more resilient supply chain for the future.

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Summary

The impact of COVID-19 on the supply chains of mining and metals companies is unprecedented. Mitigating the risks of this disruption requires companies to act now to protect inbound and outbound flows and develop a deeper understanding of supply chain risks. If the crisis reveals fundamental weaknesses in traditional supply chains, companies may consider making several shifts to build greater resilience in the future. 

About this article

By

Paul Mitchell

EY Global Mining & Metals Leader

Experienced mining and metals leader. Contributing insightful points of view to the market around productivity and digital.