How can adversity accelerate mining’s transformation?

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.

7 minute read 13 May 2020

Mining and metals companies must act fast to mitigate disruption, and consider how responses will accelerate recovery and build resilience.

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

While the outbreak of COVID-19 continues to impact countries and sectors, the mining and metals industry is navigating the effects of the pandemic relatively well. A strong safety culture and deep project management experience have ensured a continued laser focus on the workforce and a mission to keep people safe and connected. Miners are maintaining operations as close to capacity as possible, monitoring the elements of the value chain that could cause disruption, assessing gaps in supply chains and managing liquidity to ensure that no issues arise in the midterm. Companies are also putting investment decisions on hold, reducing capex and nonessential maintenance, and deferring dividend payouts.

Of course, while this is a global crisis, staggered infection rates and different approaches to lockdowns mean that the disruption created by COVID-19 differs across the world. In mainland China, activity is returning to a semblance of normality, while other countries are extending lockdowns. In some countries, mining has been shut down, but in others has been declared an essential service, providing that social distancing and hygiene rules are complied with. Global supply of several commodities is therefore disrupted, and all markets are likely to feel some level of impact from lower global downstream demand.

% of Global production suspended due to covid-19 as at 21 april 2020

Source: GlobalData

Exactly how this impact differs across markets and commodities is difficult to pinpoint, but we have considered two scenarios: the first based on the pandemic persisting for 6 to 12 months and the second where the outbreak continues for more than a year. Each scenario considers factors that include how the global economic recovery may unfold and the pandemic’s effect on the demand and price of a broad range of commodities. We’ve included a focus on Asia, given the region’s impact on minerals and metals demand and China’s stimulus into infrastructure investment.

The outcomes of the scenarios are broad and uncertain, which is unsurprising considering that the impact of COVID-19 depends on complex factors, including the current reported infection rate, population density, strength of the health system, education levels and institutional capabilities.

In the first scenario, based on the pandemic persisting for 6 to 12 months, the impacts across commodity markets are likely to be mixed:

  • Commodities reliant on a higher proportion of Chinese demand, for example, iron ore, coking coal and copper, will be more resilient.
  • Copper markets, however, did experience an immediate impact as inventories surged on lower Chinese demand. Now, supply cuts in a number of countries, combined with a return to industrial activity in China, are likely to see a drawdown on inventories and improving prices.
  • Base metals will feel the biggest impact due to a heavy reliance on downstream demand, though supply cuts may support prices.
  • Thermal coal was struggling to access capital prior to COVID-19 as demand moved to greener energy sources. Declining power demand has put this market under further stress.
  • Gold will remain in demand as a safe haven.

The second scenario, where the outbreak continues for more than a year, sees a much longer recovery varying across regions and creating more supply chain disruption. Here, we would expect to see more material reductions in demand and supply shortages, significant workforce disruption and the risk of reinfection. It’s likely that a large number of operations in the mining industry would close or be limited for a number of months and recovering from such an extended period of disruption would be challenging. We may also see the pandemic create a legacy of global protectionism that would create further barriers to international trade.

Four critical components to position for recovery

However long the pandemic continues, mining and metals companies will need to be ready for recovery once conditions stabilize. Positioning for what comes next requires taking actions now to:

  1. Collate and extract value from data across the entire value chain to ensure that the right decisions are made about the workforce, operations and supply chains.
  2. Maximize liquidity and maintain a strong balance sheet. Evaluate liquidity and capital demands to ensure continued operations and the ability to meet short- to medium-term debt obligations.
  3. Renew the focus on digital and productivity, including implementing automation and remote operating centers. Avoid knee-jerk measures by ensuring that any changes are sustainable and add, rather than erode, value.
  4. Strengthen culture, communication and leadership. As COVID-19 continues to create uncertainty and fear, it’s more important than ever that companies put people first and engage in purposeful conversations. Companies that engage deeply with employees and stakeholders will propel though recovery and renaissance faster and stronger.

However long the pandemic continues, mining and metals companies will need to be ready for recovery once conditions stabilize. 

Building resilience beyond COVID-19

Even as the sector grapples with this current crisis, commentators warn that similar events may be part of our future. Mining and metals companies can prepare for a more uncertain world now by building resilience through:

  • Collaborating with other operators, especially as a backup for critical skills and spares.
  • Refreshing business continuity plans. In particular, stress-testing financial plans for multiple scenarios can help businesses understand the potential size and duration of any impact on financial performance.
  • Accelerating digital transformation. In a recent EY mining industry webcast of close to a thousand participants, responses indicated that nearly all will increase their focus on digital transformation in light of this crisis. COVID-19’s impact on the workforce, operations and supply chains has highlighted the benefits of various technologies, such as automation, AI and blockchain, to ensure business continuity. Those businesses that have already invested in advancing their digital journey are reaping the benefits now and will continue to have a competitive edge beyond the pandemic.
What are you considering for future digital transformation in light of the current crisis

Source: EY M&M webcast, 9 April 2020 

  • Reassessing risks. The prolonged and severe impact of COVID-19 on operating conditions has been felt by every miner. And, while this is a risk that no company could have fully prepared for, it does highlight the need to assess how a company’s management of COVID-19 will affect the likelihood and/or consequence of all other strategic risk exposures. Conducting a full risk review is critical to ensure that risks are reprioritized. For example, cyber attacks are on the rise due to remote workforces, new collaboration technologies and cyber threat actors taking advantage of targets perceived as vulnerable during the crisis.
  • Increasing the focus on license to operate. This pandemic has highlighted the need for greater transparency and communications with stakeholders, underlined the impact of potential closures on communities and workers, and shown the reputational risk of widespread infection. Stakeholders are holding businesses to account for how ethically and authentically they have navigated COVID-19 and, post-pandemic, will have heightened expectations around license to operate. So far, the mining and metals sector has managed the crisis well, but it only takes one high-profile event to damage the reputation of the entire industry. Strengthening license to operate was already a priority for the sector, but miners will have to double down on this in the future.
  • Investing ahead of the curve. Mining companies should make prudent investments in contingency plans now to ensure that business preparedness and agility are translated into competitive advantage.

Proactive, agile responses are key to surviving and thriving

The scale, speed and spread of this disruption on the sector are unprecedented. Responding to its impact demands agility but also careful consideration. Companies that navigate current conditions, and approach recovery in a planned and proactive manner, are more likely to “control the crisis,” protect their economic position and reputation, and build resilience for the future.

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Summary

The mining and metals sector is faring better than many during the COVID-19 pandemic, though impacts on commodity markets are still significant. As companies navigate a long period of recovery, four critical components can help the industry emerge stronger once conditions stabilize. Learning lessons from the crisis, including around the need to accelerate digital transformation and reassess risks, can help miners build resilience for 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.