What mining can teach us about productivity
A new report which reveals the reasons for the fall in mining productivity holds some valuable insights for other sectors.
No matter how productivity is measured - in terms of labour, return on capital or resources or a combination – the mining sector has seen a steady decline over the past decade.
As the smokescreen of high commodity prices has disappeared, it has revealed the true extent of stagnation in Australian business performance.
The country lags behind others in the developed world for productivity though unions, business groups and politicians disagree about the cause.
The worst affected sector is mining, where labour productivity has declined by around 50% since 2001. Now a new report goes behind the figures to identify the problems which have led to this decline. According to Associate Professor John Steen, a strategy expert at UQ Business School and one of the authors, the report contains valuable insights for other industries as well.
‘Productivity in mining: now comes the hard part’ was produced by Dr Steen with the consultancy EY, with the support of UQ’s Sustainable Minerals Institute. The team interviewed 60 senior mining executives from around the world to learn more about the challenges the industry faced.
Here are some of the key findings and the implications for other sectors:
1. Boom times are bad for productivity
No matter how productivity is measured – in terms of labour, return on capital or resources or a combination – the mining sector has seen a steady decline over the past decade. The report blames mines for focusing on production at any cost during the supercycle.
Dr Steen says this illustrates the general principle that productivity declines in a boom: “In good times when it’s easy to make money, companies become complacent. In Australia we have had almost two decades of uninterrupted growth, unlike Europe. The easy days are now gone and the reduction in productivity is coming home to roost across the Australian economy.
“Agriculture is the only sector that has performed well. With the long drought and strong dollar, it has gone through hard times and been forced to improve its performance.”
2. Bigger is not always more efficient
While mining companies assumed that growth would allow them to achieve maximum economies of scale, they were not prepared for the increased complexity that went with it. Mega mines put huge pressures on companies to manage burgeoning workforces and managers did not have the right tools or experience to run operations on such a large scale, leading to what one executive described as ‘diseconomies of scale’.
“This is something that we have seen throughout history,” says Dr Steen. “The banking sector leading up to the GFC is one example, in the boom times it got too big too fast.
“The oil and gas industry is generally smarter than mining but, with over $200bn of investment pumped in over the past few years, it has had its own problems. Chevron’s Gorgon project is now $30bn over budget. Big operations need smart people and smart systems in place to manage them effectively but it’s hard to skill up an industry at such speed. The regulatory environment in Australia has added to the complexity and made it harder for business to manage the costs.”
3. Skilled and motivated staff are key
The report found that inexperienced teams, high staff turnover and an ageing workforce approaching retirement age all contributed to declining productivity.
“Research shows that having people with skills aligned to the business, including leaders who can manage and motivate staff, is associated with productivity gains. In any sector, skills, motivation and alignment are the three key drivers of labour productivity,” says Dr Steen.
4. Cost-cutting is not a long-term solution
Many mining businesses have already achieved major reductions in operating costs. However cost-cutting has its limits and many executives questioned felt that they would soon reach a ceiling.
“Cost cutting might reduce your cost base but it doesn’t necessarily improve productivity,” explains Dr Steen. “Labour productivity in mining is about tonnes per person and if you are not finding a way to improve that, you will not solve the productivity problem.”
5. Integration is the key to transformation
Productivity issues cannot be resolved by piecemeal solutions – an integrated approach is required to achieve a step change in the business. However achieving this is challenging due to the development of a ‘silo mentality’ within the larger mines.
A communications mapping exercise by UQ Business School showed that in some mines there was no direct communication between the major technical functions. The report highlights the need to overcome this ‘the integration gap’. Breaking down the silos and adopting an end-to-end approach will be essential to transforming mining businesses.
6. Technology and innovation are the way forward
Technology has the potential to generate huge efficiencies in the mining industry. Better quality data and analytics will enhance decision making, while new production techniques could transform the way the industry works.
For example, deep in situ mining, which is under development at the Sustainable Materials Institute, could have the same impact that shale gas technology has had on the oil and gas sector, while real-time planning and visualisation techniques could allow less skilled operators to interrogate information as it comes to hand rather than waiting hours or days to correct a problem.
Dr Steen says: “In the long term all sustainable gains in productivity come from some sort of technology or innovation. We need to be working smarter, not harder.”
7. The CEO needs to drive change
Creating a step change in mining will require greater collaboration between departments, empowering staff, aligning measurement and reward to productivity rather than headline outputs and ongoing talent management. Therefore it will require a cultural change which needs to be led by the CEO.
Dr Steen adds: “Productivity is about how you change the business and reinvent the system. Fortunately high-profile CEOs such as Andrew Mackenzie of BHP Billiton and Sam Walsh of Rio Tinto understand this and have made it their number one issue. Other businesses could learn from their example.”