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Decades behind? Mining chief might be right on productivity

Is the Australian mining sector really decades behind on productivity improvement? There’s something to incoming Anglo American chief Mark Cutifani’s alarming comments.

The incoming chief of the world’s fifth largest miner, Anglo American, told analysts on Tuesday night that all it took to make a good mining manager was a good mineral deposit.

In the mining industry, we’re some 20 to 30 years behind other more progressive sectors in terms of productivity and business practises,” Mark Cutifani said. “We’ve got to go beyond that and make sure we’re working our assets, the engine room, as hard as we can.”

In business and political circles, productivity is on everyone’s lips. Since the global financial crisis, productivity has improved across many industries, but at a slower pace. In mining, productivity has actually gone backwards. Why are other industries powering ahead while mining falls in the productivity stakes?

Necessity is the mother of invention, and many high-employment industries have had to radically improve their productivity just to survive in a globalised world. In manufacturing, things like automation and just-in-time production (where goods are made immediately before being sold) have helped some manufacturers in developed countries survive into the 21st century. Other less productive manufacturers have relocated, outsourced or shut down all together. In services, casualisation and a reduction in staffing levels have also cut down on costs.

Mining on the other hand has experienced a sellers’ market. The rapidly developing economies of the world have been paying top dollar for the commodities that fuel their expansion. With the money rolling in, it’s unsurprising the sector remains relatively inefficient.

Additionally, labour costs have generally comprised a small part of the total costs of mining, which means raising productivity in mining is difficult to do in the same way as in many other sectors. Not to mention investment lowers productivity in the short-term, as costs per unit of output rise. There’s been plenty of mining investment in recent years.

As commodity prices taper off and caution gripes the minds of mining executives, there have been moves to do something about the sector’s productivity problem. At Chevron’s $US52 billion Gorgon liquefied natural gas project, Leighton Contractors in December responded to a 40% cost blowout by issuing a prescriptive series of policies to its policing, among other things, how long their presumably well-paid employees can spend walking around the site.

In another effort to cut costs and get things moving on time, big miners Rio Tinto and BHP, as well as minnows like Fortescue, have all recently announced cost-cutting initiatives.

Labour productivity in the mining sector is an absolute disaster,” wrote BIS Shrapnel economist Adrian Hart in a report released late last year. “It is now 60% off its peak in 2000/01 — when miners had to respond to the Asian financial crisis and then a global downturn — and is at its weakest level since 1987.”

Steven Gosarevski, a research economist at the forecaster who helped write the report, says they’re currently preparing a more detailed look at productivity in Australian mining. But it’s a complicated task.

One thing we’ve noticed is that a lot of construction workers who’ve been involved in the construction of large projects have been included as mining sector employees,” Gosarevski told Crikey. “We’re trying to get to the bottom of that.”

Given the research is ongoing, Gosarevski declines to give firm figures on mining productivity in Australia — but he expects it to rise. “A lot of the big miners are currently rolling out labour-saving technologies; Rio Tinto with their automated trucks and trains, for example. That’s a trend we expect to see continue,” he said.

BIS Shrapnel also says the Australian mining boom is reaching its peak. This could improve productivity in the sector, as a fall in investment could deliver a boon to productivity levels

*This article was originally published at LeadingCompany

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