The world claims that nobody predicted the Global Financial Crisis and the commodity price drop, rebound and subsequent drop which followed it. But this is untrue. You might think the GFC is over but with 18 first world countries facing debt defaults (which most are desperately trying to inflate themselves out of), it would be a brave person (or a fool) who believed that boom times were returning any time soon.
Back in 2007/08 there was almost universal support amongst Economics academics that the situation in the US was unsustainable. There was even one of the regulators, Brooksley Born, who spoke out and was quickly excised. Funny how the media is only bringing this to light now.
Quite apart from this, in August 2007 I gave a presentation where I said that the current resources boom could not go beyond 2011. I must confess I thought it was over in 2009 with the rapid drop during the GFC but most commodities rebounded strongly. In February 2008, Leigh Clifford was in the press saying we were at the start of a 50 year super cycle. At this point I knew the end was only a matter of time.
We all know that the mining and resources industry works on a boom-bust mentality. It is possible to track this back to 1846 when copper was officially discovered in South Australia. Australia’s first (and greatest) resources boom lasted to 1852/3 after the hoopla of the official discovery of gold in Australia in 1851 died down. We see subsequent resources booms starting in the 1870’s, 1890’s, 1920’s, 1950’s, 1970’s and 2000’s. These are not necessarily stock market booms but rather investment booms and not always mineral resources; in the 1950’s we had a wool boom. The average time between booms starting is 25 years and varies between 22 and 28 years. Of significant interest is the fact that they have never run more than 8 years (nor less than 6 years). Consequently, the most recent boom, which did seem to be a particularly strong boom after a really difficult time in the industry during the 1990’s, and which started around 2003, couldn’t go past 2011. In addition, the 2000’s boom closely mirrored the 1920’s boom which ended in the 1929-1933 stock market crash. In both cases a financial bubble was formed using creative financial products. Don’t kid yourselves here. In the 2000’s high commodity prices were driven by leverage from financial institutions; leverage for speculators to push and manipulate prices up and down, and leverage for US households to keep spending and push consumption through the roof. In the 1920’s high stock prices and resources speculation were driven by leverage provided by brokers with the support of bankers. The GFC was a shake-up to the system caused by a drop in house prices in the US. But to use of leverage to manipulate commodity markets is still very much in play.
What is my point? Don’t believe for one second that investment is going back to boom times in the short term. History says it won’t before 2025. Add to that the fundamentals which see the US basically bankrupt; a financial system which should deleverage but is strongly leveraging itself further; and there is insufficient demand to offset the increased output from the boom to drive commodity prices up. I believe the masses are being sucked into a financial con by the big (mostly US) financial institutions who are using government stimulus and printed money to create an illusion of recovery to drag Mums and Dads back into the market (many through superannuation) so they could further leverage the derivative products. It can’t end well.
We are therefore left in a “bust” until at least 2025 and possibly until 2031. I have said before, the last bust (1986 – 2003) addressed labour numbers in the mines. Workforces were slashed by 50% and more which increased an illusion of efficiency in terms of output per manyear. This bust has embarked on cutting the excess labour and this process is nearly finished. There is not much more blood left in that stone. The mining companies have at least 12 more years to survive until the next boom and will have to address equipment efficiency.
For many mines it will be a simple equation; operate more efficiently or die. The new coal and iron ore barons will die and/or be swallowed up by the big players or by Chinese companies. My estimate, again based on history is that at least 70% of current mine owners / companies will be gone by the start of the next boom. You have little choice but to improve efficiency. You might as well start the process now; the pain will be less later. When your company is losing money on every tonne of a commodity going out the gate what owner will allow their equipment assets to be 20%, 30%, 50% below their capability? They won’t. In the same way, Charles Copeman and Peko Wallsend addressed labour issues at Robe River in 1986 (followed by a raft of less advertised examples across most of the mining industry), this industry will, over the next 10-15 years, address equipment underperformance issues. For some mines which can’t or won’t that will mean closing.
But surely our mines aren’t this bad. Surely, this was also addressed in the previous busts? Well, no it wasn’t. In the 1980’s we didn’t know how badly most of us operated our equipment. We had a feeling that it could be done better but it is only with the advent of complex monitoring systems and the data-warehousing of worldwide data that we now know how inefficient most of the industry is.
If you as an individual and company haven’t developed the most important strategic skill – value-adding change, chances are you won’t survive in this industry to see the next boom.
Recently PwC Australia bolstered its capability to raise productivity in the
global mining industry through the acquisition of the GBI Mining Intelligence
business (GBI), a leader in analysing big data for mining industry players
worldwide.
GBI pioneered the use of big data in the global mining industry over the past 15 years by aggregating and measuring comprehensive data on mining equipment productivity and reliability worldwide. The data is then used to provide intelligence on the performance of a wide range of critical mining equipment ranging from trucks, electric rope shovels, front-end loaders, hydraulic excavators, backhoes and drills.
The GBI database, now owned by PwC, reflects the equivalent of more than 7000 years of mining equipment productivity and reliability information collected from client equipment monitors worldwide.
Former GBI CEO, Graham Lumley together with two former GBI staff have joined our Brisbane Consulting team to form a new operating unit called PwC’s Mining Intelligence and Benchmarking led by Stephen Loadsman, PwC Consulting Australia’s Mining & Energy (Oil and Gas) Leader.
Click here to find out more.
GBI pioneered the use of big data in the global mining industry over the past 15 years by aggregating and measuring comprehensive data on mining equipment productivity and reliability worldwide. The data is then used to provide intelligence on the performance of a wide range of critical mining equipment ranging from trucks, electric rope shovels, front-end loaders, hydraulic excavators, backhoes and drills.
The GBI database, now owned by PwC, reflects the equivalent of more than 7000 years of mining equipment productivity and reliability information collected from client equipment monitors worldwide.
Former GBI CEO, Graham Lumley together with two former GBI staff have joined our Brisbane Consulting team to form a new operating unit called PwC’s Mining Intelligence and Benchmarking led by Stephen Loadsman, PwC Consulting Australia’s Mining & Energy (Oil and Gas) Leader.
Click here to find out more.