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'Diseconomies of scale' plague post-supercycle scene

AN ambitious new report by Ernst & Young has identified “diseconomies of scale” as a major driver of diminished productivity in the global mining sector.

Justin Niessner
'Diseconomies of scale' plague post-supercycle scene

EY global mining and metals advisory leader Paul Mitchell said the phase was coined by a miner in the report to describe the challenges facing larger, more complex mines where new approaches are necessary to increase connectivity, promote collaboration and foster productivity.

"The focus on increasing output meant mine had to be larger, but simply scaling up existing infrastructures has made them much more complex to run and resulted in silos and diminished connectivity within operations," Mitchell said.

"It's created an integration gap within businesses and dealing with it requires an end-to-end approach.

"The productivity decline has been so large that cost cutting and point solutions are not enough.

"Significant costs have been stripped out of the industry and good efficiency gains have been made, but it is now time to look at sustainable long-term solutions to the productivity problem."

EY says productivity in global mining has been in steady decline for the past ten years, flagging individual statistics such as a 35% slide in South African gold labour productivity since 2007 and a 45% fall in Australian capital productivity since 2000.

The report titled Productivity in mining: now comes the hard part is a joint effort with the University of Queensland based on more than 60 in-depth interviews with senior mining executives around the world.

The research concludes that the factors that have eroded mining sector productivity globally are largely a legacy of the "production at any cost" approach during the boom years.

Key labour factors highlighted as having caused post-boom productivity declines included accelerated recruitment under less rigorous induction programs as well as high labour turnover due to higher wages and job availability.

These labour factors were found to have resulted in an adverse impact on equipment utilisation levels and a slowdown in innovation.

Anglo American chief executive Mark Cutifani was quoted by the survey, drawing attention to the growing gap in transformational innovation progress between the mining and oil and gas sectors.

"Our industry is damned by the fact that our spending on innovation is one-tenth of the petroleum industry," Cutifani said.

"If we don't start to bring innovation back … the major diversifieds will be subsidiaries of General Electric or some other conglomerate that has still got innovation in their vocabulary."

EY identified a way forward through strategies of complexity management, focusing on end-to-end efficiencies, challenging the status quo, integrating "big data" into decision making and more workforce engagement.

"While the business's objectives may not have changed, a refresh or review of the operational strategy can be an excellent tool in no just changing the focus of the business, but also in initiating a change in the culture," the report said.

"A new operational strategy is a great way to drive a common sense of purpose and unity within a leadership team and focus it on resolving the critical issue of integration as a way of transforming a business.

"A strategy does not have to last forever; a strategy that is focused on driving change and delivering value, even if it only lasts a couple of years, is a valuable exercise."

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