Global metals industry continues path of cost reduction and OpEx

23 August 2016

Lower global commodity prices have hit the extraction industry, which has entered a period of making moves to reduce costs, such as streamlining operations and entering lower cost markets. Growth confidence remains a net positive, however, with 64% of respondents at least confident that their company will grow in the coming 12 to 24 months. Investment into R&D is up significantly, the new report further finds – with new technologies, such as robotics, slated as cost-reductive.

The global commodity market has entered a period of lower prices, as the global economy continues to grow slowly. Metal prices in particular, have hit rock bottom – forcing many companies into survival mode in the face of continued global uncertainty and protracted low prices.

To gauge the current sentiment among executives within the metal mining industry, KPMG has released its latest ‘Global Metals and Mining Outlook 2016’. The report is based on a survey of sixty-two senior executives across the globe, with 60% of respondents working for companies with revenues of $1-5 billion and 32% at companies with revenues of $5-10 billion.

Confidence waning

The low commodity prices are being taken in their stride for many of the respondents, with the majority of respondents (64%) saying that they are least confident that their company will be able to achieve growth, while 30% say they are very confident. Respondents are less confident about the lot of their competitors, with 22% saying that they are at least not confident of growth prospects within their industry. Respondents also tended to be less confident about global economic growth compared to growth within their own country, with 48% and 53% respectfully at least confident of growth.

"With commodity prices remaining depressed and metals prices at record lows, most metals and mining executives feel they have reached the bottom of the cycle and that growth will, eventually, return," notes Eric Damotte, Head of Metals for KPMG International. "You can't just batten down the hatches and wait for the storm to pass; it will take significant consolidation in order to reduce current levels of structural overcapacity and disruption from environmental regulation to new innovations is continuously changing the business environment. The next growth cycle will look very different to the last.”

Increased urgency to cost cutting

Even while respondents appear more optimistic about future growth within their respective markets, the campaign of cost-cutting and operational excellence (OpEx) looks set to continue. The number of respondents for whom cost cutting is an ‘extremely high priority’ has increased from 27% over the past 12 to 24 months to 40% for the coming 12 to 24 months. Those that view it as a ‘high priority’ have decreased slightly, falling from 40% to 27%, as with ‘medium priority’, which fell from 24% to 23%.

Bradken, an Australia-based mining services firm, for instance recently called in management consultants from The Boston Consulting Group to help it streamline its operations and slash costs, while Kenya has turned to McKinsey & Company in a bid to improve its competitive position on the international market. 

Build market share

The survey also asked respondents about the way in which they are intending to grow their businesses over the coming 12 to 24 months. The top cited moves are to ‘increase market share within [their] existing geographic markets and sectors’ and ‘enter new geographic markets’, at 29% each. Companies are also seeking to broaden their product lines, as cited by 18% of respondents as their top priority, while 19% say that they will change the range of offered services. Around 5% say that they plan to enter new sectors.

Damotte remarks however that, given the structural difficulties in the market from reduced demand and prices, the paths selected by companies for growth may be hard to follow, "Many metals organisations are already fighting off fierce competition from lower-cost imports in their home markets and reduced demand from the emerging markets. So while most metals organisations seem to believe they will grow their market share, the reality is that — without significant structural consolidation across the industry they will need to steal it away from their competitors. Entirely new growth opportunities will be hard to come by.”

Looking for better cost structures

According to almost the majority of respondents (47%), the primary driver for international investments remains ‘to obtain lower manufacturing costs’, followed by ‘moving “closer” to customers’, as cited by 26% as the primary driver. Damotte explains that “Metals organisations are certainly thinking about how to create the optimal footprint to match their expectations for future growth, but they are also highly focused on consolidating operations into lower-cost jurisdictions that provide access to customers while helping manage margins. Expect to see further asset restructuring as metals organisations start to execute on their investment strategies.”

New technologies new opportunities

Respondents, the survey highlights, are also turning to innovation as a means to survive the current low price environment. Investment into R&D is set to increase significantly on the past two years for many of the organisations surveyed. 16% say that they will invest more than 10% of their revenues over the coming two years, up from 11% over the previous two years – while 27% say that they will invest at least 6-10% of their revenues, up from 18% over the past two years. For the coming two years, no companies say that they will invest less than 1% into R&D, a significant increase from the past two years when 16% said that they would invest less than 1%.

In terms of specific emerging technologies, robotics is cited as the most interesting: 42% say that they will definitely invest in the technology, while 31% say that they will possibly do so. Artificial Intelligence (AI) technology is part of the investment planning for 32% of respondents, while 37% say that they may possibly invest in the technology. Kazakhstan, for instance, recently hired Google and McKinsey to support a large scale data mining facility, a programme which combines the Internet of Things with artificial intelligence and analytical techniques to gain strategic insights in production and distribution.  

Additive manufacturing – a market which according to Bain & Company will grow from $7 billion today to $12.5 billion by 2018 – is the technology into which the most (26%) have already invested, while 27% say that they plan to over the coming two years.

Richard Sharman, Global Head of Commodities Trading, KPMG International, remarks, “While technology may not be a top agenda item for miners, there has been a lot of capital invested into applying technology to improve operational efficiency – self-driving vehicles, real-time information about production and automation, for example, given the current capital constraints, some technology initiatives seem to have been shelved for the time being."