Globally, mining companies are adjusting to the new world of low commodity prices subsequent to a decade of major price growth. As an overall measure of how significant the fall has been, the World Bank Metals and Minerals price index has declined 32% since 2011, and the Precious Metals index 27%.
Along with major headlines, the relatively sudden and persistent drop is beginning to expose those mines that focussed on production at any cost, but did not sufficiently invest in the efficiency of their operations.
Figure 1 - World Bank Commodity Price Index (2010=100)
This is now, belatedly, forcing companies to look at their operations and investments for sustainability. In particular, South African mines failed to improve sufficiently during the good times and are now reeling -announcing significant job cuts and even reaching out to the government for support.
But are declining prices the whole story behind this? In short, no, they are not.
South African mines have seen consistent drops in labour productivity in spite of increasing employment numbers and growing employment costs. Of course, another contributor to productivity is capital investment, but let’s put that aside for a later analysis and focus on labour. It is a problem that most inherently know is a concern. In the past, it was patched over with record prices. DBA’s analysis shows that it can no longer be ignored and needs to be addressed.
Productivity and employee earnings: A clear disconnect
Let’s consider the overall picture of production, employment and employee costs shown in figure 2. The trends since 2006 show three important points:
Weighted measures of mining industry production in South Africa have declined steadily since 2005, dropping 11% overall and 1% per year on average.
Based on data from StatsSA, employment grew from 2005-2008 (13%) but has since then stayed fairly flat, declining 5% overall since 2011. This does not however, incorporate the latest announcements of job cuts.
Employee average earnings have grown substantially – 193% since 2005 (11% annually) and 43% since commodity prices started dropping in 2011. Even when adjusting for inflation, earnings have grown 5% per year, in real terms, since 2005.
Figure 2 - Index of Production, Employment and Average Monthly Earnings based on data from StatsSA and the Department of Mineral Resources
Taken together, the three graphs show that there is a clear disconnect between these factors. In a world of improving productivity and efficiencies, a stable- or increasing employment base should lead to a steady growth in production. Conversely (still in the productivity improving world) where production is declining, we should see a stronger decline in employment. This does not happen because firstly, mines are not making significant improvements and secondly, because protection of employment is a social and government priority.
Furthermore, employee earnings are disconnected to both pricing and productivity as we see regular growth - even though production has declined and employment has remained flat. These increases were more than affordable during the days of growing prices, but are now creating real problems for miners and hence, are contributing to the need for major layoffs and mine shut downs.
Employee output declining drastically
However, as a more objective measure, one can also take earnings and prices out of the equation to see the relationship between employees and production volumes.
A measure of output in tons or kilograms per employee shows just how much is being produced per unit of labour. Figure 3 illustrates the worrying trend that unfortunately, seems to be affecting all the major commodities in South Africa.
On average, the output per employee has declined by an overall 21% and by a compound rate of 2.9% per year. Of particular concern, due to recent strikes and job cuts, the PGM industry has had ‘kg produced per employee’ decline by 4.2% compounded annually since 2001. Some of this decline is due to decreasing grades, but Datta Burton & Associates’ research into the gold example (where grades have been a serious issue) has found that grade-adjusted productivity has only moved sideways, which just isn’t enough when costs are rising and prices are on the decline. PGM has had it worse: Anglo Platinum has seen metres milled per operating employee (a measure independent of grade declines) experience an annual decrease of 2.2%.
As a last check, when the effect of strikes is included as a reduction of employee available days, there is only a minor improvement in productivity and the overall trend does not change. This is because, according to the Department of Labour, days lost per 1000 employees has remained relativelysteady since 2004 with around 0.5% of total workdays lost per year to strikes. The major exception to this was 2012 and 2014 where 9% was lost, and that mainly affected the PGM sector. This is not to say 0.5% lost is a good number, but by being steady it does not affect the overall trend of labour output that is seen, although it does have an impact on investment and capital productivity.
Figure 3 - Output per Employee in relevant measure (kg, tons, kilotons). Based on data from Department of Mineral Resources
The Productivity-cost problem
When one does introduce employee cost back into the overall deterioration of productivity, the picture becomes more depressing. Take PGM as an example - labour productivity declined by 4.2% since 2001 while average employee earnings grew 12.2% annually. Figure 4 shows that the industry-wide real labour cost per unit output has grown steadily. This was clearly bearable during times of rising prices. However, the new low prices of commodities has exposed this productivity-cost problem.
Figure 4 - Labour Costs per Unit Output and Average Sales (Price) per Unit Output (real values adjusted for inflation). Independent index scales but with same increments
This is the crux of the problem in South Africa: increasing employment costs with no real improvement in labour productivity makes the industry less competitive on the global stage. Hence we are seeing cuts in unsustainable high cost operations and a decline in investment from international operators.
There are a lot of good reasons to increase employee wages. The point of this article is not to advocate against a rise in living conditions for mine workers, but rather to identify and articulate the dire situation of the South African mining industry, so that changes can be made and a sustainable solution can be developed. Commodity prices are unlikely to increase in the short-term - most analysts are forecasting either further declines or stability at the new lows. Even in the case of stability though, the declining productivity will lead to decreases in competitiveness and further shutdowns and job cuts.
It is clear from the analysis that productivity for competitive advantage, as well as survival must become a focus for executives and management in the mining industry. Small adjustments cannot fix this problem either - major change is needed. Although it needs to be covered in depth, there are four primary areas that should be investigated for a solution:
Technology Integration: Technology is definitely no panacea for the problem of productivity, but there are steady trends across all industries for its increasing role and ability to make operations more effective and efficient. Technology provides the opportunity for automation and frees employees’ time for improving production elsewhere. The best example in mining is in Australia where there have been major shifts towards autonomous vehicles. Indeed, Goldfields is implementing mechanisation at South Deep to make it viable. Technology does not have to limited to this area though - it should play a major role in planning, real time reporting, analytics, and equipment optimisation.
Capital Portfolio: Planners need to shift towards more effective capital pipelines. Every investment needs to be carefully selected and balanced. Currently, a shift is needed towards cost saving and efficiency initiatives to improve productivity. Overall, organisations must review their capital planning systems and governance to ensure the right projects are being selected, managed and effectively reported on.
Management Systems: In many cases, mines need to relook their entire mode of operating. Unfortunately, addressing smaller individual issues cannot fix fundamental problems nor lead to a step change in productivity. Operations need to break down their full management system and ask how well they are cycling through from strategy to execution, to reporting. A simple check is to see how well plans and schedules are adhered to. The failure to create effective plans and implement them means that activities are drawn into fire-fighting, which distracts from real improvements in productivity. Moreover, ineffective targets and bad communication structures may be preventing true performance management and optimisation of day to day operations.
Capacity Management: The swings in demand means executives must relook at the capacity of each operation and their whole value chain. Often, upstream productivity is affected by a lack of downstream output. If this occurs at the constraint of the operation it can be seriously detrimental as the entire operations output will be effected. Management need accurate models of the capacity at different stages that incorporate each other, so they can understand production as a whole and make informed decisions.
Taken together, such interventions can lead to significant improvements in productivity, but they are rarely implemented well. In the face of the new commodity prices, miners must now make a concerted effort to change or accept that they are on the road to shut down.