The hurdles we can expect to see in the year ahead
The Australian resources sector has spent the last several years with increasing pressure to fulfil demand and growth. The S&P/ASX 200 Resource Index was up 26% over the year in 2022, which happened amidst a period of chaos in world markets, skyrocketing inflation, increased interest rates, recessionary fears and stymied European energy due to the Russia-Ukraine conflict. All of these fluctuating and unavoidable worldwide events have had direct or indirect impacts on the operations of Australian mining companies.
2023 began with a perfect economic storm, which led to an array of mining companies experiencing record profits off the back of high commodity prices and demand for materials for renewable energy resources and coal. With increased cash flow, and another year of demand forecasted, the immediate future of Australian mining first appears to be smooth sailing throughout 2023. However, after back-to-back years of unstable market conditions, there will be no complacency. Keeping ahead of risks to the sector is the most important way to future proof a company and maintain long term success. To do this, the mining industry must always ask to keep an eye on.
Pickles has determined the five areas of industry risk for 2023 and beyond.
1. Environmental, Social and Governance (ESG)
ESG remains one of the industry’s top risks as the issue becomes a priority for stakeholders, especially investors.
From an environmental perspective, there is pressure for miners to implement approaches beyond policy. Elements like circular economy processes, biodiversity risk assessments, sustainable mine closures, and achieving carbon neutrality are all pressing issues the industry will soon need to face.
From a social perspective, inclusivity, diversity and equality hiring processes that require attention. To achieve this, creating processes that drive towards gender balance and create safe and respectful workplaces will need to be implemented. Part of attracting a new workforce to the industry, and upskilling current workers, will require policies, processes, controls and support from industry bodies.
These changes in the longstanding industry are achievable only by good governance and perseverance. Australian miners should be aspiring to be leaders in setting standards for accountability, ethical practices, risk management and environmental issues.
2. Geopolitical Tensions
It will soon be a year since the invasion of Ukraine. During this time, geopolitical uncertainty has been a dominating factor for the global economy. From Russia cutting off crucial European gas supplies, to China maintaining a firm hold on the global trade and processing of rare earths (see below figure), tensions are likely to grow.
Companies are under pressure to evaluate and assess trade flows, adjust to inflation, strengthen supply chains and capital allocation. Resource nationalism, a motive to maximise value from a country’s natural resources will also be a factor whereby governments try to squeeze miners for royalties and windfall taxes.
In Queensland for instance, the state government has increased its coal royalties. Originally, the three-tier coal royalty scheme allowed for the government to take 7% of revenue up to $100 a tonne, 12.5% between $100 and $150 a tonne, and 15% above $150 a tonne. Then in June, three new tiers were added whereby the state government takes 20% for prices above $175 per tonne, 30% above $225 per tonne and 40% above $300 per tonne.
3. Skills Shortages
It’s predicted that over the next 5 years, the Australian mining industry will need 24,000 workers to meet project demand with coal, gold and critical minerals being most at risk. The industry is already experiencing a labour shortage – thanks to border restrictions during the pandemic, slow immigration processing and local talent veering towards ‘cleaner, greener’ industries. Miners must work closely with state & federal governments, unions and education providers to source talent both for the short and long term.
The rise and attractiveness of ‘cleaner, greener’ industries has captured skilled workers that would have otherwise joined the mining ranks. This is where the sector's public image needs to be worked on and why ESG policies and implementation will be crucial.
4. Supply Chain Disruption
Supply chains have been one of the biggest challenges for mining operations since the start of the pandemic, with issues still being experienced today.
Mining organisations will need to move away from quick fix inbound supply chain strategies and instead focus on reserves that ensure unabated and effective operations. However, costs will likely increase along with inflationary pressures but with better planning, improved supplier relationships and logistical innovations, mining companies should be able to find an optimal middle ground.
5. Costs & Productivity
With inflation continuing, and interest rates likely to rise further, operational costs and the delay of growth plans are inevitable. Higher input costs, for things like general raw materials, tyres, sulphuric acid, explosives and direct labour, have all jumped considerably and are likely to remain at these levels for the remainder of the year. With higher costs comes lower margins, especially as the year progresses and some commodity prices – coal, oil and gas - return to be palatable levels.
Being overly cautious in planning may be an overzealous but necessary approach to prepare for potential risks 2023 has for the industry. Nevertheless, these five risks should be considered not only by mining companies but by stakeholders too. If the last few years has shown us anything it’s that investors, activists, employees and customers have found their voices and aren’t afraid to use them for the improvement and sustainability of the sector.