Features

Mining more vulnerable to changing markets

In the last 12 to 24 months the mining industry has experienced one of the most significant shifts amongst all industry sectors in Australia.

With demand from China slowing, price pressure on iron ore at an all-time high, and an overall continuing decline in commodity prices, the sector is facing substantial challenges. Although still accounting for a sizeable proportion of employment in Australia, particularly the traditional mining states of Western Australia and Queensland, the largest industry players have undertaken re-structures and downsized in recent months.

Subsequent media coverage and commentary about how this year’s Federal Budget would impact the mining sector also placed a level of uncertainty on hiring demand and projects.

This year’s Aon Australian Risk Survey highlights how the state of the industry and external concerns have shifted the risks for organisations operating in the mining sector.

KEY RISK ISSUES

There is little doubt that the mining sector is experiencing a downturn in the cyclical process. While some of the larger, established resource companies are better placed to manage this downward cycle due to their ability to continue to lower the costs of production, smaller and newer entrants face many challenges.

The media has reported some situations where the cost of production is now greater than the commodity market price, however take-or-pay arrangements with facilities such as port or rail, means the option of entering into a care and maintenance plan will likely produce an even worse financial result.

From an insurable risk perspective, one of the upsides of low commodity prices is that the exposure to loss from a business interruption event is considerably lower than during boom times.

As a result, the retained risk by way of deductible  and limits of liability required should be tailored to produce reduced premium costs.

As an industry reliant on business with overseas trade partners, it is perhaps no surprise that global economic conditions is the primary risk for companies operating in this sector. This differs from companies in other sectors, where local economic conditions are more of a concern. Moreover, the changing face of the industry and supply and demand from other markets will have played into the prioritisation of other risks – with the availability of capital and liquidity ranking second and third respectively.

FUTURE TRENDS AND THREATS

To address shareholder concerns for better returns on investment, resource companies are lowering their limits for business interruption cover, trading greater risk for lower premiums.

It is likely that resource companies will consider the synergies that can be achieved through mergers, or partial sale of equity to large overseas commodity consumers. At the same time, larger operators are disposing of poorly producing operations and focusing on core assets.

The number of major liquefied natural gas (LNG) projects about to come on line in North Queensland and northern parts of Western Australia presents an accumulation challenge to insurers.

With many of these projects located in areas prone to cyclones, insurers will need to consider their own geographical aggregation limits, wary that a black swan event could impact their financial capacity.

RECENT MAJOR CLAIMS OR LOSSES

In the past couple of years there have been several major claims for losses, with pay-outs exceeding $100 million in Australia, with other significant losses of greater magnitude elsewhere in the world.

Flooding events of Queensland coal mines in 2008 and 2011 led to many significant claims with several lodged for more than half a billion dollars each.

INNOVATIONS AND BEST PRACTICE

Best practice risk management in the mining industry is based on a comprehensive understanding of the full set of insurable risk issues around any operation, and how those risks change over time.

This requires working through risk scenarios to determine a company’s ability to deal with a loss and look at ways it can reduce its exposure.

This knowledge enables cover to be tailored to the company’s individual situation based on maximum foreseeable losses as opposed to total values accumulated.

Due to the cyclical nature of mining, we need to work in partnership with our mining clients to make certain that their coverage reflects their current and future risks. With margins so tight, it is important to get it right for the things that really matter.

 

*Scott Eccleston is the Australian Mining Practice Group Leader for Aon Risk Solutions Australia

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