In the midst of an industry wide austerity drive, the Minerals Council of Australia boss is warning miners are at risk of making too many cuts.
Delivering his final address as chief executive of the MCA, Mitch Hooke said mining companies failed to take full advantage of the market upswing, and are now lagging to correct themselves during this downturn.
He said the mining sector’s response to the demand upswing was “more reactive than pre-emptive, more following the market than leading it”.
Addressing the Melbourne Mining Club on Thursday, Hooke said the industry chased capacity at almost any cost during the boom.
“Capacity constraints became the new determinant of competitive differentiation between companies and countries as they positioned for increased production to meet demand, capture high prices and build margins and profits,” he said.
Hooke explained the mad scramble for resources resulted in an “unprecedented surge in investment in new projects” as well as “a dramatic increase in commodity prices well in excess of the long-run equilibrium of marginal costs of production”.
He said chasing mergers and acquisitions for growth pushed organic growth to the wayside.
“Costs increased in the drive for production, simply because there was still profitable margin in it, and labour costs were founded more in capacity to pay than productivity offsets,” Hooke said.
“We lagged the cycle – and the price of that lag has been opportunity costs and structural deficiencies in our operating platform.”
Hooke explained miners’ operating costs have almost doubled since 2006, pushing Australian operations into the higher end of the global cost curve – even before taking into account declining ore grades.
“Worse still our rate of increase is nearly twice that of the globe in coal and base metals and more than twice for iron ore,” he said.
He warned that just as miners lagged the cycle on its way up, it appears to be lagging the cycle now that it is correcting down.
“In today’s market, the industry’s overwhelming focus is, understandably, on the operating costs, capital management and productivity legacies of the era of price-led growth and the drive for production,” Hooke said.
While he recognised that companies are attempting to restore competitiveness and realise volumes by strengthening balance sheets and rebuilding investor confidence, Hooke suggested that the industry’s unrelenting austerity focus could risk becoming “more akin to foetal position-like behaviour”.
He explained that miners are at risk of cutting too much, adding that if the slashing isn’t in line with structural adjustments they risk not being able to bounce back once the market corrects itself.
“Increased capital discipline in both its allocation and management is moderating if not curtailing, investment in sustaining capital and in new capacity,” Hooke said.
“The industry generally again finds itself dragging on the cycle, rather than pre-empting it.”