Is it over yet? I ask this question often to my colleagues in the industry who have been waiting impatiently for the down cycle to end. It looks like we still have a way to go. During super cycle, people imagined commodity prices will go up forever, people now think that market will never recover. Neither hypothesis is correct, however the fact is that the cycle is lengthening, which means it could take years for the industry to adjust to market forces. In my opinion, below are top 4 trends we will see in the Metals and Mining industry in 2016 and beyond.
A. Operational Excellence Tops Corporate Priorities
Metals and mining companies have spent several years cutting costs, improving operational efficiency, and stopping discretionary spending. Depressed commodity prices continued to threaten profits, generate lower return on capital invested and undermine capital budget. These factors are challenging companies to revisit their core competencies, focus on only things they are good at, partner with experts on other aspects of the business and drive ongoing operational improvements. Among several strategies, most visible has been ongoing investment on innovation. Starting from process automation to advanced machinery to big data analytics to cloud technologies, companies are increasing operational efficiencies while reducing expenditure.
Rethinking supply chain: Greatest supply chain challenges stem from lack of confidence on suppliers’ performance (measured in terms of risk, reliability and quality) and supplier capacity. Improved visibility on end to end supply chain is essential for better alignment with customer needs in this ultra-competitive environment. Rethinking existing supplychain structure, companies can drive productivity gain and efficiency through co-opting suppliers into cost equation, setting shared productivity targets, and reforming industrial/labor/supplier relations.
"Starting from process automation to advanced machinery to big data analytics to cloud technologies, companies are increasing operational efficiencies while reducing expenditure"
Refocusing Capital Allocation: It is typical for traditional organizations to have fragmented capital allocation. It is hence difficult to connect capital spend to financial and operational returns. Centralized purchasing, improved asset tracking, computerized maintenance management help improve corporate visibility into spare parts, replacement and repair evaluation, cost and equipment performance and improve budgeting and forecasting.
Garnering Collaboration: Talent pooling, sharing infrastructure, partnering on capital projects, managing procurement as shared service within the industry are strategies to consider to not only increase buying power and to extract economy of scale and scope but also reform relationships with suppliers/competitors.
Optimizing Working Capital: While the cliché “cash is king” is old, it never gets tired. Predictive analytics and ERP consolidation helps strengthen focus on working capital lever to better match inventory/stockpile with market demand. The ultimate goal is to free up capital for more productive use.
B. Game Changing Technologies Inject Innovation and Efficiency
Despite existence of several game changing technologies that can augment competitive advantage, lower cost of operations, improve safety, metals and mining companies have continued to be reluctant adapters. Below are key technology trends the industry will experience in coming years:
1. Internet of Everything: We are truly in an unprecedented age of technology disruption. Phone, PC, car, server, sensor and even security systems now connect to internet and connect to each other. Companies tend to integrate their operational systems such as PLC, DPC, and SCADA with their Enterprise Resource Planning (ERP) platforms. Better connected and better networked enterprises aim to enable superior decision making by adopting a common platform for information sharing across the enterprise.
2.Machine Learning: As machines become more intelligent, complex tasks will be performed by machine, reducing labor costs. Integrating physical world with digital world leads to improved cost efficiency, productivity and revenue. Hardware technologies, such as sensors, provide wisdom for intelligent operations planning, while robotics helps overcome hazardous working conditions. Integrated diagnostics technology along with big data analytics generates useful insights from machines that can be analyzed for effective decision making on production planning, energy usage, capacity utilization, and continuous improvements.
3. Wearables: Wearables, which continue to storm consumer market, can be extended to benefit business by attaching those to employee clothing and accessories to detect employee fatigue, cut down on accidents, and enable rapid response in case of injuries.
4. 3D Printing: 3 D printing enables companies to manufacture parts in remote locations reducing delays associated with unplanned maintenance and the need to hold inventories.
5. Smarter Enterprise: Increased use of automation and data analytics, remote operations centers and other intelligent software applications, augmented by cloud computing power and data storage facilities, are enabling companies to solve critical business issues more quickly and intelligently. Drone technology (UAV) is making headway into the industry enabling accurate inventory tracking and reconciliation.
C. Finance Scarcity Continues to Worry the Industry
Commodity price drop, resulting in weaker earnings, continues to affect industry valuation. Price/earnings multiple of the industry is below retail and healthcare sectors. Industry debt burdens are out of control. Many traditional lenders have disappeared; institutional funding continues to bypass this sector and private equity wave is yet to make significant investment in the sector. Existing major players will be forced to consolidate and small businesses may disappear. Companies will seek government funding, explore crowd-funding, reduce debt levels and leverage intra-industry and inter-industry collaboration to source funds.
D. Health, Environment, Safety and Security Remain to the Fore
While industry safety record has been improving, companies will continue to invest on evaluating and refining their safety programs. Technologies such as sensors, wearables, driverless vehicles and big data analytics will help minimize incidence of serious injury. Fostering a culture of “safety first”, providing safety trainings, enhancing physical and information security are some of the steps companies will take. As Internet of Things (IoT) evolves and network extends beyond nuclear enterprise, organizations are faced with unprecedented risks from cyber criminals. Type of information at risk can vary from financial performance to business processes to IP to technology used etc. Cost of information breach can be very high ranging from damage to a company’s reputation and profits, to serious safety and security impacts.
The industry hopes to emerge from the current downturn soon and position for growth. This will require willingness to draw lessons from unrelated industries such as airline, car, and banking and apply those to metals and mining. It is about time that the industry takes a hard look at current strategies on technology investment, diversification and M&A and makes strategic changes!