If the wheels come off the supercycle...

Ten years of boom within the mining industry may be coming to an end. The commodities 'supercycle' began in 2004 and there are already signs that it is slowing down. Some commentators suggest we are now facing 20 years of downturn. Although this seems unlikely, cost management will be increasingly important for mining companies. Effective remote communications can help increase the efficiency of business operations and the value of technology investments.

Tuesday 20th August 13

Mining and financial publications this summer seem to have been full of headlines like 'End of the supercycle' or 'Death of the supercycle'. In this scenario, we have entered a vicious circle. The slowing of the Chinese economy is impacting commodity prices; which is impacting mining share prices; both of which are impacting the growth plans and profitability of mining companies. The result is the period of boom the industry has experienced since 2004 will come to a natural conclusion. The most pessimistic outlook is for a return to the dark ages of commodities between 1973 and 2003.

Not everyone agrees with this prognosis. Although the Chinese economy is not growing as quickly as before – only 7.5% forecast growth for 2012 – the Australian mining sector continues to expand rapidly. In fact, the Australian government estimates that around 60% of all capital expenditure on building and construction in the country are related to mining. Many analysts point out that there is still a very pronounced upward curve in global demand for almost all minerals and metals. Allied to diminishing supplies and you have a situation where prices may fall slightly in the short term – but not off a cliff.

Of course, the difficulty is that, at the same time as prices and share values are in flux, the cost of production is rising. Deutsche Bank estimates the cost of running and building mines increased by between 10-15% in 2011. You don't have to look too far for the reasons for this. Copper mines, for example, now have to dig up 50% more rock than they did in 1994 for the same amount of the metal.

It is against this backdrop that BHP Billiton announced it is to shelve $80 billion of investment it had planned for 2015. Yet, Latin America and Africa still offer many potentially attractive opportunities. So, the supercylce may not be coming to an end, it may simply be changing shape.

Whether we go into a supercyle mark II or exit the current supercycle altogether, the transitional period will increase the industry's focus on effective cost management. It's instructive to see that the Ernst & Young report on the business risks facing mining in 2011 and 2012 saw 'Capital project execution' appear at number 5 in the top ten list where it had not appeared at all in the previous list. This was three places above the perennial 'Cost management'.

The Ernst & Young report states: “Upstream metals and mining projects comprise a significant percentage of company spend and require particular focus on budgets, schedules and execution.” Given the current climate, it is attractive to focus on short-term cost cutting but this should be complemented by taking steps to generate longer term value for the mining company.

The effective use of remote communications can help in both respects. Of course, a mining company is not going to alter its mine plans solely based on the quality of the communications infrastructure available but remote communications has a disproportionately high effect on business efficiency for the amount of capital expenditure.

For a mine operation to be as efficient and profitable as possible, there has to be a reliable, high performance and easily adaptable network infrastructure. The need for data hungry applications and real-time information sharing has grown rapidly. The inability to meet these demands can be costly. One industry estimate suggested that the oil and gas industries alone lose $15 billion each year through poor decision making from lack of access to relevant information where and when it is needed.

In addition, in uncertain economic times, all companies will look to control head count. The mining industry is no different. However, the mining industry is slightly different as it is faced with a growing crisis in terms of available skills. One way to address this area is to look for business processes that can be handled through remote operations. For most organisations, the success of increased remote operations will be determined by the robustness and availability of the network that lets them monitor and manage from wherever the business requires – whether on-site, off-site or the other side of the world.

To fully exploit the investment that a mining company makes in communications, it should consider how to get the most from its network infrastructure. Often, a site will require little more than Internet access and SCADA-style data applications. However, larger sites – especially in the more remote locations on earth – have much more sophisticated demands. While mine engineers and geophysicists need to share huge files and video with headquarters, there is a need for access to high performance business applications and miner welfare facilities.

There can be many different organisations – the mine owner, prime contractors and sub-contractors – on the site. This often leads to the establishment of a number of different networks on the same site. Today, it is possible to create a single network infrastructure that allows a number of sub-networks to operate securely and independently that reduces the cost of equipment and management required to provide the range of network services the site requires.

An effective remote communications infrastructure can give mine operators the opportunity to think innovatively. While many different potential risks moved up and down Ernst & Young's list, one remain very near the top. Operators know that they have to maintain a social licence to operate in the areas where they are active. In addition to safety and environmental issues, this means working closely with the local communities. For very little expense, mine operators can look to extend their existing communication infrastructure to deliver educational and entertainment-style content to communities that surround their sites.

Today, mining companies have access to a greater range of network technologies to create high performance, high availability communications infrastructures anywhere in the world. Developments in satellite means that high data rates can be achieved securely and affordably for inter-site and inter-country communications. Advances in wireless and mobile makes a wide range of applications available for intra-site  and site-to-site communications.

Whether ending or changing shape, the current focus on the mining supercycle is giving us a chance to look at ways to make mine operations more efficient. Remote communications can help to reduce costs and introduce more remote operations on sites. In addition, it can help drive longer term value by allowing operators to do more with their infrastructures. A mining company should select a network service provider that they can work closely with to scope out its specific requirements and create a communications infrastructure that will exactly meet its needs and budgets.