PERTH (miningweekly.com) – Mining companies in Australia and around the world are facing a challenging 2014, as costs remain stubbornly high, productivity is forecast to hit new lows, commodity prices continue to fall and supply/demand imbalances persist, advisory firm Deloitte has reported.

In its ‘Tracking the Trends 2014’ report, Deloitte reported that in the 12 months to the end of May, the average market capitalisation of mining companies fell by some 21%, while cost to add or build production continued to increase.

In Australia, for instance, the cost to build new iron-ore and coal capacity has surged in the last five years. In 2007, it cost A$100 to add a tonne of capacity but by 2012, costs nearly doubled to A$195/t. It is the same for coal, with the cost to add capacity going from A$61/t in 2007 to A$176/t in 2012.

Although cost is not a problem isolated to Australia – as highlighted in the global Deloitte study - industry players have warned that the rising costs were impacting on the country’s competitiveness, and that investors are looking at offshore projects for better returns.

The cost of doing business has made Deloitte’s top-ten list of concerns for the third consecutive year, but the firm noted that it was only in recent months that companies have started finding ways of lowering costs.

Deloitte said that companies have to find ways of bringing down costs in a sustainable way and that they should look beyond simply tweaking their current cost structure. “The trouble with reactive cost-cutting is that it is rarely sufficient or sustainable. Companies that slash the workforce now may find themselves scrambing to recruit new teams as the market recovers,” it stated in the report.

Deloitte reported that, as miners worked to address their cost imbalances, many of these companies would need to refocus on a return on capital employed by making a business case for producing fewer ounces or tonnes, at higher grades.

The second most significant challenge identified in the report was to match supply to demand, with Deloitte stating that market imbalances were wreaking havoc on commodity prices.

Deloitte pointed out that unconstrained project development was threatening to push certain commodities into an oversupply.

The major consumer of commodities, China, was also ramping up domestic production, negating the need for increased imports, while also transitioning away from the investment-driven growth that fuelled the demand for commodities used in construction and power generation.

Deloitte noted that these supply and demand dynamics contributed to serious commodity price devaluations.

However, China’s urbanisation was expected to continue apace, which, in turn, would increase demand for strategically important commodities like copper, metallurgical coal, potash and gold.

The report has also identified funding as a major issue for 2014, as the significantly lower shareholder returns pushed the mining companies out of investor’s favour.

While the large diversified miners had the option of turning to the debt market, junior miners did not have that option. As a result, some junior miners had less than six months run-time, which Deloitte noted would fuel acquisitions or could result in corporate failures.

The scarcity of capital has also caused production to stutter, with projects being mothballed or scaled back, while others were divested.

Meanwhile, Deloitte has also identified the need for innovation in the sector, the interaction with local communities, the threat of resource nationalisation and corruption as further issues to be faced by miners in 2014.

The lack of skilled labour and the continued safety risks associated with mining also remained factors, Deloitte said.

The report advised that miners would need to make structural changes to survive 2014, which could include engaging in sustainable cost reduction, relentlessly focusing on productivity and returns on shareholder value, right-sizing capital projects, taking advantage of modular construction and embracing new forms of innovation.

It would also require new approaches for dealing with local communities, governments and regulatory bodies.