The mining and metals industry will need to operate under a new normal post Covid-19, one in which it can operate and sustain itself under the new constraints and challenges that a post-pandemic world brings with it, says industry research company Fitch Solutions.
The pandemic and its aftermath will cause miners and metal producers to reassess their investment and operational strategies in both the short- and long-term.
Fitch Solutions adds that the post-pandemic world will likely accelerate the incorporation of technology and automation in operations and have miners explore their options to shorten and simplify supply chains.
Metal producers will also look towards vertical integration, the company notes, adding that the increase in international and local political risks is also likely to give rise to increased protectionist trade and fiscal policies – including the heightened risk of greater royalty and tax policies, as well as the incidences of social unrest leading to potential mine disruptions.
The Covid-19 pandemic is severely impacting the mining and metals sector, leading to weaker commodity prices, operational hurdles and supply chain disruptions. While the industry will recover from the effects of the pandemic in the coming quarters, barring the instance of a second wave of global infections, Fitch Solutions expects its existing dynamics will be “pressured to adjust post Covid-19”.
The Covid-19 pandemic has exposed the vulnerabilities of the metal industry’s raw material supply chain, where metal producers relied on outside mining companies for ores to feed their smelting operations.
Lockdowns in countries across the world, as well as restrictions in transportation during Covid-19, have led to many smelters running low on ores, especially those that did not originally have a large stockpile to sustain operations during the pandemic.
To better prepare themselves for other potential global crises in the future, Fitch Solutions expects metal producers to consider vertical integration of operations post Covid-19 so as not to face the risk of ore shortages and supply chain issues.
Vertical integration is not a new concept, the company says, referring to major producers that are already vertically integrated, including the likes of ArcelorMittal in Europe, Norilsk Nickel in Russia and Vedanta Resources in India.
However, Fitch Solutions acknowledges the limitations of vertical integration, which include the question of funding ability, availability of mining projects up for sale and if smelters can be built near them.
In any case, the company expects metal producers to consider investing in this strategy only after full recovery from the pandemic and when balance sheets are strong.
Meanwhile, Covid-19 also contributed to metal prices dropping close to the lows of 2015, with producers having limited control over the extent of the price crash. While metal markets were generally tight at the start of this year, investor sentiment tends to overpower fundamentals during times of global crises.
Post Covid-19 will not change miners' vulnerability towards price volatility and downturns, but the pandemic will encourage greater effort from miners to try to mitigate the impact of these in future, says Fitch Solutions.
To protect profitability during price falls, the company believes miners will embark on an ever-charged drive to reduce costs so that they are shielded from price downturns in future.
“As miners have already been on a cost-saving and efficiency-increasing drive for years, additional gains in this area through traditional means will be limited. Thus, this will underpin the drive towards low-cost technology integration, specifically machine learning and data analytics, especially among miners that have not already started integrating technology into their operations, namely midtier and junior miners.”
Fitch Solutions also notes that cost saving initiatives will likely slow the pace of environmentally focused projects in the short term, except for renewables power integration in countries where doing so reduces energy costs, such as in Chile.
In addition, Fitch Solutions believes that there will be “increased consolidation or asset sales among overextended miners in the coming two to three years in order to strengthen balance sheets in the aftermath of the Covid-19 pandemic”.
Meanwhile, the automation drive in mining is an existing trend which the company believes Covid-19 will provide further impetus to over the longer term, especially among majors who can afford it and already have the foundational technologies integrated into their operations to facilitate it.
In the short term, Fitch Solutions expects financial constraints arising from the Covid-19 pandemic to put a lid on firms’ capital expenditure (capex) targets, which will limit spending on technology and especially automation in the near future.
However, enabling automation in mining is a matter of huge expense, and incorporating technology in large operations at such an expense takes months at the very minimum, the company says.
“We believe miners will exercise significant capital restraint for a time to come, especially those that face significant financial hardship as a result of the effects of the Covid-19 pandemic, which will place automation on a firmer ground only in the coming five to ten years.”
Nevertheless, Fitch Solutions expects that major miners with the funds and infrastructure in place will act upon site automation as soon as possible, further increasing the divide between majors and juniors.
Additionally, the company believes that one important technological necessity post Covid-19 will be the ability to control and monitor sensors or automated vehicles through smartphones and tablets at home or anywhere.
According to Fitch Solutions, this will facilitate business continuity during future global crises that may require quarantine and self-isolation, although the prerequisite would be that the mine in question is already equipped with automated sensors and vehicles.
For miners that have yet to integrate technology into their operations, Fitch Solutions believes they will move to capitalise on the benefits of machine learning and data analytics first, given the lower cost and immediate benefits.
As the pandemic has shed light on supply chain weaknesses, Fitch Solutions says mining and metals companies will become more wary of supply chain disruptions in the future, which will encourage them to build stronger relationships with their vendors, especially those supplying critical equipment, and build a backup system in case primary vendors fail.
“We expect to see more globalisation of supply chains compared with the existing globalised system. This will benefit local equipment and technology providers, for instance, rather than only big global names, and give rise to mining innovation in countries outside the traditionally advanced nations including Australia and the US.”
Fitch Solutions says it will also provide incentive to global brands serving the mining and metals industry to customise regional solutions in order to continue serving these companies during times of future crises that involve the closure of national borders.
At the same time, Covid-19 will exacerbate existing populist and nationalist sentiment, reinforcing the company's longstanding view that globalisation is plateauing and could partially reverse over the coming years.
As such, the company expects greater trade restrictions in a post Covid-19 world where governments will strive to protect domestic industries. Importing equipment or other supplies could become more costly at times, increasing costs for some miners and metal producers.
As a result, although supply chain adjustments will take time and remain a risky endeavour, Fitch believe some miners will look at the benefits of shortening and simplifying supply chains.
The deterioration in social stability that Covid-19 brings will pose rising risks to mining operations and supply chains, especially in countries with the lowest country risk scores in the company’s Mining Risk/Reward Index, such as Myanmar, Iran, the Ukraine, Bolivia and Argentina.
Social instability could lead to civil unrest and workers’ strikes and, therefore, temporary mine supply disruptions, via road blockades, port or mine union strikes.
In this regard, miners operating in high-risk countries will need to reconsider their investment strategies or be well prepared to build solid relationships with their employees or incorporate significant employee benefits and flexible policies, Fitch Solutions suggests.
Meanwhile, Covid-19 will cause a recession in most countries this year, posing risks to growth in later years and will lead to a deterioration in political risk.
Fitch Solutions’ country risk team expects Middle Eastern and North African countries to emerge from the Covid-19 crisis with substantially larger fiscal deficits, Latin American countries will see slower trend growth across much of the region and elevated political risks owing to economic weakness, and sub-Saharan African nations will see rising debt loads, unemployment and increasing political risks.
In Asian countries, the team expects rising unemployment and inequality, and in Europe the team expects an aggravation of the pre-existing causes of stagnation, including sluggish investment, weak productivity growth and demographic challenges.
“We expect these factors will encourage cash starved but resource-rich governments to impose higher royalty and taxes on international miners. Especially at risk are miners operating in countries that have already displayed resource nationalistic tendencies in past years, such as Indonesia, Mongolia, Egypt, Argentina and multiple nations in Africa.”
To be better prepared for such changes in tax policy, Fitch Solutions says miners need to become ever more stringent in their expenditures, reduce costs and further increase efficiencies, or perhaps reconsider their investments in riskier countries.