Commodity prices remain the top risk for the mining industry

21 March 2021 Consultancy.com.au 4 min. read
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The pandemic is undoubtedly worrying leaders in the mining sector, although their biggest concern remains fluctuating commodity prices in a volatile environment. KPMG’s latest mining survey presents the sector's outlook for 2021.

The Big Four accounting and advisory firm ran a similar study at the start of 2020, to find that commodity pricing was the top risk facing mining leaders worldwide. One pandemic and a global economic crisis later, mining leaders are still most consumed by the threat of price volatility.

Covid-19 is not entirely absent from the risk agenda. Below ‘commodity prices’ on the risk list is ‘global pandemic’ – a new yet predictable addition – followed by economic uncertainty. That said, KPMG’s Australia-based global mining leader Trevor Hart explained how mining is actually positioned favourably in the new normal.

Industry identified risks

“The pandemic may have increased the risk associated with political instability and economic downturns, but at the same time it has prompted enormous stimulus spending in most major jurisdictions, driving demand for commodities.”

“Meanwhile, volatility in global markets has seen investors flock to safe havens, driving a surge in precious metal prices, such as gold,” added Hart. All things considered, mining companies are entering 2021 with a touch of optimism. In fact, KPMG reports that two-thirds of mining executives expect their business to grow this year.

Behind this optimism is a willingness to adapt. Well over half of all executives agreed that mining companies of today must embrace new business models – including strategic partnerships, private equity funding and public private partnerships.

Mining companies are adapting to new trends

Also on the cards is digital transformation, which 80% of mining leaders see as more of an opportunity than a threat. The face of mining is changing, driven by new technological capabilities such as Internet of Things, artificial intelligence and data analytics – all of which can make mining safer, more efficient and more sustainable.

As it happens, these are key priorities for mining leaders in 2021 – more so than before the crisis. 2020 saw another round of avoidable mining incidents, bringing safety concerns into the public eye once again and causing further reputational damage for an already unpopular industry. Indeed, community relations and social license to operate are the fourth biggest risk facing the sector this year.

In fifth spot is another set of issues that have made a dramatic jump in importance over a very short time – environmental, social and governance (ESG). More than 90% of mining leaders noted the importance of a “measurable ESG strategy” today, while another 80% plus believe the success of a company is weighed against these targets.

ESG a growing risk for the mining industry

“Mining executives are increasingly focused on ESG risk, especially when it comes to climate change and meeting rising community expectations. The days of considering ESG factors as ‘soft’ secondary risks are long gone,” said Hart, who also noted “a growing emphasis on environmental risks, including new regulations and sustainability.”

So pivoted business models, digital transformation and a focus on ESG are the top priorities in mining this year. The means to this end will likely vary. Many will focus on organic growth, and their internal innovation to drive tech transformation. For others – 64% –· merger & acquisitions and consolidation are important to modernise, cut costs and shore up against an expanding risk profile.

In the backdrop, Hart notes several global trends that will influence these efforts. “Globally, government stimulus is being directed into energy transition projects. This construction boom will continue to drive demand for raw materials, such as copper and nickel. Some sectors will continue to face growing headwinds, such as coal. We are seeing a trend towards the “mergers of equals”, as part of the broader consolidation trend.”