Cost Insights
by PowerAdvocate

Intelligence for energy companies seeking a data-driven approach to cost management

A Narrowing Opportunity for Mining Supply Chains

July 14, 2020 at 8:37 PM / by PowerAdvocate

As commodity markets rebound, the window of opportunity for mining operators to drive supply chain savings is narrowing.

In this discussion, we look at:

  • Recent trends in commodity metals pricing
  • How these trends represent a strategic – and narrowing – opportunity for mining operators to capture savings
  • Key components of a strategic roadmap for how mining supply chains can effectively leverage current market conditions to achieve market-based savings and protect against future inflation risk

The Commodity Price Cycle Following COVID

At the onset of COVID-19, commodity metal markets plummeted as global demand for raw materials significantly declined through the months of March and April (Figure 1). For example:

  • Steel demand fell as North American, Japanese, and Korean automakers suspended production shortly following the COVID-19 outbreak.
  • Boeing and Airbus halted aircraft manufacturing operations following a y-o-y decline of >80% in flight bookings, significantly impacting demand for metals such as aluminum.
  • Demand for rebar and hot-rolled structural steel declined as capital projects across industries were cut in response to the pandemic.

Figure 1: Commodity metal prices fell 18% in early 2020 as COVID-19 impacted global demand and supply. Source: American Metals Market, PowerAdvocate

Metal Commodity Price Trends Jan ‘20 – Apr ‘20

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Despite the market softening that took place in March and April, commodity prices have since been on the upswing (Figure 2). Supply has rightsized as several mining operations have been forced to reduce output or stop operations because of the pandemic and associated economic slowdown:

  • By mid-April, approximately 5% of Australian nickel production was put offline as local measures to contain the spread of COVID-19 reduced workforce options for companies.
  • Three mines in Brazil were closed in June due to a high number of COVID-19 cases, removing 2.7 million tonnes of iron ore from the global monthly output.
  • Canadian mining operators are keeping several sites offline or under maintenance due to the rapid spread of COVID-19.

In addition, reeling from the largest GDP declines since World War II, major economies are passing a variety of stimulus packages to prompt growth and return to positive yearly GDP in 2021. Many of these measures focus on infrastructure expansion and will directly support metal intensive industries, boosting metal prices:

  • China, which accounts for 40% of global copper demand, released a $500 billion stimulus plan to fund new infrastructure projects heavy in copper and steel such as railways and communication networks.
  • Germany created a €5 billion stimulus for the auto industry. Half is earmarked for consumer rebates on new vehicles and the other half for auto manufacturer support. An additional €2 billion is set aside for expanding charging station networks, driving demand for copper and nickel.

Figure 2: Reduced supply paired with economic stimulus and re-opening economies has driven commodity metal pricing upward 9% since May. Source: American Metals Market, PowerAdvocate

Metal Commodity Price Trends May ‘20 – Jun ‘20

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Taking Advantage of a Narrowing Opportunity

Declining commodity prices represent opportunity for supply chain to reevaluate contracted rates and negotiate market-based price discounts with suppliers. However, as metal and other commodity prices continue to rebound, the window for opportunity is closing. In fact, an analysis from our >$5T supply chain database revealed that supply market pricing may already be at an inflection point. (Figure 3).

Figure 3: Deflated commodity prices have driven down key equipment costs, but a price rebound may close the opportunity for supply chain to renegotiate favorable rates. Source: PowerAdvocate

Example: Mobile Equipment Should-costs, YTD and Forecasted

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Although prices are rebounding, there is still opportunity for supply chain to act – there are three key strategic actions mining operators can take to identify and execute on the market-based savings opportunities still available in their supply chain.

Step 1: Identify which items are most exposed to key metals

As a first step to achieving market-based cost savings, we recommend that operators identify which of their items are most exposed to commodities with deflated prices. While operators may have an intuition of how metal prices impact the costs of certain items, a deeper understanding of these cost drivers is required to effectively prioritize where the greatest opportunities lie.

Figure 4: Copper, steel, aluminum, and nickel prices have all declined YTD. Items that are most exposed to these metals provide the greatest opportunity for savings. Source: PowerAdvocate

Example: Equipment LTM Spend and Exposure to Metals Commodities

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Step 2: Use a should-cost model to establish a target savings rate

Once operators have identified potential categories for savings, the next step is to establish target savings rates leveraging dynamic cost models. Naturally, metals commodities will drive a significant portion of costs, but additional factors like labor rates and supply and demand play a critical role in market pricing and are important to take into account (Figure 5).

Figure 5: The cost of generators is predominantly driven by steel, labor, and intangible costs. Source: PowerAdvocate

Generator Cost Model

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With a holistic view of an item’s underlying cost drivers, a dynamic should-cost model can be leveraged to track and forecast market pricing over time, offering deeper insight into potential category savings. As Figure 6 illustrates, the target savings rate for a generators contract last negotiated in mid-2018 would be >20%.

Figure 6: From July 2018 to July 2020, the cost of generators has declined 22%. Source: PowerAdvocate

Generator Should-cost Jul ‘18 – Jul ‘20

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Step 3: Identify what market data to strategically leverage in a negotiation

Once a target savings rate has been established, developing a negotiation strategy is a key final step. Engaging suppliers with cost model data is an effective strategy because it roots the conversation in facts. Declines in metals markets offer operators a natural point of leverage (Figure 7).

Figure 7: Reduced steel and copper prices drive the decline in generators’ overall cost. Source: PowerAdvocate

Generator Cost Drivers % Price Changes Jul ‘18 – Jul ‘20

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In summary, mining operators have an opportunity to drive supply chain savings with the right data and the right strategy, but the window to act is narrowing as commodity prices continue to rise through the back half of 2020. To take advantage of the opportunity, there are several key actions operators can take to effectively leverage market data and negotiate better rates. If you would like to learn more about how other operators have strategically leveraged market data amidst the COVID-19 market downturn, please feel free to contact the PowerAdvocate Team.

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