Australian Coal Mining Productivity off the Bench

BRISBANE, Australia - April 1, 2013 - PRLog -- The Australian Bureau of Statistics shows the productivity of the Australian mining industry is down by 48% since 2001, based on what is universally referred to as multifactor productivity (MFP) which allows industries to be compared both across sectors as well as between countries.

Graham Lumley, CEO of GBI Mining Intelligence, summed up the trend at the surface coal operations conference in Brisbane recently: “There was a substantial rise in productivity in the Australian mining sector from 1986-87 through to 2000-01, with the MFP rising 36% during this 14-year period, representing a compound annual increase of 2.2%”.

“Following this there was a 47% decline in MFP from 2000-01 to 2011-12 so that during this 11-year period the annual compound decline came in at 5.7%,” he explained.

“There was a rise in productivity in the US mining sector from 1986-87 to 2004-05 of 17%, reaching a compound annual increase of 1.0%. During the six-years through to 2010-11 there was a 7% drop in MFP, falling to the tune of 1.1% on a compounded annual basis.

“Analysis from other countries shows similar trends generally indicating 2000 was the “cyclical high” across all national boundaries.“The lower variability in the US appears to be a function of their mining industry output having a largely domestic focus, as opposed to Australia’s drive being almost entirely export orientated.

“While mining industry revenue has grown rapidly over the decade, the volume of output has only grown at an annual average rate of 3%, despite mining employment more than doubling and strong growth in capital stock. As a consequence, both labour productivity and MFP have fallen since 2001 when commodity prices started rising sharply.

“When compared with US mining, US manufacturing as well as Australian manufacturing, our mining productivity has literally fallen off the bench.”

But such statistics, founded on costs associated with labour and capital, don’t go to the heart of coal mining’s key performance measure – the efficient and effective utilisation of equipment.

For that GBI has devised its own mining equipment productivity index which works with two primary levels of performance: median, or middle, and best practice which approximates the 95th percentile.

For that GBI has devised its own mining equipment productivity index which works with two primary levels of performance: median, or middle, and best practice which approximates the 95th percentile.

“The distinction of performance between these two standards of performance is important as it is the gap between current performance and best practice which most mines should be aiming to close.

“For most coal mining companies improving mining efficiency is not an option; it is an imperative. Our data demonstrates poor management and inefficiency actually reduces margins as the price of coal rises.

“Management response of simply cutting all ‘non-essential’ expenditures will not be enough. What is needed is the repairing of the structural inefficiencies which have been introduced by poor strategy and poor management during the 10-year boom in commodity prices.”

GBI’s CEO emphasises it is relatively easy just to purchase more equipment, employ more contractors .... “and that is what many mines are doing”.

“However, it is amazing in an industry where skilled people are in such short supply, that the dominant solution to moving more material is to purchase more equipment. More equipment means more people,” he said.

Lumley contends, despite opinion within the local industry, Australia is not best-in-class for any piece of mining equipment and has declined more than most other countries during the recent boom.

Tapping into one of the most comprehensive equipment data bases in the world Lumley proclaims Australia is below the annual output of North America and above Africa (except for front-end loaders - FELs).

“Australian annual output relative to Asia and South America is generally (but not universally) lower; but most importantly, has dropped relative to these other competing countries,” he said.

“Australia’s larger decline in performance is a function of work practices, culture, leadership, strategy, etc. It is not a function of poorer equipment or the environment. It is an issue related to the boom and needs the repairing of the structural inefficiencies which have been introduced by poor strategy and poor management during the boom.

“Action on multiple levels is required and a focus on what others are doing well is a necessary part of the ongoing viability of many of Australia’s mines.”

GBI figures while strip ratios in the coal industry are up by 36% in 2012 compared with 2006 and annual operating cost is up by 53% (time based not unit cost) for the same period, equipment performance is down by 48%.

“Of these factors equipment is the only reversible factor,” Lumley argues. “High market demand and record profit margins have meant most producers have not had an imperative to wage war on costs. Mines have not felt the need to increase efficiency to gain competitive advantage,” he said.

“The difference between best practice and median has increased. Consequently, there should now be more differentiation between mines based on efficiency.”

GBI proposes a solution to improving equipment performance can be found by adopting a method of simple business improvement incorporating analytics.

“Business improvement is proposed to be comprised of two steps: ‘quantify the gaps’ and ‘do something about them’,” Lumley maintains.

“Analytics (both basic and advanced) applied to internal and external data can provide a virtually untapped source of information about gaps (losses) in performance. These ‘discoveries’ provide the facts which managers can use to make informed and value-adding decisions.”

To stay up-to-date on the latest news in the Australian coal industry, subscribe to Energy Publishing’s Australian Coal Report.  Energy Publishing Asia Pacific is a Brisbane-based internationally renowned publisher of leading coal industry publications and reports covering Asia Pacific and the Americas. In addition to the weekly Australian Coal Report, our publications include the weekday Inside Coal, weekly Coalfax, Indian Coal Report and South African Coal Report and importantly, we also deliver key market price indicators for all regions, including the Newcastle Export Index (NEX) and the world's first Coking Coal Index as well as a Database of Prices & Indices.

To take out a free trial of one of our reports or for more information please contact epi.coalinfo@ihs.com, call +61 7 3020 4000 or visit http://www.coalportal.com/.