China’s reduced craving for raw materials is driving mining companies to adopt extreme measures to cut costs amid steadily falling prices.
Having already cut billions of dollars, mining companies are now scratching for savings wherever they can find them, from renegotiating rubber contracts for tyres, to adopting driverless trucks and trains. Even menus aren’t exempt.
Kinross Gold workers in Mauritania are losing their posh Nespresso brand coffee machines advertised by movie star George Clooney. And Rio Tinto has been cutting back on meat pies.
“The world is moving into surplus in most commodities. The focus absolutely has to be on cost cutting and to cut out the excesses of the past five years,” Rob Clifford, a mining analyst at Deutsche Bank in London, said. “And you need to focus on the small stuff. Every pie counts.”
At a time when more flush industries are lavishing gourmet items on its workforce, from fresh sushi at Google to new “paleo diet” food stations at the cafeteria in Apple’s headquarters, the mining industry is jettisoning everything from bottled water to braais.
Rio Tinto, which brought in more than $50 billion (R530bn) in revenue last year, saved about $60 000 by reducing servings of hot meat pies and sausage rolls. That was part of a broader effort that stripped $2.3bn from annual costs in an overhaul of global operations.
That drive would persist, chief executive Sam Walsh said in a television interview. “We need to continue to improve our efficiency.”
Similarly, Kinross is withdrawing the Nestlé espresso capsules as part of a push to lower operating costs after a one-third slump in gold’s value.
The company was moving to “percolator coffee machines and ground coffee to replace the more expensive single-serve capsules,” Kinross said in an e-mail sent on April 2 to its staff at the Tasiast mine in Mauritania, written in English, Arabic and French. The company stated the switch would save $80 000 a year.
Andrea Mandel-Campbell, a Toronto-based Kinross spokeswoman, declined to comment directly on the e-mail.
“We’ve been focused on reducing costs and increasing efficiencies across our operations for some time now,” she said. “We’re pretty proud of some very tangible results that we have been seeing lately.”
With the Bloomberg world mining index down 42 percent in three years, investors will keep pressuring for cuts by curbing wages, reining in expansions, and closing or selling costly mines.
BHP Billiton, the world’s biggest mining company, has stripped out about $3.9bn in costs and spending on exploration in the past two years.
To curb costs at its Australian coal mines BHP Billiton has instructed its truck fleet to reduce downtime on shift changes and has begun refuelling trucks at mining pits to avoid wear and tear on tyres. The company says this has improved truck performance by 40 percent.
BHP Billiton said it was reviewing the size of the workforce at its Australian iron ore operations, which reported about $20bn in sales in financial 2013.
Anglo American, the fifth-largest mining company, has reviewed contracts with suppliers of fuel and rubber for tyres, and removed contractors at its Australian coal operations to trim costs.
Yet the industry may be hard pressed to keep the cuts coming.
Mining companies would have trimmed their capital spending by more than half between last year and next year, JPMorgan Chase analysts estimated in a May 12 report, raising the industry to overweight from underweight. This raised the possibility of cash returns to investors, JPMorgan said.
“The easy cost reduction opportunities have been tackled,” Morgan Stanley wrote in a note last week. “While the efficiency drive will continue, the pace of cost reductions will slow.”
That’s little solace for workers at nickel producer Western Areas who have not had a pay rise in three years as prices of the metal have tumbled, while the company is keeping expenses under the microscope to contain its losses.
“Every cent we save goes straight through to the bottom line,” managing director Dan Lougher said in an interview. “Cost reductions are part of our culture. When prices of bananas go up we take them off the menu. They are on the menu at the moment.” – Bloomberg