The Natural Resources Podcast

Mining's Fading Heartbeat | David Humphreys

March 02, 2020 David Humphreys Season 1 Episode 1
The Natural Resources Podcast
Mining's Fading Heartbeat | David Humphreys
Show Notes Transcript

Welcome to Highgrade's podcast on the world of natural resources. We kick off our podcast journey with a theme that goes to the very core of the extractives industry, to its heart. We explore the fundamental topic of mining productivity. Sounds boring? Think again: this is a window to what the industry has been, and what it will be. We talk about money, energy, people, robots, and much more. Come join us as we sit down with Dr. David Humphreys, resource economist extraordinaire. 

Åsa Borssén:   0:00
Welcome to this Highgrade podcast and to our world of natural resource is I'm your host, Åsa Borssén. And today I'm joined by Dr David Humphreys, resource economist extraordinaire and an extraordinarily smart guy to talk to.

Åsa Borssén:   0:48
Indeed, this is Highgrade. You already know us from our video channel at www.highgrade.media. So, the good news is that we have now added podcasts to our portfolio. Our pledge to you is to deliver the same quality debate on natural resources and development but covering more topics, in more detail and bringing in a wider variety of people. And the chance for you to listen to us while biking to work, running that extra mile, or why not while doing the dishes at home. We kick off our podcast journey with a theme that goes to the very core of the extractives industry - to its heart, really. We will explore the fundamental topic of mining productivity. Sounds boring? Well, think again. This is a window to what the industry has been and what it will be. It's about money, energy, people, robots and much more. And as I mentioned, I will do this with no other than Dr David Humphreys. Few people know the industry's quirks as intimately as David does. And he has a knack for explaining technical issues, such as productivity, in a very simple and engaging way. David, it's a pleasure to have you with me.

David Humphreys:   2:02
Very nice to be here, Åsa.

Åsa Borssén:   2:04
David, you have a remarkable career in the industry. You have been chief economist for large corporations such as Rio Tinto and Norilsk Nickel. But you've also been attracted to the academic world, and you've written numerous papers and books. Do you think of yourself primarily as a corporate executive or as a researcher?

David Humphreys:   2:23
I've never really made that distinction quite honestly. I mean, I've also worked in government, by the way, for nine and 1/2 years as well, so, and I think that where one has a specific skill set of the sort that I've developed I mean, I think it hasn't been an issue for me to be able to roam across government, industry and academia, without necessarily feeling I'm making a major transition in doing so.

Åsa Borssén:   2:53
And an economist by training, How did you end up in mining?

David Humphreys:   2:58
Ah, well, I was sort of an economist. I actually, my academic background was in economics and politics. My PhD actually is in politics. How did I end up? Well, when I got my PhD there didn't seem to be a lot of jobs around for people with PhDs in politics. And I chanced upon an advertisement in the newspaper from the British Geological Survey. They had a contract with Department of Trade and Industry to provide advisory services on minerals policy. And they were well stocked with geologists. But they felt they needed an economist to work with them. And in the absence of any ready-made minerals economists in the UK, they kind of opened the job to someone who was prepared to turn themselves into one. And I thought this could be a pretty interesting thing to do. But being in a scientific institute, not being a scientist, I kind of ran out of road by the 1980s. At which point, fortunately, Rio Tinto offered me a job and so I moved across into the private sector. And I worked at Rio for 18 years. Nine of those as Chief Economist. From there, subsequently I went on to Norilsk Nickel. A move that was viewed by many people as slightly eccentric.     

Åsa Borssén:   0:00
How come? 

David Humphreys:   4:33
Because I had the most wonderful job in the world in Rio Tinto, I suppose. And, you know, I had no reason to do anything than carry on in that job until retirement, but, you know, it was a unique challenge. Norilsk, a very large Soviet company, if you like, that was trying to transform itself into a modern global mining corporation, and felt it needed a bit of assistance from people who had worked in modern global mining corporations to help it in that. And it was a challenge for me. But then it all came to a fairly abrupt end in 2008 for all sorts of reasons I won't bore you with. And from then on, I thought, you know, I've kind of done two very high profile jobs as an economist in the mining industry, I think, I'll go out on my own. So, subsequently I consulted, I worked as non executive director. I wrote a book, as you perhaps know, The Remaking of the Mining Industry, I've taught and I've taken long holidays. So it was basically the..  where I've been for the last, what, eleven-odd years.

Åsa Borssén:   6:01
And about three years ago, we met in Berlin to talk about that book, The Remaking of the Mining Industry, and the state of the mining industry. And that was our first ever video interview. And today you join us as we launch our Highgrade podcast. Lovely symmetry let me point out. But back then it was all about a busted boom, cost cutting, industry consolidation. And now it's a rather different industry than that of 2015/ 2016. How would you describe the industry today? What is the headline?

David Humphreys:   6:39
Well, the industry hasn't exactly kind of rushed back into, you know, that the investing agenda that was that preoccupied them between I'd say, 2004- 2012. I mean, they took a real battering after that, on there bottom lines with huge write offs and a lot of criticism, obviously from shareholders who had lost a lot of money as a result of their over extension during the boom. Yes, I'm not sure I can sum up exactly, you know, where they are at the moment. And one thing is clear is that they've had to put a lot of effort into getting their houses into order. Ah, again cutting out many of the functions that were geared towards the rapid expansion of those companies and focusing on housekeeping, on productivity growth - which we'll obviously going to talk a bit more about - making themselves more attractive to the investing community again, building trust amongst a sceptical investing public as well as a public that is becoming increasingly sensitive to the environmental agenda. So I think they got their hands pretty full at the moment. But, um, and it's noticeable that they are still keeping the purse strings fairly tight. I mean, there isn't from exploration or investment evidence of a renewed appetite to do what they did previously. And maybe that's partly caution about the demand outlook. But it may be because they just don't wanna have to repeat the mistakes that they made last time.

Åsa Borssén:   8:36
So now onto a paper you recently published, Mining Productivity and the Fourth Industrial Revolution. It grabbed our attention, particularly because the conclusion is daring and, may I say, a bit alarming. Let me try to summarise the argument, and it goes something like this. First, the industry faces ever increasing production costs. And second, in the past, higher costs have been more than offset by higher productivity. And third, and this is the catch now, that productivity has plateaued or gone in reverse, and we should brace ourselves for some disruptive consequences. And that is my interpretation, and we can discuss this in detail. But let's start from the very beginning. In simple terms, what does productivity mean?

David Humphreys:   9:32
Productivity is a measure of the efficiency with which we use economic factors like labour, like capital, like intermediate products, such as energy. In essence, it seeks to capture the relationship between the inputs to an economic activity and the outputs that we get from it. And I mean there are two principal measures of productivity. Labour productivity which is what is most commonly known about, which is simply the amount of output divided by the number of employees or the number of employees hours worked. There is a more sophisticated variant called multi-factor productivity, which, in addition to labour, tries to take account of capital, an intermediate product inputs as well. But I mean both of them, the purpose of both of these is the same: to assess how efficiently we're making use off economic inputs.

Åsa Borssén:   10:37
And..please continue.

David Humphreys:   10:39
No, what I was going to say is that, I mean, at a general level in the economy this is, it is important. It's followed closely by economists because productivity output per head is very close to what the public is mostly interested in, which is income per head and in fact its principal driver. So we're talking, there's a direct line between productivity and standards of living. So as a general point, that's very important as a broad economic indicator. But in the mining sector, it has particular relevance because we're dealing with a wasting asset. So, one of the things that you have to do when you're seeking productivity growth in mining is not simply to increase output, but to do it in the face of the deterioration of the resource that you are working on. So you've got a double challenge there. You have to offset the effects of depletion before you can make any headway in actually increasing productivity.

Åsa Borssén:   11:49
And so what are the factors shaping productivity in mining?

David Humphreys:   11:55
Well, this is where things get a bit challenging. I mean, we can list them. That's not a problem. But where we struggle is, too, um, isolate the relative contributions of the different factors. So we can say we know that technology and innovation are significant contributors, workers, the quality of your workers, which is to say their experience, their education is a factor. Management systems are a factor. Institutional context is a factor; what is the market structure that you're working in? What are the government regulations that the producer is subject to in respect of things like health and safety or waste disposal, and so on. But possibly the single biggest contributor, historically, I like going back 100 years or so, has been economies of scale. Mines over a long period have tended to get bigger and bigger, and to make use of larger and larger equipment. So if you go back, even if you go back to the early 60s, the largest haul truck could carry about 30 tonnes. Today, the largest haul truck can carry almost 500 tonnes. So you've had a massive growth in the efficiency with which we've been able to extract mineral raw materials and that's why I say this is one of the really the most important contributions that we've had. And the question, of course, now is whether we can sustain that, whether we're finding those big deposits, whether we can really grow bigger mines and whether it's realistic to expect that kind of gains that we've had from that kind of scaling up of machinery to occur into the future.

Åsa Borssén:   14:05
And we will, we will get back to that. But just let me just pick up on one thing that you said, is that we struggle with relative contribution. Why is that? Is it a lack of data?

David Humphreys:   14:17
Ah, it's partly a lack of data. Yes, we don't have data that comes necessarily in the form. The reasons, as I said, that with multi factor productivity, for example, you could measure labour, you can measure the capital inputs, you can measure the intermediate inputs, things like energy, spares and so on that go into production. But all these other factors that we have, they all report statistically in a residual, so you don't get much guidance as to what goes into that residual. There's also the problem that some of them are interlinked in that, you know, that a large truck, for example, I mean, is the product of both scaling up, but it's also the product of technology. So to what do you assign the causation there? I mean, is it technology? Is it scales? So a lot of these are interlinked and this is why. And goodness me, we've tried to do this, to break out these things, and it's really, it's really very difficult indeed.

Åsa Borssén:   15:31
Now, the key point of your argument is that productivity in mining has stopped growing. How do you arrive at this conclusion?

David Humphreys:   15:38
Well, with respect, I mean, it's a kind of provisional conclusion in as far as I'm only making observations about the data that we have available to us today. And that's a conclusion that's kind of forced on me by the fact that productivity fell significantly during the course of the boom years, which is not untypical, productivity tends to fall when prices go up. You would have expected some kind of compensatory rebound in productivity after prices came down and producers started turning their attention to efficiency of output, efficiency of their operations. And so far there's little evidence that this has occurred. And it's just not me saying this. I mean, it's a number of people who've looked at these kind of things, like McKinsey, like Deloitte's and so on. If one looks at publicly available statistics like those from Australia and the US, yes there's been some levelling out, possibly some slight increase in productivity, but it's still way below the levels that it was before the boom. And this is the dilemma that the industry is in. Is this just a temporary situation whilst the effects off the investment they've been making in productivity growth, waiting for those two kick in? Or is there something else going on here that maybe marks a bit of a change from the history that we've had in the past? So, I'm not being too emphatic. I'm fairly cautious about it. But my gut feeling is that we have passed some kind of threshold and that the challenges facing productivity are rather different from those that we've faced in the past, and possibly rather more intractable. And that's really what I was trying to point too, and ask if you know, the current technologies underpinning the next phase of growth in the industry are as powerful in delivering a kick to productivity as those which we've had in the past.

Åsa Borssén:   18:09
If you're to believe social media, though, the future of mining productivity is all about robots and artificial intelligence and the Internet of Things. You don't seem too much of an enthusiast about this fourth industrial revolution. Why is that?

David Humphreys:   18:26
Ah, it's not that I'm not enthusiastic about it. I mean, I don't doubt that these technologies have an important role to play in the future of the industry, I mean, what I refer to in my papers and which is a term that's fairly widely used now, Fourth Industrial Revolution Technologies or Industry 4.0 is sometimes called. Yes, I mean, I read a lot about this and am familiar with a lot of the literature around it. And of course, you can point to it. It is happening unquestionably. I mean, say, the internet of things. I mean the ability to link up all the operations within a mine from the drill through to the mill. Obviously, attaching sensors to equipment has improved their efficiency, improved maintenance and so on. I mean automation, you have examples in particular in Western Australia of, you know, autonomous trucks, driverless trains. So I'm not saying it isn't happening. It's clearly happening. The question I'm posing is whether the impacts of these technologies are essentially incremental, or whether they are as disruptive as some of their backers claim and specifically whether they have sufficient, whether they can have sufficient impact to offset the decline in productivity from other sources, specifically economies of scale because mine's simply aren't getting any bigger. So, you know, we have to look to other places for productivity growth. We're finding other sources, but so far, the results of this is just not showing through in the statistics. Meanwhile, the challenges from resource depletion are becoming, if anything, greater.

Åsa Borssén:   20:38
But do you mean then that mining is still about the size of the shovels and trucks? And that it is, in fact, a pretty rudimentary industry still.

David Humphreys:   20:52
Well it is a fairly rudimentary industry. I mean, until we find new ways of recovering minerals from the earth without having to dig big holes, I mean, that still is the essential model that we follow. And if you look at the dramatic changes to, that were brought about by the Second Industrial Revolution, which say that, you know, back in the latter part of the 19th century, where we saw huge advances in mechanisation, scale and electrification and so on, where there were huge developments based on the kind of physical nature of those technologies and the physical nature of the mining sector. As I said, with fourth generation technologies, to me, it just looks like incrementalism. It doesn't look to me like delivering the same kind of massive strides of productivity that we saw emerging in these earlier periods. I mean, I would love to be wrong and it's kind of dangerous to argue against a record of 100 years of history. But you know, things do sometimes change. And I do think that in the wake of the last boom, the industry has not gone back to where it was and possibly can't go back to where it was because the world has moved on. And of course, it goes back to the book that I was talking about in my last interview with you, The Remaking the Mining Industry, and this was a major sub theme is that the world has changed as a result of the boom, changed in important ways, and that was my attempt to try and identify what some of those changes are. One of the ones that I pointed to then was that I did think that the resource challenge was going to get greater and, you know, we could discuss, you know, what are the particular challenges. But certainly one of them is, one of them is energy, and one of them is waste.

Åsa Borssén:   23:10
Beware of the paradigm that shifts, I think is a quote from you...

David Humphreys:   23:17
Yes, and to be honest, Åsa, I mean, I kind of resisted the idea that these changes, that fundamental changes were about within the mining sector, because, you know, as I said, there's a lot of history that suggests that things don't change greatly. But you know that for many years, you know, we didn't have to worry about issues of climate change. And then, you know, the day arrives when it suddenly becomes a major strategic issue for the industry. So, yeah, that the world does change but identifying precisely the ways in which it's changing and what you need to do about it, of course, it's not something you could do quickly because you need a few years of data to, basically, underpin your convictions about what those changes are and how they're affecting the industry. So that's why I was somewhat cautious about it. But the evidence to me seems to stack up. And I don't see anyone else out there telling me I'm massively wrong on this. I think I see a lot of people in the industry saying, look, we're doing, you know, doing what we can. We're working very hard on this. But I don't hear too many claims about how this is going to transform the productivity growth in the industry. It will contribute to it. But whether it will transform it, I think one has to be a little bit doubtful about.

Åsa Borssén:   26:37
Okay, so let's assume that productivity is not growing. So what? Most people will not feel a great deal of sympathy if company margins are squeezed a bit.

David Humphreys:   26:37
Well, for a start, I'm not sure necessarily whether that's an implication of the industry, of declining growth in productivity or even declining productivity. Because if these are effects which operate right across the industry, then obviously you have a global shift in the cost curve of the industry. So, the relative advantages of the low cost producers remain - the whole curve shifts. So good producers, efficient producers will remain good producers and efficient producers and will be deferentially advantaged in competition. So I think one of the logical consequences of the reduced productivity would be increased costs within the industry. But it would also be increased prices because at the end of the day, all of these things have to be paid for, and if we operate in competitive markets, then prices will eventually have to reflect along to a marginal cost of the industry. So if those go up prices will have to go up too, consumers will have to pay more to reflect, not just reduce productivity, but also the greater environmental, higher environmental standards that the industry is now having to observe.

Åsa Borssén:   26:38
Yeah, and that was gonna be my question. Are these production costs going to be passed on to consumers? Or let me put it like this, is my smart phone going to get more expensive?

David Humphreys:   26:52
Ah, look, society makes choices about what's important to it. And if it is deemed that the issues to do with waste disposal within industry becomes more expensive then someone has to pay for it. That's a societal choice, it has to be paid for. Now, you either pay for that by improved productivity. But if you can't achieve productivity on a scale to offset those additional performance on waste disposal, then yes, prices do have to rise. Now, these are massive generalisations I'm making here, Åsa, and of course, you know, because of my background, I tend to think in terms of, you know, big commodities like you know, iron ore or copper and so on. But if you look at your smartphone, obviously there's a lot of, a lot more elements, and some of them, some of them are produced in relatively small quantities where some of the issues facing the big miners and big mine commodities don't really exist. But generally speaking, the answer to your question is yes. I mean, if there will be a cost to producing in a more socially and environmentally responsible fashion. And it seems at the moment, that is what the public wants. That is what the investors expect. And it may be that some of the corners that the industry have cut in the past with respect, for example, to tailings dams they will have to pay a higher price in the future for those, and it's only the consumer at the end who can pay for these things. Because all of this industry is ultimately premised on consumer demand and consumer preparedness to pay.

Åsa Borssén:   28:53
An argument that often comes up in this context is that of completion. Sorry. Depletion is of course what I meant to say. Do we need to worry that there won't be enough minerals for the industry? Are we going to run out of, say, copper for electric cars.

David Humphreys:   29:12
Ah, no, absolutely not. I think depletion is a much misunderstood concept and I've been involved in debates around this. Now, a lot of attention at the moment is being forced, is being directed towards issues of grade decline and clearly for certain commodities that have been significant declines in ore grade. I mean  copper head grade, average head grade of the industry for copper mines, has fallen something like 30% in the last 20 years. For gold, it's even more than that. But I would remind people that the grades of a number of commodities has declined for quite a long time without causing any problems of availability. We got better at extracting things. And of course, there are a number of other commodities which grade declines aren't really as big an issue like iron ore,  like bauxite. But amongst those commodities which declining ore grades are an issue, I would say it's not so much availability that's at issue here. It's the impact on energy use and it's an impact on the costs of waste disposal. And I think those are two areas which do have a potentially significant negative implications both for industry productivity and for industry cost trends. So it's not availability I don't think the issue. It's a question of how much pressure on the cost curve will flow from the requirement to use more energy. Because if you go lower grade material, you have to dig up more, you have to carry more, you have to crush and grind more, you need more energy to do all that. And by the way, this is not necessarily a linear relationship. As grades fall beyond a certain point. You need disproportionately more energy to recover a given amount of any element. The other issue is, we'd already talked a little bit about, is wastes and we are seeing the rate of accumulation of waste from the industry. The industry as far as I can  judge and I've looked a little bit of this, generates something in the region 80 billion tonnes of waste a year and the rate of growth of that waste is growing two or three times as fast as mine production, as the production of the elements that we seek. Now, obviously, if you've got a lot more waste, you gotta use more energy again in terms of moving it to safe storage. But you also have to deal with a lot more tailings. These are the suspended sediments that come from  mineral processing and this has been emerging as a really quite a major issue for the industry as a result of dam collapses like those at Mount Polley, Samarco, Brumadinho. And addressing this, again, potentially it implies greater costs not just because the industry's gonna have to spend more securing dams and building them better, but also because it's going to be a lot more waste to be disposed of. So in that regard, depletion that issue is little bit nuanced, but those are areas that I point to and say you know what I think we're moving into a slightly different phase in the life of the industry, where these things which have always been there are becoming significantly more important, more public and requiring more attention and investment from the industry.

Åsa Borssén:   33:35
So what is the industry going to do about this?

David Humphreys:   33:39
Well, the industry realises it's having to move pretty fast. I mean, you know that there is, as you know, an inquiry that has been launched involving the ICMM, that is looking to establish new standards for tailings dams. Under pressure, this is, from an investing public who were saying, you know, this is an issue the industry can no longer sweep under the carpet. But I think that's only really the beginning of it. I mean, the issue of evaluating the the vulnerability of legacy dams is something that will need to be undertaken. And I think this will require the active involvement of governments as well as industry. I don't think it's sufficient just to point finger at industry and say 'sort this out', because there are a lot of orphans out there amongst the tailings dams that government, and only government, can really help sort out. So this will be a big issue for the industry. But it not just on its own, but as part of a broader range of issues where the industry is expected to improve its standards, its behaviours. Because that's what consumers and manufacturers increasingly are requiring of them. And their consumers, if you like, are requiring of them. And you only have to pick up the newspapers to find out that, you know, pressure from consumers and from consumer groups on companies like BMW companies like Apple, saying they want reassurance that  the products that they're using in their products have been sourced from responsibly mined sources. And this, I think, is something set to become a major issue in the future and one that the mining companies can't ignore.

Åsa Borssén:   36:03
An interesting and challenging future ahead. David, it's been fascinating to talk to you. Thank you very much for joining me today. 

David Humphreys:   36:11
Thank you very much, Åsa. 

Åsa Borssén:   36:15
Thanks for listening, everyone. I hope enjoyed the conversation. And there is so much more to come. Go to our website www.highgrade.media sign up to our email list to stay up to date with our world of natural resources. Until next time, so long.