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What a difference a year makes

May 13, 2013

Do you recall the end of 2011, when many commodity and raw material prices were soaring?

That is when experts at Deloitte wrote a report “Tracking the Trends 2012: The top 10 trends mining companies may face in the coming year”. It made excellent reading for any procurement or contracting professional interested in the mining industry and highlighted a range of opportunities and (in particular) risks and challenges that they would need to take into account in their contracting strategies and plans.

Yet what a difference a year makes. I shared the report with an IACCM member, the head of contract management at one of the largest mining companies. This is what he said:

“Interesting reading, but in many ways a “time warp.”  The report’s data reflects the “boom” environment in place in 2011/beginning 2012 when mining companies couldn’t expand quickly enough to meet the huge increase in demand coming mostly out of China.  Commodity prices spiked at record levels, and most miners were concerned with how quickly they could bring on new production.  The report does reflect the struggle against fast-rising costs (everyone chasing the same people and other resources) and governments interesting in getting a slice of the “super-profits.”  Fast forward a year or two – China is suddenly growing much slower, the US and Europe continue to lag, and some of the new supply/capacity is coming on line.  Prices plunged and forced  miners to focus on dramatically cutting costs, pulling back or moth-balling investments and looking for pieces they can sell to improve their balance sheets.  Several of them (including Rio Tinto and BHP) have changed CEOs and senior management in the last year as well  I understand that mining has always been a “boom and bust” type industry, but wow what a difference a year makes!”

There were of course many others who got ‘the trends’ badly wrong. Governments – for example Australia – thought they could cash in through extra taxes and planned expenditure accordingly. Now they face a revenue ‘black hole’.

So what are the lessons? Obviously a major point is the speed with which change can occur and how dramatically this can alter the risks we face. It indicates that a major priority for contracting is to build mechanisms that enable flexibility and include indicators that give early warning of change. The point is that many risks cannot be anticipated so in many ways the greatest risk is when we fail to allow for the unexpected. Given the volatility of business conditions, it seems to me that this is an area which requires far greater focus from the contracting experts.

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