How to overcome demand swings in mining & metals
October 22, 2021
October 22, 2021
The principles of supply and demand have defined economic models for centuries. But since the beginning of COVID-19, we have seen significant changes to both, especially in the mining and metals industries. What is happening? And why?
In 2019, demand was surging for most products, and commodities were no exception. Then, when the pandemic hit the U.S. in early 2020, we saw dramatic reductions in demand with a tight supply of common necessities. As vaccines began rolling out in the first half of 2021, demand again surged while supply chains remained constrained. Now, in the second half of 2021, we see yet another swing in demand for commodities like iron ore and copper.1
These dramatic and ever-changing variations in demand, coupled with on-again-off-again availability of commodities, are expected to continue to challenge supply chains like never before.
First, let’s take a look at the forces at play in the mining and metals industries.
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In the near term (next six months) and longer term out to 2025, iron ore pricing is projected to be very volatile. In the middle of 2021, the price sat at $200/ton, while an average price by the end of 2021 is expected to be down to $172/ton—with a further reduction to $95/ton by 2025.2 This price decline is due to the slowdown in China from its decarbonization drive, which has resulted in restrictions on steel production and subdued Chinese iron ore demand.
Even though a significant price drop is expected over the next five years, the iron ore supply is increasing year-over-year from 2,350 million tons in 2020 to an expected 2,550 million tons by 2025 (it’s important to mention that the price increased 50 percent between September and October). This trend shows that even with supply increases, the demand is declining below the supply capabilities, and companies must be able to adjust their supply chains to match changes in pricing and demand levels.
Copper, however, paints a very different picture. Copper is facing supply concerns from floods in China, labor negotiations in Chile, and blockades in mines in Peru. These combined events drove prices up 47 percent from 2020 to 2021. Further out, there is now a projected shortage in copper supply relative to demand through 2025, with the shortfall reaching as much as 290K tons.3
These supply constraints are at odds with increased copper demand spurred largely by the green energy transition, including accelerating growth of electric vehicles (EVs) and charging systems in the automotive industry. In fact, “green copper” demand is expected to grow an average of 13 percent year-over-year for the next 10 years.4
Like copper, nickel is a primary material used in the EV industry, specifically for batteries. The forecasted demand is expected to increase from an estimated 100K tons in 2021 to almost five times this amount in 2025 at about 450K tons. In addition to the EV market, there is also increased demand expected from Indonesia related to its expanded stainless steel capacity, which has increased exports 120 percent year-over-year. Even though a large demand increase is expected, the supply is projected to stay at the current pace, keeping prices more stable at around $17K/ton for LME (London Metal Exchange) 3M prices.
Lithium and cobalt
As the green energy and electric vehicle transition continues, lithium and cobalt will also be significantly impacted over the next several years. That is because of the need for lithium in lithium-ion batteries and the use of cobalt in creating better battery stability and safety.
Lithium chemical demand is expected to grow from approximately 340K tons in 2020 to over 1M tons by 2025. This growth is largely spurred by demand in the EV industry. However, there are also supply concerns, which are expected to drive up lithium prices by about 140 percent from 2020 levels to a projected price of $12K/ton by 2025.
The demand for cobalt in batteries for plug-in EVs is expected to grow from approximately 25K tons in 2020 to about 85K tons by 2025. Given this demand increase, supply is anticipated to be very tight, with a small deficit in the ability to meet demand by 2025. This situation leads to a projected increase in the price of cobalt from approximately $14/lb in 2020 to an estimated $22/lb in 2025. The other important factor for cobalt is that about 70 percent of global supply comes from the Democratic Republic of Congo, which is volatile and has significant risks in supply chain reliability and security.
Copper and lithium raw materials are in short supply, driving up prices,5 and threats of mine strikes in major producing countries only stand to make matters worse.6 Human resource constraints are also a problem: Western Australia’s iron ore miners are dealing with a severe shortage of train drivers,7 while the U.S. lacks enough truck drivers.8 As the amount of freight shipped by trucks increases, the number of drivers continues to decrease. The current shortage of nearly 48,000 drivers in the U.S. could grow to nearly 240,000 by 2023. Additionally, congestion in Chinese ports is holding up vessels, causing massive delays and driving up shipping prices.9
For mining and metals companies, the combination of significant swings in demand, persistent supply constraints and accompanying price volatility represent the continuously changing dynamic that is severely impacting supply chains. As demand and commodity prices move, companies will need to be able to quickly scale up when demand and prices are higher, and then just as quickly scale down to cut costs when demand and prices are lower. This level of agility is essential for companies to obtain the most profit at the lowest cost.
This new normal is expected to continue given market volatility driven mainly by China and U.S. demand, and due to the green energy transition. However, the current economic conditions also hold great opportunities for companies to build up their core capabilities so they can adapt to supply chain exceptions, leverage data to make quicker decisions impacting profitability and build resilient supply chain models to be positioned stronger than ever. The question is: “How?”
Coping with the demand and supply challenges presented above requires greater business focus and agility. That is, companies need to shift to a customer-centric supply chain, leveraging data and technology to optimize all aspects of the business toward serving customers in the most efficient and profitable way possible.
We have identified six building blocks that can help mining and metals companies be more customer-centric and adapt to both current and future challenges in demand or supply.
1. Living segmentation
Given unpredictable demand and supply challenges, mining and metals companies can no longer expect to serve all possible customers. Instead, companies should look at more granular customer segmentation. For example, using data-driven analytics and artificial intelligence (AI), companies can pinpoint which end customers represent the greatest revenue potential for the least cost, and prioritize serving those targets. Similarly, companies should reassess their internal segmentation across business units—typically mines, smelters and refineries. By realigning inventory strategies internally, companies have the potential for shorter cycle times, more on-time deliveries and reduced need for expediting. As a result, we estimate companies could reduce inventory and transportation costs by 2 to 8 percent.
Figure 1: Example of the complexity in a typical copper mining value chain
2. Asset agility
Technology can also help mining and metals companies gain agility, improve operational efficiency and provide real-time decision support. For example, technologies like robotic process automation (RPA) and AI can automate many supply chain functions to reduce costs and the potential for human error that could cause delays. Moving data and workloads to the cloud provides more flexibility to scale computing resources up or down based on fluctuating market conditions. Additionally, the cloud offers an agile, cost-effective environment for developing new applications and quickly bringing to market new business capabilities.
3. Service-oriented supply chain
While common at many mining and metals companies, placing ownership of business decisions and profit and loss at the individual site or plant level limits visibility and the ability to act cohesively on larger regional or global forces. By centralizing P&L and certain supply chain functions, companies can make more strategic decisions affecting the business as a whole—for example, around transportation or distribution. Centralizing business intelligence and decision-making can also support a customer segmentation strategy by using real-time data to prioritize or reprioritize customers based on profitability, growth potential, ease of servicing, etc.
4. Real-time visibility
Creating a digital “control tower” using cloud, Internet of Things (IoT) and AI technologies can bring greater visibility across your entire enterprise—from raw materials and supplier inventories to customer orders, production status, transportation (inbound, outbound and inter-company) and supply chain logistics. A control tower can also sense and respond to impending situations such as port congestion, equipment failure, inventory shortages or human resource issues.
Figure 2: End-to-end control tower creates visibility and alerts to drive quick insights and actions
5. Data and applied intelligence
As mining and metals companies increasingly digitize, they are creating vast amounts of data. Today, a single copper mine can generate more than 500GB of data every minute. Creating value from all this data at scale requires advanced analytics with AI and machine learning to derive meaningful insights in real time. We believe the best use cases for leveraging these capabilities are reducing truck fuel usage, increasing equipment uptime and lowering demurrage costs. For example, one Accenture mining client applied analytics to create an integrated planning, scheduling and blending solution that reduced transport, inventory and demurrage costs by 2 percent while increasing company revenue by over 3 percent.
6. Continuous innovation
As companies adapt to constantly changing market conditions, continuous innovation is essential. The mining and metals industries still face issues around safety, production efficiency and carbon footprints. Harnessing advanced technologies like cloud, AI, IoT and blockchain to drive further innovation will help address these issues. Autonomous mining is a good example. The World Economic Forum has projected that automation and robotics will cut injuries in the mining and metals industries by approximately 10,000, connected worker technologies by approximately 22,000 and remote operating centers by approximately 12,000 over the decade ending in 2025.10
Historically, mining and metals companies are early adopters of operational technologies but laggards when it comes to supply chain innovation. At Accenture, we have seen our consumer goods clients taking the lead and aggressively building their customer-centric supply chain foundations, especially in the beverages, automotive and food sectors. However, a few of the leading companies in the energy and mining sectors are just starting to take their first steps towards this goal by launching regional pilots. During periods of global supply and logistics disruptions, the business case for implementing the above-mentioned customer-centric supply chain building blocks is gaining enormous strength, influencing the strategic agendas of more and more CEOs and COOs in the mining and metals industries.
Shifting to a customer-centric supply chain will not occur overnight. It is a journey that most companies will take with incremental steps. We recommend starting with a high-level roadmap, creating a business case for each of the different building blocks based on value potential and then designing sprints. The sprints can be structured to capture value in four to six weeks, allowing for flexibility and agility while delivering value quicker. We recommend this approach in order to be ready for—and take advantage of—the inevitable market changes related to customer demand and price.
Special thanks to Kamila Achi and Christian Inciong for their contributions to this blog.
2 S&P Capital IQ Pro
3 S&P Capital IQ Pro