Commodity prices rise and fall in tune with economic trends, which are currently foreshadowing a potential global downturn. To avoid being blindsided, there are some bold plays mining companies can consider to prepare.
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It seems the mining industry has barely recovered its stability before once again facing slowing economic growth. Globally, trade volumes are down and geopolitical tensions remain high. The inversion of the yield curve in the US, Canada and UK bond markets over the third quarter sent a strong market signal that a downturn might be in store.1
Concerns about China’s economic revival remain front and center. For the third quarter of 2019, the country’s GDP grew only 6 percent year-over-year—its slowest gain in more than 27 years.2
Several key forces appear to be driving this current level of economic uncertainty. Growing income disparities around the world seem to be giving rise to more nationalistic and populist governments. This is spurring a trend away from multilateralism. Free trade has even given way to protectionism in some countries, and the global economy is resetting to this new norm.
These macroeconomic headwinds are weighing on the industrial metals sector. Volatility across the sector has been rising, from base materials to bulk commodities, with some commodities being supported by supply side constraints (figure 1). For their part, precious metals have been benefiting from the investment community’s flight to safety.
Despite these variable fortunes, however, one thing is clear: commodity prices rise and fall in tune with global economic trends, and, right now, those trends may be heralding a downturn.
“If miners are to learn from history, the time is ripe to begin shielding against a downturn,” says Andrew Swart, Global Mining & Metals Leader, Deloitte Touche Tohmatsu Limited. Companies with commodity portfolios that may continue to soften should think about taking proactive action so they can emerge from any potential downturn more robust and in a better position to take advantage of the cycle.
Organizations can lay a foundation for this future through various bold plays.
A downturn offers a clear opportunity to build the muscles to forge the future, not just react to it. Here’s how:
When the going gets tough, many companies abandon their innovation and research & development (R&D) portfolios, seeing these as longer-term plays that don’t drive short-term value. It’s hard to resist this temptation. However, most downturns only last four to six quarters, and keeping that innovation focus now can position the organization for competitive advantage. Digital programs can also be refocused around key areas that drive short-term value, such as:
There are, of course, many other examples where innovation and digitization can add key value in the short to medium term. Companies should remain laser focused on driving these.
Drastic cost cutting during a downturn can see companies trimming muscle, rather than fat. Typically companies that go through drastic cost reductions without redesigning the underlying processes see all that cost come back within a year to 18 months. Organizations need the muscle and, in the absence of rethinking how the work gets done, the cost will likely return. To avoid this:
Downturns provide a great opportunity for companies to relook at their relationships and decide which ones to invest in, which ones to abandon, and perhaps which ones to renegotiate:
The instinct is always to cut and reduce, but now might also be the time for companies to invest in key resources—specifically, assets and people:
“A period of volatility may offer unique opportunities that businesses can leverage if prepared. The key is to harness both the energy and constraints of volatile conditions to solve tough challenges and spark innovation.” says Bill Marquard, Director, Monitor Deloitte US.
Deloitte’s Global Energy, Resources & Industrials specialists provide comprehensive, integrated solutions to all segments of the Oil, Gas & Chemicals, Power & Utilities, Mining & Metals and Industrial Products & Construction sectors. Offering clients deep industry knowledge and a global network.
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