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Scenario planning matters more than ever in mining

Earlier this year, mining companies scrambled to maintain their current operations as the pandemic bludgeoned multiple industries. We call this effort ‘keeping the lights on’. Now, as the pandemic’s shock waves continue reverberating around the globe, miners must take a longer view, and ask themselves: “How should we think about our industry’s future and manage the many uncertainties facing us?”
Scenario planning matters more than ever in mining Scenario planning matters more than ever in mining Scenario planning matters more than ever in mining Scenario planning matters more than ever in mining Scenario planning matters more than ever in mining

Marc Schmidt, Agustin Costa, Tycho Möncks, Konrad von Szczepanski and Thomas Vogt*

Those uncertainties are profound. Overall, gross domestic product growth forecasts are worsening for all major economic regions of the world, and a global rebound to pre-COVID levels isn't expected any time soon. For mining companies, the pandemic's worst impacts have included commodity-price volatility and country lockdowns that have put production of various commodities at risk.

Additional uncertainties remain, such as the duration of the pandemic, and the severity of its impacts; how effective treatments and disease-management measures will be; and how reactions to the crisis among governments might change in future (for instance, how might nationalism intensify?). What about businesses' reactions? To what degree will companies seek to mitigate risks by reconfiguring their supply chains?

And how resilient is the supply base for essential products and services required by the mining industry? How can we understand and mitigate supplier risks deep in our own supply chain?

Through scenario planning, miners can identify and monitor key sources of uncertainty, explore potential futures' implications for their business and craft strategies for succeeding in different scenarios.

Spotlight on possible futures

One way to engage in scenario planning is to consider how demand and supply forces might change. We might, for example, look at demand, and the robustness of mining-commodity end-use sectors. To what degree will end-use sectors exerting the largest impact on mining commodities sink into a deep depression versus achieve a healthy level of economic recovery? And then supply, and developments in mining's supply chain ecosystem. How freely will mining commodities and value-added products be able to move across borders, given government trade policies? Will miners and their customers prioritise supply chain resilience, or cost optimisation? How will their choices affect the degree of diversity within the supply chain, in terms of suppliers' size, location and maturity?

If we think of how these forces might unfold and interact, we can envision several possible futures for mining (see figure 1, below). Of course, many more futures are possible; these are meant to serve as examples of how the thought process behind scenario planning works.

Though no one can predict which futures will most likely emerge, mining companies can - and must - monitor the key sources of uncertainty and ask themselves, given the signposts we're watching, what direction does the industry seem to be moving toward? Will it face tailwinds or headwinds in that future? How well can current strategies succeed there? Should the company pivot toward a new strategy, and how?

The table shows examples of indications suggesting a direction toward each of these futures, and key implications.

Future

How we would get there

Key implications

Lean Prosperity

  • Coordinated response to virus containment and stimulus measures
  • Sharp focus on boosting resilience
  • Rapid vaccine deployment
  • Stricter ‘local content' trade rules
  • Protectionism over collaboration, as governments prioritise domestic production
  • Decline in transportation
  • Automation to reduce costs, decreasing demand in the machinery end-use sector

Deglobalised Downturn

  • Persistent virus threat prompting government borrowing to support public health
  • Trade barriers to protect economies
  • Elusive vaccine
  • Trade and travel restrictions from fears of ‘foreign virus' resurgence
  • Slow recovery in demand across industries
  • Protectionism over collaboration
  • Emphasis on doing less with less, as companies downsize and prioritise cash-flow security over growth
  • Potential bankruptcies

Globalised Turmoil

  • Persistent virus coupled with ineffective economic stimuli and pressure to restart economies
  • Further lockdowns prompted by prolonged infection or potential second wave
  • Government stimulus limited by populism
  • Governments and businesses forced to open borders to survive
  • Declining demand across all key industries, especially construction, machinery, transportation and electronics
  • Globalisation stemming from pressure on businesses to prioritise low cost over supply chain resilience
  • High economic volatility, from premature reglobalising and lack of resilience

Same-Path Resumption

  • Looser virus containment thanks to ‘lucky breaks' (existing medicines, seasonality)
  • But limited long-term changes in mindset and ways of working
  • Fast reglobalisation and return to old ways of working
  • Economic recovery as pandemic comes under control, restrictions get lifted and key industries resume operations
  • Reglobalisation of supply chain as governments open borders
  • Moderate economic volatility as world reglobalises without developing supply chain resilience

Copper: A case in point

Changes in any of the demand and supply factors could catalyse big differences in impacts on the mining industry. And they could strongly influence which futures may be most likely to emerge and what strategies various players in the mining value chain might consider.

Let's use copper as an example. As large openpit mines are exhausted, underground mines are expected to gain share. Meanwhile, head grades have fallen markedly in recent decades, further constraining future supply, and miners' margins have come under more pressure from cost inflation.

The pandemic triggered a plunge in global demand that caused copper inventories in warehouses to build up. Since March 2020, disruptions in copper production have grown swiftly, causing a loss in potential production of about 300 kt. While stock levels have since recovered, the emerging worsening economic situation may further jeopardise already-at-risk mines, which constitute almost 10% of global supply.  

The table shows examples of demand and supply impacts on copper for the possible futures we've explored.

Future

Demand impact

Supply impact

Lean Prosperity

Demand driven largely by power generation and construction sectors in India and China, with mature markets showing stagnation across most sectors.

Smelters and finished product manufacturers in US benefit from trade restrictions, taking share from players in export nations.

Deglobalised Downturn

Economic recession and stiffening trade restrictions further disrupt growth, with China becoming a key driver of demand.

Declining appetite and stiffer trade barriers slash demand for copper finished goods.

Globalised Turmoil

Economic recession sparks decline in most sectors, and exporters to EU flock to Chinese and Indian import markets.

Cost-efficient, cash-rich mines come out as winners, with acquisition opportunities.

Same-Path Resumption

Economic recovery improves outlook for most sectors, with growth led by electronics and construction in China and India.

High-cost mines come online in a shortage environment, and current players benefit from rising prices.

These scenarios would have different implications for different players in the copper value chain. To illustrate, for mine producers, trade restrictions on copper could dampen demand for concentrates in China, affecting Chilean and Peruvian exporters. In economic-downturn scenarios, only cost-effective players might win, regardless of trade restrictions. In recovery scenarios, marginal mines could come online, since existing capacity utilisation is already high.

What about refined and finished-goods producers? Assuming that trade restrictions increase tariffs for imported refined copper products, US smelters might see increased demand and higher market share. In turn, refineries in net export nations (China, Japan) could see demand decline and might need to shift their trade to economies with small smelting capacities (such as Singapore).

As possible survival strategies, miners and concentrate producers might identify low-cost, undervalued assets with high value upside potential as M&A targets. And they could secure long-term supply contracts with top Chinese and Indian smelters. Meanwhile, smelters and refineries could explore opportunities to set up their own blending facilities to reduce their dependence on traders. If trade barriers for copper finished good stiffen, these players might consider securing long-term supply contracts with finished goods manufacturers in importing countries such as the US.

Clearly, scenario planning requires close monitoring of numerous trends that interact in highly complex ways. But mining companies that commit to this effort will stand the best chance of positioning themselves for success no matter which future materialises.

We invite you to learn more by visiting BCG's COVID-19 microsite for a range of perspectives on how to plan for multiple scenarios to survive the crisis and emerge stronger.

Also, look for our forthcoming Mining Journal article drawn from this year's Value Creators in Mining report.

*Marc Schmidt (schmidt.marc@bcg.com), Agustin Costa (schmidt.marc@bcg.com), Tycho Möncks (moencks.tycho@bcg.com) and Konrad von Szczepanski (vonSzczepanski.konrad@bcg.com) are managing directors and partners at BCG; Thomas Vogt (vogt.thomas@bcg.com) is a partner and director at BCG.