Meet The ‘Diseconomies Of Scale’ Dragging Down The Efficiency Of The Mining Industry

Getty / Paula Bronstein

The size and complexity of mining operations have created “diseconomies of scale” which were created when the mining industry had to ramp up production in response to rocketing prices.

This jumble of assets and organisation is a significant factor in diminished productivity in the global mining sector, according to research by EY and the University of Queensland.

The report, Productivity in mining: now comes the hard part, is based on more than 60 in-depth interviews with senior mining executives around the world.

Paul Mitchell, EY Global Mining & Metals advisory leader, says the research confirms the factors eroding mining sector productivity globally are wide and varied, covering labour, capital and materials, largely a legacy of the “production-at-any-cost” approach during the boom.

“We also found a very strong theme around the challenge of operating larger, more complex mining operations and it is clear this requires a new approach to increase connectivity, promote collaboration and foster productivity,” says Mitchell.

“One miner aptly referred to the problem as the ‘diseconomies of scale’.

“The focus on increasing output meant mines had to be larger, but simply scaling up existing structures has made them much more complex to run and resulted in silos and diminished connectivity within operations – it’s created an integration gap within businesses and dealing with it requires an end-to-end approach.

“The productivity decline has been so large that cost cutting and point solutions are not enough.

“Significant costs have been stripped out of the industry and good efficiency gains have been made, but it is now time to look at sustainable long-term solutions to the productivity problem.”

John Steen, an Associate Professor at the University of Queensland Business School, says lack of innovation is another key theme to come out of the research.

“Compared with the oil and gas sector, there is an accumulated deficit of transformational innovation in the mining industry, and this is a problem recognized by the sector,” he says.

“With ore grades declining in mines around the world, the mining industry will have no choice but to embark on similar step-change innovation programs.”.

Labor, capital, materials and economies of scale are common causes behind the productivity decline in the global mining sector:

  • Labour: the inexperienced teams; high turnover in people; large numbers of skilled people at retirement age; and a focus on volume rather than efficiency have all contributed to declining labor productivity.
  • Capital: the desired standards for equipment availability and utilization rates have fallen, and there is a lack of innovation in a sector that once prided itself on it.
  • Materials: the depleting reserves and declining ore grades require innovative ways to access more ore and recover more metal.
  • Economies of scale: the larger operations have created complexity, compounded by talent and skills challenges.