In its recent report, A continuing focus on efficiency and productivity, the firm also warned coal miners against quick-fix short-term solutions that could damage their longer-term sustainability.
If the sustained low price environment is the “new normal” for the medium-term, then “there can be no sacred cows”, KPMG said, as the thinking and practices that prevailed in the boom such as paying to chase volume were being “scrutinised and challenged”
“Delivering quick wins is necessary when faced with such a profound shift in a market,” KPMG said.
“However, it can be dangerous to ignore possible longer-term consequences of some of the short-term tactics employed to protect the business.”
KPMG listed running down stockpiles, deferring pre-strip and development, short hauling and deferring maintenance as “logical responses” to shaping a more attractive outfit and loss when facing a short-term profit or cash challenge.
They could work particularly well, the firm said, in a short, sharp downturn, as a swift return to stronger demand and commodity prices would partially offset the expense of catching up with stripping and reversion to longer haul routes.
“Given that the downturn is more protracted, a recut life mine plan, based on assumed lower prices, realistic but aggressive cost reduction targets and competitive product specifications, is now required,” KPMG said.
Re-negotiating contractors’ prices has also done the job of reducing costs for many miners.
KPMG said there was more value to be had by going beyond price in working constructively and effectively with suppliers.
The firm warned, however, that the collective actions taken by miners to reduce supply costs had also led to major risks emerging in the mining services sector.
“Mining compromises need to have a good handle on these risks, and have the flexibility to rapidly address any operational threats that may emerge from the failure of suppliers who deliver critical capabilities,” KPMG said.
Cost curve sticky slide
However, labour costs and access arrangements for infrastructure had created a “stickier slide” down the cost curve.
“As a developed country with a high cost of living, and an extended period of wage inflation in the mining sector, we have structurally high labour costs versus our competitors,” KPMG said.
“The ‘take or pay’ infrastructure access arrangements were critical for access to capital and increasing supply are now a heavy burden and difficult to change.”
The firm also warned that the policy and industry-level changes that would better align the export cost structure to the market were yet to be seen.
However, KPMG expects this will be critical to the Australian coal sector’s restructuring.
