BHP, the largest Australian miner, expects the labour shortage and global energy crisis to continue driving up the costs of extracting commodities well into next year, even as supply chain disruptions dogging the resources sector show early signs of improvement.
In a speech to be delivered in Sydney on Wednesday, BHP’s group procurement officer James Agar says cost inflation has emerged as a central concern for the mining industry in 2022, just two years after the onset of COVID-19 sent unemployment skyrocketing, wiped out global demand and pummelled prices.
Australia’s largest mining company expects the lag effect of inflationary pressure to last through the 2023 financial year.Credit:Louie Douvis
“Like the broader economy, the mining industry has been experiencing a combination of ‘good’, or demand-led inflation, and ‘bad’, supply bottleneck inflation,” Agar will tell the International Mining and Resources Conference (IMARC).
“Unfortunately, the balance between the two has been skewed heavily towards the ‘bad’ since the Russian invasion of Ukraine.”
Companies across the nation’s $400-billion resources industry have been grappling with ballooning cost pressures squeezing their margins this year as COVID-19 exacerbates a chronic shortage of skilled workers needed to run their operations and develop new projects. Meanwhile, the cost of energy has been soaring since Russia’s invasion of Ukraine, as buyers worldwide shun Russian fossil fuel supplies and deepen a global energy crunch that had been building for some time.
The price of crude oil, which is used to make fuel and briefly sank below $0 in the United States during 2020, surged past $US120 a barrel earlier this year and remains around $US90 today.
“Labour markets are tight globally, with no sign of easing soon,” Agar says. “The energy crisis in Europe is profound and will continue to drive volatility in energy markets.”
However, BHP is starting to see “some improvement” in global supply chain performance. Supply chain disruption in manufacturing is now significantly lower than in the second half of the 2021 calendar year, while shipping delays and port congestion have eased considerably.
“So, the picture is mixed: labour and energy markets presenting a major challenge, while constraints across broader manufacturing supply chains are easing,” Agar says.
“All said, we do expect the lag effect of inflationary pressures to remain a persistent challenge through the 2023 financial year.”
While describing the near-term economic outlook as uncertain and fragile, as the US and Europe face the growing risk of recession, BHP predicts that China will be a stable source of commodity demand in the next 12 months. According to Agar, China’s stimulus policies should continue to drive its need for commodities, such as Australian shipments of the steel-making raw material iron ore.
To combat inflation, manage supply chain problems and continue investing in commodities that the world will urgently need to decarbonise, Agar says successful partnerships will be more critical than ever, and BHP was seeking to embed what it terms “radical transparency” into its relationships with stakeholders from traditional owners to major suppliers.
“At BHP, we know we haven’t always been perfect in this regard … big corporate processes, transactional mindsets and sometimes a bit of a closed book,” he says in the speech.
“By being transparent with each other – clear about our goals, open about our challenges – we stand to build mutual value.”
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