Viewpoint: Australian iron ore firms turn to technology

Australian iron ore and coking coal mining firms are turning to technology solutions to contain cost pressures driven by older mines, explosives prices and equipment availability.

Iron ore mining firms are increasingly using methods such as automation to cut costs, having reached the end of the quick-win productivity improvements achieved over the past three years. But the cost improvements from technology are likely to be smaller than the big gains that iron ore firms reported from 2014, in the wake of major expansions in the early 2000s. And they will require some upfront capital investment that leading to costs rising before they fall back again.

The iron ore industry is leading the way with automation, while coking coal producers are considering options to follow suit over the next few years.

Robot drivers

Australia's three largest iron ore mining firms — UK-Australian mining giants BHP and Rio Tinto and domestic producer Fortescue Metals — are already using autonomous haulage for some of their truck fleet, as well as autonomous drill rigs and trains, in an effort to improve efficiency and reap cost savings. Smaller, marginal producers have not been able to install the new technology and are missing out on the cost improvements they offer, making these firms less competitive.

Australia is a major supplier of seaborne iron ore and coking coal, with several higher cost mines coming back on stream over the past couple of years because of high prices. The costs of more marginal producers in Australia can provide a floor for prices, as more expensive mines tend to be mothballed if prices fall below their cost of production for a sustained period.

Falling diesel prices have provided some cost relief. Prices of 10ppm sulphur gasoil have dropped to around $75/bl fob Singapore from over $100/bl in early October. And the cost of imported goods including diesel has also been affected by the fall in the Australian dollar against its US counterpart from $0.71 in early October to around $0.73 in early December.

But any upswing in Australian diesel prices would push costs up for most Australian mining firms, with the decline in fuel prices over the past three months having been the major factor that has contained total mining costs during the period.

Explosives prices have been depressed since 2015, as oversupply from new production plants that were planned during the mining boom came on stream just as demand fell because of lower iron ore and coking coal prices. Mining firms have cut their explosives use by focusing on higher grade areas of their mines, keeping a cap on production and minimising wastage. This coincided with the start-up of several new explosives plants in 2015 and 2016, causing the Australian ammonium nitrate price to fall significantly

Stronger iron ore and coking coal prices, combined with a need to mine lower-grade areas after higher grades were depleted, has led to a surge in demand for explosives in Australia. This has seen an end to the slide in ammonium nitrate prices, with some expecting prices to rise over 2019 and 2020.

Explosives prices were also supported by an interim determination by the Australian anti-dumping commission against imports from China, Thailand and Sweden.

Equipment costs rise

Costs associated with heavy trucks, diggers and other earth-moving equipment are also rising, as global demand for these ‘yellow goods' rises over the past two years. The lead time for these items has now increased to 1-2 years, according to accounting firm Ernst & Young, and mining firms are having to increase spending on maintaining old equipment while they wait for orders for replacement vehicles to be filled. Using the older equipment is a drag on productivity, further adding to unit costs.

Labour costs are also being driven by competition from other mines and sectors, as well as a shortage of supply of skilled labour because of low training levels in the past few years, when firms instead focused on cost cutting. Fewer students have chosen mining-related degrees, making it increasingly difficult to recruit mine engineers and geologists.

Australian iron ore and coking coal mines are also coming under inflationary pressure as established mining hubs age, leading to increased geological complexity, strip ratios and haul distances. But technological solutions are being found for some of these problems, with the installation of moveable conveyor systems at iron ore and coking coal mines replacing trucks on long-haul routes and significantly cutting costs.

A move to below water table mining at BHP, Rio Tinto and Fortescue iron ore mines in the Pilbara region of Western Australia is also adding to costs, as mining engineers are forced to dewater pits. Ore from below the water table also has a higher water content that can clog up processing machinery and reduces the per tonne value of the ore.