News focus: Negotiating the mining rollercoaster

14 March 2011

15 March 2011 | Lindsay Clark

Mining suppliers have dealt with hair-raising climbs and vertiginous descents, says Lindsay Clark.

Both downs, and now ups, have been experienced by the mining sector, which came down with a crash in recession but has since been one of the first to recover.

This turnaround follows the result of strong demand for commodities in Asia and the Far East, which has sustained activity in extracting base metals, minerals and fuel.

While this boom is filling the order books of the manufacturers that support the mining industry, it creates a double-edged sword for their procurement teams and those elsewhere. Rising commodity prices are creating cost inflation for the goods they buy, as well driving demand through the whole sector.

As CPO of global manufacturer Caterpillar, which makes heavy machinery used in mining and quarrying, Frank Crespo can see both sides of the equation. “It comes with the territory,” he says. “We have to recognise that there are certain price points in commodities where those industries start to re-invest and grow, and we’re going to be a beneficiary in that process, but at the same time we have got to manage our costs and ensure the supply.”

Mining giant Rio Tinto caught the attention of the world in November when it announced a staggering increase in capital spending for 2011, up by $7 billion (4.3 billion) on the previous year to about $11 billion (6.8 billion). Although not all of this investment will be spent on equipment, it illustrates the challenge for procurement, which must ensure suppliers can keep up.

Rio Tinto is not alone in boosting spending. Joy Global, a manufacturer of mining equipment, said in a financial statement for the first quarter of 2011 that customer capital expenditures are expected to be up more than 20 per cent in 2011, after rising more than 30 per cent last year.

CEO Mike Sutherlin said: “We expect continued strength in the demand for mining equipment and aftermarket services as our customers increase their production levels and add to their mine expansion plans.”

In the light of the staggering growth in the market for mining equipment, Caterpillar has been focused on keeping vendors on board to secure supply. “It’s something we focused on quite a bit last year,” CPO Crespo says. “We grew triple digits production-wise last year, [so] in the summer time we were establishing strategic supplier workshops.”

These events involved about 400 suppliers in one and a half, or two-day sessions around the world. “We wanted to have a collaborative effort to articulate what Caterpillar was looking for,” Crespo says.

The manufacturer asked each supplier for three ideas to help them both succeed. This resulted in more than 900 ideas, many of which were “just common things that if we tweaked or refined it would only enhance the relationship,” Crespo adds. The effort expended on relationships has helped assure supply during this growth period, he says. “It provides a more transparent understanding between Caterpillar and suppliers – to make better decisions, increase capacity, and investment on their part.”

Caterpillar is also willing to share risks with suppliers struggling to grow. “It’s not just trust,” Crespo says. “We have made it clear to suppliers if they see a reason or approach to think about us finding ways to invest with them, we’re open to those ideas. We may not take each and every one of them, but our message is not, ‘go and build it, get bigger and hope that the orders are going to come through’.”

Such measures could include supply chain finance, to ease liquidity in the supply chain as it expands. “We’re not afraid to do that at all, [but] it has to be the right situation and the right model,” Crespo said. As a result, he feels his suppliers are staying with the firm through the economic ups and downs. “We have not seen suppliers coming out with a more hardened attitude. Feedback is: ‘this feels right’.”

It is not the first time the sector has had to deal with “yo-yo” demand, says analyst Loren Gerlach, a PwC director in its oil, gas and mining team. “We saw this incredible surge in demand in the middle of the last decade. Everyone got into this mindset of ‘get what you can’, and the whole concept of strategic sourcing was turned on its head, because it became ‘please sell it to me’, rather than ‘how can I leverage you’.

“Then suddenly we had things fall off a cliff in [the fourth quarter of] 2008, with cash flows quite constrained, yet there was an order book. Companies had paid ahead for equipment they might not need. After a few months of worry, the resource market started to turn up in mid-2009,” Gerlach says. “It does create a real challenge 
for buyers.”

Although the supplier market to manufacturers is back to a “capacity-constrained situation”, procurement professionals are starting to learn from the sector’s unpredictable nature, Gerlach says. “There is an awareness that strategic relationships really matter. When there are shortages, suppliers tend to prioritise their core customers – the ones they’ve developed a real partnership with. Conversely, when there’s less demand the bigger companies tend to focus on their core suppliers in making sure that they give them a sustainable revenue stream.”

Bob Barber, VP global sourcing at Boart Longyear, which makes mining equipment, said while the firm could not forecast collapses in demand that periodically hit the sector, it makes every effort to share market data with its suppliers to ensure they are not caught out. It also warns them that good times always come to an end in this volatile industry.

“When we were in the upturn, we were always telling the suppliers that, like any upturn, there is a downturn. There are two sides of the cycle. We had prepped our suppliers for when the [financial crisis] came. I don’t think anyone prepared for how quick and severe it was, but there was an awareness it would happen,” he says.

At the time, Boart Longyear acted rapidly to adapt to the new circumstances. But suppliers already knew “they would have to react very quickly” when the downturn came. “We didn’t lose a single major supplier,” adds Barber.

With a total procurement spend of $1.1 billion (£679 million), and a sourcing team of 30 professionals across the globe, Boart Longyear is benefiting from a growing sector. For 2011, it forecasts a 19 per cent rise in revenue and a 35 per cent increase 
in profit.

The commodities boom is creating sustained confidence in manufacturers supporting the mining sector. Yet the message 
to suppliers remains one of 
caution about the likelihood of another downturn.

“We’re not going to get a 
great advance [warning] of it,” advises Barber. Only when it hits will buyers know if they have created truly strategic relationships across the supply chain and learned the lessons from previous cycles.

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