How to manage risk in a resurgent resources industry
Australia’s resources sector has bounced back in 2018. This is great news for a cyclical industry that’s been through a tough spell but the upswing has an impact on risk profiles that must be taken into account. Equipment failure is the most obvious example as machinery is put under greater strain.
Analysts at BIS Oxford Economics predict mining production growth will accelerate by 5.5 per cent in 2017-2018 – up from 2.5 per cent in the ABS National Accounts Data for 2016-17. Mining investment activity is also expected to deliver a positive economic impact.
Large projects mooted or already underway include Fortescue Metals’ $1.7 billion investment in the Eliwana mine and rail project in Western Australia and Talison Lithium’s proposed expansion of the Greenbushes lithium mine in the state’s south-west. This would allow Talison to service growing demand from battery and car manufacturers.
With output capacity and utilisation of equipment and associated infrastructure becoming tighter from increased production, all mining businesses need to review risk exposures and minimise the potential for costly breakdowns.
During the past 20 years, electrical and mechanical breakdowns have contributed 44 per cent of gross losses for FM Global’s mining clients.
Factors to be considered include the age and maintenance history of equipment, operating conditions and environment, the training and experience of operators, the fitting of safety devices and contingency planning. The likelihood and severity of loss increases sharply when three or more of these equipment factors are deficient. Maintenance, the lack of safety devices and insufficient operator training have been most frequently involved in large losses during the past four years.
In a complex and ever-changing mining landscape, analytics helps mining businesses predict the future, avoid costly outages and make decisions with confidence. With millions of data points from engineering visits combined with loss history, FM Global helps clients see risk more clearly. Predictive analytics is used to determine the likelihood of loss, predicting what can go wrong and where it’s most likely to happen.
Out of 60,000 locations visited every year, we identified the top 1,000 most likely to suffer a loss. Mining locations within the top 1,000 locations most predisposed to loss contributed 82 per cent of our gross risk loss in dollars. Key mining equipment that contributed to mining losses included grinding mill gears, crushers and drum hoists. Mechanical and electrical breakdown was the leading cause of loss but these often start fires that multiply costs. For example, if a seized bearing overheats and ignites a rubber conveyor belt.
Keeping your business up and running depends on how your equipment is designed, installed, operated, maintained and protected. By assessing your equipment against factors proven to reduce the frequency and severity of equipment breakdown, you can identify the equipment most at risk. This improves integrity and reliability.
More boom, less bust
Failing to invest in operational resilience and risk management makes your business more vulnerable to boom and bust cycles. This is obvious when your business is managing high production costs during periods of falling commodity prices. Insights generated through analytics will help you decide exactly where to direct comparatively scarce risk management dollars.
But in some respects it becomes even more important during a boom. When demand spikes, your business has a finite window of opportunity to make hay while the sun shines. This is where your business delivers its greatest returns so an equipment failure is even more costly.
During these periods of high demand, when your equipment is running around the clock, the impact of a breakdown or incident increases. If you haven’t made the necessary investment, you’ll be less prepared to deal with the consequences and what should have been a relatively small incident may well become a major disruption.
There are many variables used by insurers to determine how to price your insurance and risk transfer needs. Organisations that have invested in strong risk management practices over the years and have limited exposure to natural catastrophe events will experience fewer losses. They will also see greater stability in their insurance program pricing, terms and conditions.
Brokers and insurers have a shared responsibility to ensure mining companies budget appropriately for insurance costs. This means anticipating the boom and bust stages of a mining cycle and prudently working with clients to anticipate changes before they occur. If your business anticipates a step change in revenue via increased demand, organic growth or acquisition, then it’s prudent to review your organisation’s risk appetite and put a strategy in place to deal with risk transfer or retention needs.
At FM Global, we look to partner with mining companies that share our belief that most losses are preventable. Our clients typically understand what needs to be done and are prepared to make the necessary investments. That’s good for business and helps to minimise the likelihood of nasty surprises.