Commodity price risk top concern for global mining leaders with pandemic and economic risk close behind: KPMG Risk and Opportunities for Mining Global Outlook 2021 Survey.
Resilience on the one hand and uncertainty driven by the global pandemic on the other are the key themes for global miners according to the latest KPMG survey of the sector. The global report, KPMG Risk and Opportunities for Mining Global Outlook 2021 released in Perth, Australia today, shows a sector responding to an environment of complex and diverse risks.
The KPMG report offers an in-depth look at risk in the sector from more than 225 mining executives across the globe. As in the KPMG global mining risk survey 2020 edition, commodity pricing was the top risk for the industry for 2021. Unsurprisingly the new addition of global pandemic risk came in at number two whilst economic downturn and uncertainty rounded out the top three, reflecting the significant volatility the sector faced in 2020.
Trevor Hart, Global Mining Leader at KPMG said the pandemic may have increased the risk associated with supply instability and economic downturns but at the same time it had prompted enormous stimulus spending in most major economies.
“We’ve seen not just a spike in prices for iron ore but more broadly Government stimulus and supply interruptions caused by COVID-19 has been driving up prices for commodities ” said Mr Hart. “Volatility in global markets has also seen investors flock to safe havens, driving strong precious metal prices, such as gold. This is not just a commodities story. COVID-19 also seems to have accelerated the focus on climate change and efforts to decarbonize and ESG and environmental risk concerns have also risen up the risk curve.”
Mr Hart noted that ESG-related risks remained prominent, with community relations and social license to operate unchanged from its previous position in 2020 of number four.
“It’s significant that environmental risks, including new regulations, jumped to number five up from seventh spot last year,” he said. “Overwhelmingly, the surveyed mining companies agreed that they now needed to have a clear, measurable ESG strategy. Yet around a third of respondents noted investor expectations are still not well understood or consistent across the market.”
Trevor Hart emphasised that although risks associated with the COVID-19 pandemic were an immediate concern, mining executives are increasingly focused on ESG risk in the medium to long term. “That’s especially so when it comes to climate change and meeting rising community expectations,” he said. “The days of considering ESG factors as ‘soft’ secondary risks are long gone; recent years have taught the mining that mistakes can carry very hard consequences.”
The KPMG mining survey also highlights a growing emphasis on environmental risks, including new regulations, and sustainability, illustrating the sector is paying attention to the components of ESG. Notably, 91 percent agreed that today’s mining companies need to have a clear and measurable ESG strategy, whilst 37 percent of larger company respondents agreed social licence was the biggest risk facing the industry.
With demand strong in most areas and mining companies focused on maintaining healthy balance sheets to withstand cyclical volatility, the industry appears in an excellent position to grow. Interestingly, companies now rank access to key talent as the number nine risk their own organisations face, perhaps reflecting restrictions in travel across the globe and skills competition.
In other findings, concerns about access to capital, political instability, ability to access and replace reserves, and permitting risks all remain prominent on the risk landscape for 2021, although each has been marginally downgraded from the previous year. Meanwhile, the emergence of regulatory and compliance changes/burden enters the list in tenth position.
“Last year, our KPMG Global Mining Report looked at the climate change context and we said the other driver in both the local and international mining sector was carbon,” said Mr Hart. “That has proven true and the race to decarbonise mining has only intensified and technology and innovation are helping drive that race. On that theme, an overwhelming majority (82 percent) of survey respondents identified technological disruption as an opportunity rather than a threat.”
Mr Hart said ESG and shareholder demand were focused on reducing carbon footprint: “Climate change remains a defining issue. It is no longer just about operating responsibly, and the adoption of carbon neutral goals will see business models change and portfolios readjust.”
Healthy metals prices are signaling great opportunities for miners. Although there has been lots of volatility, since the start of 2020, USD copper has lifted about 50 percent, nickel 35 percent and iron ore 80 percent. Even gold and aluminium have increased around 20 percent in USD terms. “Organic growth is still a key theme for miners both globally and in Australia,” said Trevor Hart. “Companies continue to focus inward first seeking organic growth, innovation, and productivity gains as their top strategies for growth. In addition to boosting domestic consumption, globally, government stimulus measures are being directed into energy transition and infrastructure building projects.”
He said all of this would continue to drive significant demand for raw materials, such as copper and nickel as would rising demand for battery minerals and rare earths, although some sectors, such as coal, would will continue to face growing headwinds.
Some concern about access to capital also remained a theme for 2021. Mr Hart noted that nearly half of respondents (45 percent) agreed the ability for the industry to access the traditional sources of capital has deteriorated in the last three years, while 39 percent said access to capital is a significant constraint and required them to change gears when it came to strategy. This underlines the critical role of an ESG focused market, with global investors increasingly challenging miners on how they grow and demanding the responsible deployment of capital. Recent, continuing strengthening of many commodities prices is certainly seeing easier access to capital at the moment, Mr Hart said.
Caron Sugars, National Board Advisory Services Lead Partner and Mining Risk specialist with KPMG noted the intensified focus on ESG and climate change in the latest report. She said that for Australian mining companies, ESG was dominating boardroom conversations.
“This significant cultural shift, particularly towards meeting community expectations, is reflected in the global survey and it is also true for Australian miners,” said Ms Sugars. “Globally, respondents overwhelmingly (91 percent) agreed that today’s mining companies need to have a clear and measurable ESG strategy, while 83 percent said success is now measured against these ESG targets. KPMG anticipates this trend will be picked up in the KPMG Australian Mining Risk Survey to be released in July 2021.”
Ms Sugars said: “Fortunately, at the same time that ESG and other non-financial risks are attracting more focus, technology is rising to the challenge to support organisations and boards in understanding these risks proactively.”
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