An expert in the field says Australia’s shift to net zero by 2050 has seen a strong increase in the demand for decarbonisation commodities. However, the cost projections for a growing number of our mining and energy megaprojects are extremely vulnerable to the inflation problem and supply chain disruptions, making it difficult for developers to announce, and keep to, fixed costs for these projects.
The Australian mining, manufacturing, construction and services industries price index rose 5.6 per cent from June 2021 to June 2022. This is the biggest increase since 2008 off the back of the GFC.
This is primarily due to supply constraints for building materials and metals, a decrease in global crude oil supplies in construction with increased demand in response to the easing of COVID restrictions, high freight costs and labour shortages.
Raja Sahulhameed, the West Australian Principal at the advisory division of Hatch says without effectively managing project investment decisions and looking at alternate supply chain options, megaprojects are at serious risk of cost overrun.
“Cost overrun primarily occurs when projects underestimate execution risk. For example, between 2002 and 2020, governments spent 21 per cent more on major transport projects than initially anticipated.
“From the investor’s perspective, a cost overrun can be determinantal as the cost overrun increases the investment required, however the return diminishes or remains relatively the same. Any increase in costs without an increase in potential revenue severely impacts the financial viability of the project.”
However, Raja says there is a way for the mining and metals industries to make project investment decisions during this challenging time: by shifting the the way their supply chains operate. He offers three tips:
Firstly, players in the mining and metals sector should avoid signing lump sum contracts and, instead, adopt collaborative contract models, such as Integrated Project Delivery (IPD) and NEC4 Alliance Contracts. Raja says:
“These are common in other sectors but are not yet used widely in metals, mining and energy projects. Under such models, stakeholders work together during an agreed preplanning period to develop the project scope, schedule and budget.
“Conventional procurement contracts allocate specific project responsibilities and risks to each participant. Under a collaborative contract, however, the project becomes a collation of sub-projects, where each non-owner participant is rewarded by reference to the performance of the sub-project for which it is responsible for, rather than the performance of the entire project.
“This provides far more protection and less risk.”
Secondly, Raja says companies should utilise alternative supply chains to minimise cost inflations and supply disruption.
“Around 20 per cent of a company’s supply chain can be changed. Companies could look to India and South-East Asia for alternative materials and components.”
Since 2014, exports from India have increased from around AUD$1.32 billion per financial year to nearly AUD$14.7 billion, demonstrating a strong shift to alternate supply markets.
For example, global technology company ABB has committed to a ‘Made in India’ policy, making India a global hub for electrical equipment manufacturing. Siemens Gamesa Renewable Energy has been expanding production in India, including for its next generation wind turbine, the SG 3.4-145.
Expanding on the idea of branching out to alternative markets, Raja says companies should investigate opportunities to purchase pre-designed modules.
“Companies such as Metso Outotec offer ready-to-go modules. Investing in pre-established modules can make projects more efficient in an environment where project start dates are already challenged, and reduce the number of production staff needed when labour shortages are a prominent issue.
“This approach can assist in making cost-effective decisions in the current environment of inflation and disrupted supply chains.”