Unlike a classic economics-driven commodity price crash, COVID-19 is health-driven, and has caused operating model and supply chain disruptions that have impacted operating companies and services companies in the Australian resources industry very differently.
According to recent data by State of Play, approximately 70 per cent of operators are facing critical supply shortages, whereas only 20 per cent of services companies are. The discrepancy is an opportunity for innovation and collaboration; supply chain partners working to mitigate the shortfall.
The data is demonstrating the agility of the resources industry. In March, 30 per cent of the industry did not expect to be able to operate past three months, whereas in April the number has almost halved to about 16 per cent.
“Resources companies and their suppliers are adapting, pivoting quickly in the new environment and finding new ways to operate, virtually, remotely and flexibly,” State of Play says.
The reported resilience in the industry to continue to operate occurs even as the effects of COVID-19 magnify. April has seen an increase in the magnitude of the impact, from 61 per cent reporting a significant impact or higher, to 74 per cent this month.
“Clearly, the industry is realising the impact of the pandemic, just as it moves to adapt and succeed in spite of it.”
Show me the money
The research also shows that COVID-19 is leaving operators without the people they need (59%), whereas services companies across the board face a loss of revenue and profits (89% and 51% respectively).
“This is perhaps unsurprising; operators still require manual interaction with much of the on-site equipment, whereas service models have been rapidly virtualised as a result of government restrictions. Meanwhile, services contracts have been cancelled or scaled down as a result of cautionary cost-cutting, whereas the fundamental cashflow of many miners has remained broadly intact.”
The impact that the pandemic is having on different companies is also evident in their views on government support. Services companies are primarily facing cashflow issues, with wage support (68% compared to 58%) and debt relief (32% compared to 0%) relatively higher concerns compared to operators. Meanwhile, asset owners are worried about the resilience of their operations, looking for open trade flows (50% compared to 18%).
Asymmetric futures
Globally, governments are stepping in to shore up local economies and support industries particularly hard hit. There are two facets of government support, each essential to the recovery in their own right. First is relieving pressure on balance sheets through wage support and corporate tax relief.
“In particular, businesses with marginal assets or cashflow pressure are able to focus on adaption rather than simply survival,” State of Play says.
The second option is stimulating the broader economy. At a basic level, the health of the global economy relies to some extent on sentiment. To this extent, transparency and information is important, with more testing and information sharing seen as key policies for the government to assist the global resources industry.
“More broadly, maintaining and stimulating demand, either through maintaining trade flows or infrastructure demand, indirectly impacts the cashflow and growth options for the industry.”
Thus, government policy is likely to be successful in combining direct assistance through cash injections and indirect support through stimulating demand in the global and domestic economies.
