The resources industry, with global value chains, extensive travel schedules and a volatile price environment, was seemingly vulnerable to a pandemic. However, the industry’s longstanding focus on health & safety risk, long-term, remote and sometimes automated assets and a more stable market for products are inherent defences to pandemic disruption. As the world comes to terms with the situation, understanding how the industry responded to the crisis gives us an insight into how we may emerge into a post-covid world and how we can improve the industry as a result.
Over the past two months, State of Play has partnered with METS Ignited and NERA to conduct a series of surveys on the impact of covid-19 on the global resources industry. As the pandemic spread across the world in March, the industry immediately experienced a significant level of concern. 72% of the industry rated their concern about covid-19 at high or extreme, with 83% reporting a weekly increase in concern. In hindsight, for Australia, March was when fear, uncertainty and government policy activity peaked as citizens were ordered home and states closed their borders.
April saw a relative stabilisation, although still an overall increase in concern, only 13% relaxed their view of the severity of covid-19 and its impact on the industry. This represented the zenith of quarantining policies in many regions. Overall, resources industries were quick to recognise the risk of the pandemic and reassessed their view rapidly. FIFO rosters were rearranged, remote work infrastructure was stress-tested and decision-making in global matrix organisations was decentralised.
Government response to the pandemic was to implement significant, structural barriers to minimise its spread. Closed borders and restricted travel in particular disrupted global resources value chains. As restrictions continued, the impact grew. In March, 62% of the industry reported a significant impact or higher, in April it was 75%.
In the short-term the pandemic was more manageable; inventories covered shortfalls in production or the supply of critical components, maintenance could be delayed, and service models could sometimes be virtualised. However, as the pandemic lengthened, such short-term responses became inadequate for the longer-term and have been replaced by more sustainable strategies. Services companies launched permanent virtualised service models and operators negotiated specific travel allowances for a limited number of personnel. Fortunately, only 4% of the industry reported being out of business, however many more faced significant losses and downsizing.
The nature of the impact varied wildly depending on industry sector. Operators faced employee unavailability on site as the biggest impact at 52%. For services companies, either due to virtualised models or a loss of contracts requiring few people on site, only 12% were impacted by the lack of people in particular physical locations. However, the loss of revenue hit 93% of the services industry, both in downsizing or suspension of services leading to a loss of profit (58%) or a frustration of existing contracts (42%). Both sectors faced a similar level of disruption to the operation of their business model (48% and 49%), however services companies are most likely to have to re-evaluate the fundamental assumptions on which they do business as they move forward.
As the industry moved quickly in March to adapt to the new situation, some only expected to last as a business for another month (9% in March, 8% in April). 28% viewed the new arrangements as sustainable, only to decline to 22% as some companies reckoned with the constraints of isolated work, disrupted supply chains or lower demand for products. Conversely, many companies moved in the other direction, with those surviving 3-6 months and 6-12 months each increasing to 26%. The success of virtual work and continuation of operations despite restrictions encouraged many in April to expect that they would ultimately avert the worst of the downturn.
The longevity of the pandemic impact has become more apparent as it lingers. Initially it was seen as a short-term supply-side shock, interrupting operating and service models, while leaving the option of returning to normal as a possibility within the near future. However, the longer-term effects of the pandemic are now clearer; the impact of large-scale unemployment and government debt is leading to sharp adjustments in growth prospects for many industries, resources included.
Alongside a low-oil price environment, infrastructure spending is less affordable for governments with suddenly far higher levels of debt, consumers are less likely to spend on goods from electronics to transport, all of which impacts the structural demand for natural resources. Thus, the impact of the pandemic is longer than just the quarantine restrictions, and the expectation of its impact to last over a year has increased from 20% to 37% as a result.
The most visceral change for (almost) everyone in the industry has been the transition to virtual work (or living on-site for many operators). While the increasing flexibility of work has been a feature of modern economies since the second world war, it has been accelerated significantly over the past 20 years with the improvement in communications technology. Cultural inertia, infrastructure requirements and the value of face-to-face work practices in some cases has restrained this trend from its full realisation, however the experience with covid-19 may be set to change this. 88% of the industry expect a structural shift towards more flexible work given the relative success of virtual work under quarantine.
Unsurprisingly following a major unforeseen shock, risk management promises to be another significant change as a result of the pandemic according to 80% of the industry.