The Australian experience of innovation driving productivity and competitiveness in the mining sector

Dr Terry Cutler1, Cutler & Company Cochilco Seminar, Santiago Chile, December 2012
I welcomed the opportunity to participate in this seminar. First, because I have come to regard Chile as one of the more exemplary laboratories, at present, for innovation-led growth. And, secondly, because Chile and Australia share much in common, having similar industry structures and shared mutual interests in forging stronger trans-Pacific partnerships. Both are resource-based economies. The scope of this topic is challenging, almost over-ambitious, for a brief presentation. There are two ways the topic could be addressed. The first is that we might look at what we know about innovation, and then examine the implications for what we do in the mining sector. The second is to examine what our experience in the mining sector tells about the emerging innovation challenges for the sector. To alternate between the two approaches is probably the most productive.

Minings current image problem in Australia

For over 150 years the mining sector has been pivotal in shaping the socio-economic development of one of the most sparsely populated countries in the world; Australia is also one of the most highly urbanised. Resources and agriculture have largely driven the infrastructure platforms of rural Australia, regional development, and export trades. So why does the sector now have such a negative public image in Australia? I suspect there are a number of reasons. Mining and resource based economies have long been marginalised in OECD industry models as low technology2. This is based on a classification of economies according to their mix of industrial activity, from low tech to high tech. Australia has traditionally been characterised as predominately a low tech, resource based economy. This translates into the caricature that Australia is just a quarry! This completely ignores the crucial and continuing role of technology and innovation in exploiting Australian mineral resources and agricultural land3. As we shall see, Standard Industry Classification statistics dont help, especially through perpetuating a false dichotomy between resources, manufacturing, and service industries. More recently, mining and resources are being blamed for causing a two speed economy because the mining export boom of the 2000s has driven the Australian dollar to well over parity against the US dollar. It is true that high exchange rates expose industries geared to AUD 80 cents against the US Dollar. But the real underlying problem is the historic uncompetitiveness of Australias manufacturing sector and domestically oriented service industries with a tradition of tariff barriers and the de facto protections from being a remote, small market unattractive to global players. The current challenge is in fact little different to
This paper reflects the personal views of the author and not the positions of any of organisations with whom the author may have an association. 2 T. Hatzichronoglou, Revision of the High- Technology Sector and Product Classification, OECD Science, Technology and Industry Working Papers, 1997/02, OECD Publishing. http://dx.doi.org/10.1787/134337307632 3 This is brilliantly documented in Geoffrey Blaineys definitive economic histories of the mining industries in Australia, notably in The Rush That Never Ended: A History of Australian Mining, Melbourne University Press, Melbourne, 1963 and The Tyranny of Distance: How Distance Shaped Australia's History, Sun Books, Melbourne, 1966.
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that in the 1980s involving the need for significant industry structural adjustment to the impacts of lowered tariff barriers and the floating of the currency. Nonetheless I think a lot of the problem with the negative image of the mining sector is that most Australians are simply not exposed to, or knowledgeable about, these resource industries. The bulk of the population is highly urbanised in a few large cities, remote from mining. The urban/rural divide is a constant theme in Australias history, and is a major undercurrent in policy debates. The recent public slanging matches between the Australian Government and the industry over special mining super profit taxes has not helped. In Chile, on the other hand, the Mining Royalties Law that directs copper export royalties towards national development has created, I suspect, more favourable public opinion towards the sector.

A brief overview of the mining sector in Australia.

Official statistics indicate that mining currently (2010) represents 10% of national gross value added and a mere 1.7% of employed persons4. These figures, however, grossly mask the actual economic role and contribution of the sector, and the complex interplay and spillovers between resources, manufacturing and services. In particular, mining services are growing rapidly, as indicated in the following exhibit. Exhibit: Mining services output growing rapidly

Source: Ed Shann, Maximising growth in a mining boom, Minerals Council of Australia, March 2012 A 2003 industry report to government in noted that much of the 200 per cent increase in minerals industry productivity over the past 20 years can be directly attributed to the implementation of [mining technology services sector] innovation5. A lot of the mining services firms in Australia are small but high growth, and internationalising quickly. So a key observation is that they are a major source of innovation for sector productivity and growth, as well as providing significant SME participation in the sector.
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Australian Bureau of Statistics (ABS), Australian Year Book, 2012 Cited in Don Scott-Kemmis, Australian Story - The Formation of Australian Mining Technology Services and Equipment Suppliers, University of Sydney, November 2011

The economic contribution of the sector would appear even greater if directly related investment in the provision and operation of supporting infrastructure is taken into account (although this has rarely been calibrated). Such directly related infrastructure includes ports, shipping, rail links, pipelines, and telecommunications. Often mining is the catalyst for infrastructure which then supports wider economic activities and communities, especially in non-metropolitan Australia. Australia has a broad base of significant mineral resources. The following exhibit indicates 2009 shares of world production for key commodities.

Australia thus has a much more diverse resources base than Chile, including significant oil and gas resources (now expanded with the development of coal seam gas fields). This affects industry structure and focus. Many mines and miners are horizontally diversified across different mineral products (rather than vertically integrated into value added processing and metal manufactures). This Australian resource profile can lead to productivity challenges when one commodity (such as iron and coal) has a price surge which results in a severe tightening of the labour market. Unlike Chile, where the sector is more geographically concentrated, in Australia the sector overall is very geographically distributed, as indicated in the mapping of selected mines and deposits produced by Geosciences Australia. MINES AND DEPOSITS OF SELECTED BASE METALS AND MINERAL SANDS2011

SELECTED MINES AND DEPOSITS OF BLACK AND BROWN COAL AND URANIUM 2011

This geographic spread has always driven huge and costly demand for supporting transport and communications infrastructure. This gives rise to two productivity issues how competition policy can be used to ensure access to bottleneck essential infrastructure, and how we might leverage this investment to create multipliers through support of other economic activities in regional areas. Iron, oil and gas do, however, make Western Australia the major mining region overall. Historically, Australias terms of trade have been highly volatile. Minings share of exports grew from 37% in 2006/6 to 55.4% on 2010/11 (while manufacturing fell from 51% to 34%, not helped by the strength of the Australian dollar). Mining exports have more than doubled over a decade.

Source: Based on ABS catalogue 5302.0

This astonishing export performance reflects strong North Asian demand (China and Japan are the biggest mining export markets). The resultant pursuit of volume over cost to capitalise on record prices has, however, created a productivity crisis, as illustrated in the following exhibit.

A December 2012 report from Minerals Council of Australia contains the disarmingly honest comment that:
For close to a decade we havnt had to provide more bang for the buck [ie, productivity] as the world was willing to pay so much more bucks for the bang. No longer.

It could be argued that in this situation financial markets have been the enemies of innovation and productivity through amplifying short term incentives for managers and distorting investment cycles. If we look at long term price trends, however, we can see that short term price volatility has remained within a downward band of the long run price curve. The following exhibit encapsulates a fundamental innovation challenge: decreasing real prices, decreasing ore grades for commodities such as copper and gold (with concomitant cost increases) all within the context of increasing demand.

One logical consequence of this scenario is pressure for renewed attention to exploration for new deposits. Mining, along with manufacturing, dominates overall Australian business expenditure on R&D (BERD). In the case of mining, changes to R&D tax concession schemes announced in 2009 tilt the value of tax benefits towards smaller technology start ups, under a revised tax credit scheme. In terms of focus, mining BERD is overwhelmed focused on the development end of the research spectrum. Business Expenditure on R&D

Some brief observations on the Australian sector experience

The Australian sector experience highlights the role and importance of institutional arrangements. A major issue for the mining sector is the challenges of policy alignment across Australias three tiers of government national, State, and local government. State governments determine leaseholds and control much of the relevant infrastructure provision, within statutory national overlays around Native Title and environmental approvals. There are different State regulatory regimes (especially around competition policy and infrastructure access rules). Nationally, different Ministries oversight the resources sector, industry, innovation policy, science and research, the Treasury is responsible for competition policy and so forth. Unlike Chile, there is no co-ordinating national governance machinery for innovation, creating challenges around Whole of Government frameworks and priorities. Budgetary pressures since the Global Financial Crisis have exacerbated conflicts between the levying of State royalties on mining, and national tax regimes, especially in the aftermath of the divisive debate over the introduction of the national mining super profits tax. All this creates investment and business uncertainty for the sector. It can also be observed that the sector has been relatively unsuccessful in capturing downstream value-added. Government attempts to nurture globally competitive alternative technology processing technologies for magnesium and titanium, for example, have largely failed to transform industry value chains. BHP Billiton divested its downstream steel

operations in the 1990s, and alumina and other smelting operations originally established off the lure of artificially low electricity supply now risk becoming uncompetitive with adjustments for the pricing of carbon emissions. In 2008 the Review of Australias national innovation system6 focussed on framework conditions and settings, with the main themes of its recommendations being summarised in the following exhibit. 2008 Review: 4 key thrusts for innovation policy, & 4 supporting roles for government

This Review did not survey sector specific issues in any depth apart from possible roles within national priority areas. Subsequently there has been new attention to sectoral specialisations with regional innovation systems. This has lead to an emerging policy and innovation investment focus on regional innovation hubs. This focus had been anticipated in CSIROs current forward strategic plans. For some time CSIRO has co-located with other parties within the innovation system, typically universities or other research institutes, but generally on an ad hoc and opportunistic basis. The strategic focus on innovation hubs or special precincts is designed to go beyond mere co-location to build robust and dynamic collaborative operating environments. The intention is to add to the mix co-investment, location based collaborative alliances, facility sharing, and to nurture platforms for social networking and information exchange in support of intellectual capital formation and tacit knowledge. This initiative is a work in progress, but highly prospective as a networked model of research and industrial collaboration. These innovation hubs then become nodes for international linkages. The starting point for this precinct strategy has been the identification of five potentially globally significant hubs of activity which could benefit from even greater scope of collaborative engagement and scale of capability assets to leverage reach and impact. These are: 1. 2. 3.
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A resources science hub in Perth, Western Australia; A human life sciences hub in Melbourne, Victoria; A manufacturing and material sciences hub in Melbourne, Victoria;

T. Cutler, Venturous Australia, Cutler & Company 2008

4. 5.

A plant, ecology and water sciences hub in Canberra; and An ecosciences hub in Brisbane, Queensland.

CSIRO and Australian science already have a significant global standing in these domains; the challenge is to grow and leverage this asset base for industrial development. In addition, CSIRO has identified a number of nationally important innovation clusters tied to significant national challenges, development priorities or capability needs. The Perth resource sciences innovation hub will exploit synergies between mining and energy resources.

The mining innovation challenge becoming more challenging

Robin Batterham, former Chief Technologist for Rio Tinto and former Australian Chief Scientist, has made the provocative observation that resource extraction fundamentals have remained essentially unchanged for 200 years7. I believe that the point is that we are rapidly exhausting the potential returns on existing technologies, and I would agree with this. Certainly in areas like exploration we need new tools and approaches, as exemplified in the presentation at this seminar of CSIROs ASTER mapping tool. Then there is the challenge of attending to innovative opportunities across whole of enterprise and mine life cycles, and across value chains including working back from emerging products and services to what these may imply for resources demand. Sectoral convergence and transversal innovation is another emerging challenge. ICT and biotech provide early examples of the growing importance of cross-sectoral innovation transfers. In addition, traditionally discrete activities in mining and the energy sector are converging, offering significant synergies in areas such as geothermal energy and technologies for coal seam gas extraction. One of the biggest new challenges is the increasingly complex stakeholder environment for mining operations involving: Community engagement (in areas such as land rights, local economic participation, and the impacts of Fly in Fly out operations and remote operations on the viability of regional communities); Environmental protection and remediation requirements; Safety concerns; and The trade-offs around competing economic uses between mining and tourism, agriculture, or water conservation, for examples.

The development of coal seam gas extraction in Eastern Australia has highlighted the potential impact of these new complexities on the viability of major investments and the competitiveness of mine to customer supply chains. There is a major innovation challenge around mine to end customer supply chain competitiveness. The following exhibit, from a Australian coalmining region, illustrates some of the issues. Illustrative

Robin Batterham, Some challenges around innovation, Unpublished paper, November 2012

This illustrates the co-ordination and transaction complexities of supply chain handovers, and the potential for unproductive logistical bottlenecks, costly transactional overheads, and difficulties in securing supply chain optimisation.

The importance of maintaining clarity about the innovation fundamentals.

The fundamental parameters of the business of innovating for productivity and competitiveness do not change, even if the sectoral imperatives for innovation are forever changing: the goalposts of the innovation game are always shifting. All sectors of the economy are confronting greater complexity and wicked problems arising from global megatrends and increasing uncertainty. In this context it is always worth asking two basic questions: what would a successful and robust innovation system look like, and secondly, what are the potential points of failure in innovation systems. During my surveys of innovation policy and practice I have been surprised that these questions are seldom raised, let alone addressed. Following the 2008 Australian review I chaired I developed the following working answers, which need further work and consideration.

Source: T. Cutler 2009 Complementary work at the Harvard Kennedy School of Government on growth diagnostics extends the notion of points of failure to the identification of binding constraints. This resonates with some of the structural constraints on mineral extraction productivity arising from water scarcity and high energy input costs. A second fundamental challenge in innovation practice is recognising the complex matrix of interactions it requires across different levels of activity. The traditional focus on enterprise level innovation and productivity is necessary but not sufficient. In the following matrix diagramme each level of activity is necessary, but not sufficient in itself.

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Source: T. Cutler 2007 In todays world Levels 4 and 5 invite increased focus and policy priority. I am increasing of the view that the core focus of innovation policy should be on regional innovation ecosystems, shaped around the particular economic specialisations of any region. This is consistent with the early discussion of geographic innovation hubs. In the 21st century it no longer behoves us to consider national innovation in isolation of the overarching global ecosystem. All regional innovation systems or hubs need to be globally integrated and connected. This point reflects the new reality that global R&D investment and the domicile of innovative talent is increasingly footloose. It will shift to sectoral locational hotspots. A further factor is the implication of global interconnectedness for relatively small country economies like Australia and Chile. Australia, for example, produces at best some 2% of global R&D and innovation. The consequential imperative is how best a country like Australia or Chile accesses the other 98% of knowledge and innovation generated elsewhere, and on what terms of trade to cost-effectively be able to deploy and adapt that 98% more productively than others in the same innovation marketplace. In this countries like Chile and Australia are likely to have more common interest than they would have in bi-lateral dealing with the dominate global innovation producers of North America, Europe and North Asia. This is a significant but neglected corollary to the imperatives for global integration. The final innovation fundamental I will raise is the role of human capital in sectoral innovation, and the importance of intangible people assets. It is people who innovate, and collaborate. While investment in skills and training is necessary, again this is not sufficient. I posit that we need to identify and manage three facets of our human capital assets: intellectual capital (smarts), creative capital (mindsets), and social capital (social networks). A framework for thinking about people assets productivity and competitiveness is outlined in the following working schematic.

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Source: T. Cutler 2011 We need to think about innovating as collaborative social networking. The business of innovation is changing. While the fundamentals of innovation dont change, how we go about the business of innovation is changing. Some of the changing parameters include: 1. 2. 3. 4. 5. The shift from in-house lab or contract research to open/networked innovation (eg mining service suppliers); The shift from commercialisation model (science push) to market pull; solution seeking through payment for results (US SBIR scheme; innovation challenges; crowdsourcing); and increased reliance on cross-disciplinary and cross-sector inputs; A new focus on living labs (embedded researchers eg Mine of the Future) and deep practice to reduce innovation risk; Accelerator programmes (addressing time to market) and frugal innovation (changing innovation cost structures) The advent of the internet of things and the role of data analytics (data deluge): innovation management and experimentation as continual experimentation embedding good habits of testing and measurement (Geoff Mulgan, NESTA, UK)

We need to ensure that public policies recognise and support these new realities and we need to consider their implications for innovation in the mining sector.

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The bottom line

Innovation is means to an end it is not an end in itself. The essential equation is as follows:

We must maintain the linkages between innovation, productivity and competiveness as a virtual cycle. And innovation is not a thing or a formula: it is action it is about changing thins and doing things differently. We should talk less about innovation, and more about innovating, and about what makes an innovator.

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