Managing global procurement and supply in the resources Sector can be difficult. We live in challenging times and international supply chains are shifting and stressed, while at the same time costs are rising across the board. Axis Group Global Procurement & Supply has supported mining projects and plant operations for over 20 years and we share insights & lessons learnt now that global developments have elevated procurement and supply chain as a key value driver for resource companies globally.
- Due to rising new challenges and developments, global supply networks have been redefined, and as a result, disruption is now a common feature of many supply chains across regions and sectors. The resources sector is no different: security of supply, schedule impact, inventory costs, volatility in demand & supply and price risks are common
- There is the pressing need for resource companies to actively manage value chains, logistics and many complex variables related to global supply
- Successful companies have a clear global sourcing strategic intent and execution focus
- While China continues to stand out as a prominent cost-competitive supply market, many low cost alternative supply markets have emerged
- Selected alternative lower-cost markets include for e.g., India, Vietnam, Thailand, Poland, Czechia, Mexico etc.
- Mining companies that make solid ‘supply cluster & category’ choices do consistently gain advantages and de-risk their supply chains
- Local vs Global priorities and considerations must be integral to all global procurement planning to bring balance across the entire spend profile
- ESG objectives, e.g., combatting Modern Slavery and pursuing environmental goals, must be integrated into global supply planning and execution
- Leadership from the top, capex project governance and supply team skills and capabilities will largely determine procurement and supply outcomes
- Partnerships are strategic levers and pivotal to success in managing complex end-to-end global resource sector supply chains
Resource nationalism and challenges in today’s supply chains
Before the pandemic, the world had already begun to perceive various changes and obstacles in value chains, such as trade disputes, Brexit, and de-carbonization objectives. Then, the situation was made worse by a “black swan” event that decimated the strategic infrastructure of supply chains, mainly as a result of lockdowns. Climate change and de-carbonization ambitions contributed to the disruptions in the resource industry as the pandemic affected crucial supply networks.
Stressed Global Supply Chains
Supply chains have been particularly impacted by international shipping costs, reaching their all-time highest levels (figure 1.2) after the pandemic began and only recently returning to ‘normal’ levels. This was caused by a multitude of factors. Severe congestion at major global ports, shortages of containers and delays in inland logistics due to a shortage of truck drivers, all multiplied the already soaring ocean freight rates. As it can be seen in these charts, freight costs between certain ports reached price increases of 5-7 times the usual rates; as well as schedule reliability – the ratio of vessels arriving on time fell to below 40%, causing major security of supply concerns. While schedule reliability has also now improved, it is still below pre-pandemic levels.
Costs Up & On-Time-Arrivals Down
The current global landscape has made managing procurement and supply a more complex undertaking across all industries. Numerous headlines outlined the impact of supply chain disruptions and examples included: ‘Chip shortage causing Ford to slash vehicle production’, ‘Aluminium prices hitting 10-year highs’ and decrease in demand of steel and iron in China indirectly impacting the manufacturing output.
These disruptions impacted all sectors, including resources. Determining viable global supply clusters; matching spend categories, products and packages to appropriate suppliers; and ensuring a sound and robust procurement and supply process and infrastructure requires an innovative approach to navigate through this era of increased interconnection and turbulence.
Resources sector supply chains are challenged
Indeed, our resource clients share with us that they too have not been immune to the various challenges faced by global supply chains. If not managed carefully, these challenges have a significant impact on both the development of new and the operation of existing mines. Refer to figure 1.3
Resources Sector Supply Chains Reflect Global Risks
Shipping delays, security of supply concerns, price volatility, low output from mines, Capex projects on hold and the need for costly inventory holding are a few of the unwelcome outcomes that resource companies recently experienced. Supply from certain regions or suppliers were particularly affected – and there is always a possibility for such disruptions occurring more frequently in the future.
Managing supply chain visibility is the key to achieving success in sourcing and procurement. Additionally, ESG objectives became more challenging to meet and the forces that drive an increase in Modern Slavery were more common in many supply chains due to the widespread economic fallout coinciding with the inability to visit suppliers for audits (due to lockdowns and travel restrictions).
With the multitude of risks converging in global supply chains, the question of managing cost also arises. Decisions to ‘pay more’ in order to reduce risk (or lead-times) have become common. But is this sustainable? Global resource sector companies have become reliant on opportunities presented by the China supply market. This should be no surprise considering that China has significantly increased its capabilities over the last two decades and yet remains extremely cost competitive. There are however alternate manufacturing markets that compete with China’s cost competitiveness. Refer to figure 1.4.
Cost Structures Differ Across Supply Markets
So, it becomes necessary to merge the risk considerations, that we mention above, with these cost profiles. The implications are that resource sector procurement and supply managers are faced with a set of tough choices on ‘Supply Clusters and Categories’. For example, note that there are some emerging cost advantages in Mexico, India, Vietnam and Poland. Do these offer realistic alternatives? We will expand on this later in the paper.
Where there are risks, there are opportunities
Over the last ten years, we’ve observed growing potential in new markets for spend categories that are relevant to the resources sector. These include countries such as Poland, Czechia, Mexico and India; however, we do not envisage any of these markets individually challenging China any time soon in a serious manner on typical spend categories.
We do expect costs and risk to slightly increase in China over time, however, the world’s leading supply market will remain highly attractive as a competitive ‘one-stop shop’, and a globally integrated option for the resources sector. Resource companies focused on cost, quality and speed will need to develop improved methods of working with their Chinese suppliers. Parallel to this, new supply markets collectively are making up a new pool of supply and several need to be nurtured – in multiple jurisdictions – to de-risk the global supply chain and take advantage of the next big opportunity.
To solve the challenges of driving global procurement effectively, we propose a new look at the approach companies take to: (1) Global Sourcing Strategic Intent & Execution, (2) Working with China, (3) Investigating New Markets that Matter, (4) Supply Cluster & Category Choices.
1. Global Sourcing Strategic Intent & Execution
It is essential that senior leadership buy into the benefits of global supply and that there is a clear link back to corporate objectives. The global supply strategy must be deliberate in terms of which products, from which markets and to work with which suppliers. A sound governance structure needs to be in place to maintain momentum and provide guidance such that expected benefits are unlocked.
At an execution level, we advise a process of spend analysis, supply market validation and then a considered implementation with strong change management.
Implement appropriate global sourcing strategy & execution framework
Alternate global sources of supply will de-risk the supply chain but will also create more complexity. Working with the right partners will allow you to continue to focus on your core operations.
Key interventions should be done by qualified partners to de-risk along certain points of the supply chain. Supplier selection, quality management, modern slavery audits and expediting, to name a few, are essential tasks to undertake, with further emphasis on these interventions being required due to the current disruptions global supply chains are facing. In figure 1.6 we look at a typical supply chain for a resource company, and what needs to be done to mitigate any disruptions from a supplier all the way to the customer.
These value chains are complex to manage (figure 1.6), with many interventions that need to happen to get products moving from supplier to the mine or process plant. The level of complexity is high, but successful organisations do meet the challenge. They also combine the best of global procurement with the goals of supporting local content and inclusive procurement policies.
Resources Sector Supply Chains are Complex to Manage
2. Working with China
It is often asked what the ‘winning formula’ is for effective procurement from China. Successful China procurement is the result of a comprehensive set of complex and highly specialized processes. Distilling this down to a ‘magical recipe’ for success is no simple task and there are no shortcuts. However, as a useful reference, two fundamental ingredients for procurement success are: the selection of the right suppliers; and the effective management of chosen suppliers to optimise their performance.
This is easier said than done, and a closer examination of these two processes is certainly warranted. For a fuller perspective: China Supply Market Potential
3. Investigating New Markets that Matter
To determine the full scope of opportunities, we first need to examine the data and associated trends. Key procurement challenges (figure 1.7) along the process of supplier selection and then management, must be considered whilst new markets are tested. A strategic plan must be in place when determining which markets are appropriate and which suppliers are optimal for specific procurement needs – and utilise qualified partners that can provide solutions across the end-to-end supply chain.
Key Procurement Challenges in New Markets
In figure 1.8, we see how China has risen to be the world’s largest exporter, with USD 3.59tn worth of exports in 2022. However, there are several emerging markets that appear in the rankings of top global exporters. Mexico, Vietnam, India, Thailand, Malaysia, Poland, and Türkiye, to name a few, have steadily increased their share of global exports, and are continuing to challenge the traditional leaders.
Meanwhile it is very important to note that Germany, USA, Japan and other developed markets are still renowned for high quality, high-cost products, but the emerging developing markets provide alternatives that are also high in quality but are more competitive in cost. Getting the trade-off right is important and certainly not easy.
New Global Order: Incumbents, Winners and Losers
We present a detailed analysis of these trends in A World of Global Procurement Opportunities – but Where to look?
4. ‘Supply Cluster & Category’ Choices for the Resources Sector
To look at how these markets are involved in the supply of products needed in the resources sector, Axis Group has developed a taxonomy (figure 1.9) on typical spend categories for mining companies by doing extensive research and leveraging our 20 years of experience.
Mining Industry Spend Taxonomy
At the core of this research and through investigating global mining company spend, Axis Group filtered 14 categories (figure 1.10) – which totaled USD 725bn of global exports last year – that are typically procured in this sector. In figure 1.10, we look at the export growth of our chosen categories for the past 10 years, and the top 20 countries market share of the relevant exports.
5. Selected Mining Categories Importers and their Import Partners
USA and Australia are two of the top global importers of mining equipment. Their supply market portfolio includes many developed markets while also including emerging markets such as India, Mexico, Vietnam, Thailand, and Malaysia. Many US based companies have been implementing a ‘China +1’ strategy, and have also tapped ‘friend shoring’ initiatives with its partners to build resilience from critical challenges in value chains.
- USA’s top 20 import partners in mining categories included 6 key emerging markets, Mexico, India, Vietnam, Thailand, Malaysia and Poland
- Top 3 emerging markets by import CAGR for USA in the period of 2011-2022 were Vietnam (27%), Thailand (18%) and Malaysia (14%)
- Australia’s top 20 import partners in mining categories included 5 key emerging markets, India, Thailand, Malaysia, Mexico and Vietnam
- Top 3 emerging markets by import CAGR for Australia in the period of 2011-2022 were Vietnam (12%), India (8%) and Mexico (7%)
China’s Prominence in Mining Categories vs Developed and Emerging Markets
China is a leading exporter for these categories (figure 1.12); however, other ASEAN countries and India can be attractive for resource companies, hence a growing market share for some of these exporters.
In summary, and based on some top fourteen mining product exports, we see a number of possible outcomes:
- China should remain a core part of resource companies’ sourcing portfolio, given its high capability and cost-competitiveness in numerous product categories
- At the high-quality and high-cost end of the spectrum many traditional economies will continue to play a role i.e., US, Japan, Germany, Spain, South Korea, etc.
- India, Vietnam, Thailand and Malaysia should be selectively considered due to their growing capacity in key resource sector categories
- Eastern European countries such as Poland and Czechia should be observed for their growing potential in select categories
- Mexico plays a core role in LATAM and North American supply chains, but has potential to bolster the supply of other global markets
China’s Prominence in Mining Categories via Rapid Export Growth & High Market Share
Beyond the 14 product categories we identified, China and selected emerging markets should also be considered as alternatives to high-cost markets for other resource sector related categories in direct spend. Previously in figure 1.9 we looked at the typical mining company spend tree, where other Capex, Opex/MRO and services were identified to be sourced from these markets, with examples such as:
- Site construction, mine construction and facilities construction related products
- Construction services
- Material handling equipment and consumables
- Processing equipment and consumables
- Bulk chemicals i.e., flocculent and reagents
- Electrical equipment and consumables
- Explosives related equipment and consumables
China is one of the largest exporters for a number of these categories of products, with figure 1.14 looking at the size of its exports in the broader harmonized system (HS) codes. Hence while numerous new markets exist, China should still be a key sourcing hub for procurement managers in the resources sector. This is especially true across electrical machinery and equipment, mechanical appliances, chemicals and reagents, various steel products and rubber products such as conveyor belts.
China’s Exports – World Leader in Resource Sector Procurement Spend Categories
Effective global sourcing is by no means an easy task. There are many challenges and obstacles: gaps in team skills and capabilities, information asymmetry, time pressure, complexity, lockdowns, travel restrictions, end-user resistance, change management requirements, standards, etc. Language, culture, distance and views on contracts or managing quality and inspections also enter the picture.
However, current risks and shifts in global supply chains make it imperative and a priority for resource sector procurement managers and teams to get it right.
When done effectively, global procurement and supply present a powerful lever for driving value in the resource sector that can reduce cost, manage quality, expedite schedules, mitigate risk, and ensure important ESG compliance across the supply chain.
Imagine the entire world was your supply marketplace?
Axis Group Global Procurement & Supply has supported mining projects and operations worldwide for over 20 years. Our solutions are truly integrated and span the entire international value chain from source to final supply – including analytics, sourcing, procurement, supplier performance management, quality management, inspection, expediting and logistics.
If your project or operations are challenged by unacceptably high costs, extended lead times or risk, we can provide additional capability. Reach out to Axis Group International in Australia, Asia or Africa at email@example.com or call +61 483 386 118.