MINING PRODUCTIVITY: WHY HAS IT FALLEN? WILL IT RECOVER? John E. Tilton Pontificia Universidad Católica de Chile and Colorado School of Mines Email: [email protected] PUC Department of Mining Engineering Santiago, Chile April 26, 2013 LABOR PRODUCTIVITY 1985-2011 CHILEAN COPPER INDUSTRY (Tons per Own Worker) 160 140 120 100 80 60 40 20 0 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Source: Cochilco SIMILAR GLOBAL TRENDS •Australia, Canada, US, and other mining countries • Coal, iron ore, and other mineral commodities • Both labor and multifactor productivity PREVAILING VIEW • Falling productivity likely to continue over the long run • New technology no longer able to offset depletion • China’s growing demand • Less attractive deposits • Less technological change AN ALTERNATIVE PERSPECTIVE • Falling productivity is mostly cyclical • Result of high prices and efforts to expand output rapidly • Productivity likely to rise if prices fall RECENT RESEARCH • 2012 RioTinto request • Interpretative survey of the literature over the past several decades • Copper, aluminum, iron ore and coal FOCUS AND APPROACH • Two central questions – What are the major drivers of changes in mining productivity? – Are recent changes largely secular or cyclical? • Approach – – Identify determinants of productivity and the extent to which they may vary cyclically – Empirical evidence – does productivity tend to rise and fall with commodity prices? MAJOR DETERMINANTS • Innovation & technology – Major vs minor technological advances – IT technology – Embodied vs disembodied tech change – Learning by doing • Resource quality – Ore grades – Stripping ratios – Other OTHER DETERMINANTS • Government regulations • • • • Worker quality Economies of scale Capacity utilization Unplanned stoppages (eg, strikes) CYCLICAL DETERMINANTS • • • • • Innovation Resource quality Worker quality Unplanned stoppages High cost and inefficient mines close when prices decline • Cost control vs output EMPIRICAL EVIDENCE • Copper – Chile in recent years – US in 1980s • Metal Mining - Canada 1989-2006 • Iron Ore - US and Canada in 1980s • Coal - US in early 1970s LABOR PRODUCTIVITY 1985-2011 CHILEAN COPPER INDUSTRY (Tons per Own Worker) 160 140 120 100 80 60 40 20 0 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Source: Cochilco CHILEAN LABOR PRODUCTIVITY AND THE COPPER PRICE, 1985-2011 (Tons per Own Worker, 2012 US$ per Ton) 160 $10,000 140 120 $8,000 Productivity 100 $6,000 80 60 Price 40 $4,000 $2,000 20 0 $0 5 87 89 91 93 95 97 99 01 03 05 07 09 11 8 19 19 19 19 19 19 19 19 20 20 20 20 20 20 Sources: Cochilco, UNCTAD, World Bank CHILEAN LABOR PRODUCTIVITY AND THE COPPER PRICE, 1985-2011 (Tons per Own Worker, 2012 US$ per Ton) 160 $10,000 140 120 $8,000 Productivity 100 $6,000 80 $4,000 60 Price 40 $2,000 20 0 $0 5 87 89 91 93 95 97 99 01 03 05 07 09 11 8 19 19 19 19 19 19 19 19 20 20 20 20 20 20 Sources: Cochilco, UNCTAD, World Bank CHILEAN LABOR PRODUCTIVITY AND THE COPPER PRICE, 1985-2011 (Tons per Own Worker, 2012 US$ per Ton) 160 $10,000 140 120 $8,000 Productivity 100 $6,000 80 $4,000 60 40 Price $2,000 20 0 $0 5 87 89 91 93 95 97 99 01 03 05 07 09 11 8 19 19 19 19 19 19 19 19 20 20 20 20 20 20 Sources: Cochilco, UNCTAD, World Bank PRICES AND PRODUCTIVITY METAL ORE 30 MINING, CANADA, 1989-2006 Chart 12: Prices and Productivity, Metal Ore Mining, Canada, Index 1989 = 100, 1989-2006 250 200 150 100 50 Implicit Price Deflator Labour Productivity Total Factor Productivity 0 1989 1991 1993 1995 1997 1999 2001 2003 2005 Source: Appendix Tables 5, 15, and 17. Sources: Bradley & Sharpe, 2009 real GDP per worker is calculated for mining industry, silver ore the gold and For the 1997-2006 period (Appendix Table 14a). There is a clear upward trend in the price of LABOR PRODUCTIVITY IN THE U.S. COPPER INDUSTRY, 1975-2001 Source: Tilton, 2003 COPPER HEAD GRADES US COPPER INDUSTRY, 1971-1993 Source: Tilton and Landsberg, 1999 LABOR PRODUCTIVITY AND PRODUCTION IN THE U.S. IRON ORE INDUSTRY, 1970-1995 Source: Schmitz, 2005. PRODUCTIVITY IN THE U.S. COAL INDUSTRY, 1947-1991 (1972 = 100) Source: Ellerman and Berndt 1998 as cited in Darmstadter 1999. PRODUCTIVITY IN THE U.S. COAL “During the 1970s nearly everything seemed to conspire to reduce labor productivity, but the largest effect was attributable to the rising price of coal. . . Both statistics and anecdotes suggest that the first response of coal-mining operators was almost literally to throw labor (and other inputs) at the coal face. The inevitable result was lower productivity.” Souce: Ellerman and others, 2001, p. 405 FINDINGS • History suggests a strong cyclical component in productivity trends • When prices rise, productivity falls, and vice versa • So mining productivity is likely to rise again when prices falls IMPLICATIONS • Rising productivity means mining costs may decline in the future • So copper prices could also fall • Not necessarily bad news for producing firms and countries • And, clearly good news for consumers and society as a whole REFERENCES Darmstadter, J. 1999. Innovation and productivity in U.S. Coal Mining, in Productivity in Natural Resource Industries, edited by Simpson, R.D., Resources for the Future, Washington, DC. Ellerman, A.D., Stoker, T.M. and Berndt, E.R. 1998. Sources of Productivity Growth in the American Coal Industry, MIT Center for Energy and Environmental Policy Research, Working Paper no. MITCEEPR WP-1998-004, March. Schmitz, Jr., JA, 2005. What determines productivity? Lessons from the dramatic recovery of the US and Canadian iron ore industries following their early 1980s crisis, Journal of Political Economy, pp. 582-625. Tilton, JE, 2003. Creating Wealth and Competitiveness in Mining, Mining Engineering, September, pp. 15-22. MINING PRODUCTIVITY: WHY HAS IT FALLEN? WILL IT RECOVER? John E. Tilton Pontificia Universidad Católica de Chile and Colorado School of Mines Email: [email protected] PUC Department of Mining Engineering Santiago, Chile April 26, 2013 LABOR PRODUCTIVITY AND PRICES FOR ALUMINUM, VARIOUS COUNTRIES, 2000-2010