The COVID-19 pandemic is having an ever-evolving effect on the greater mining industry in 2020. Every day brings news of market shifts, idle sites, and disease reach.
But if mining leaders are familiar with any sort of market condition, it’s one that is highly uncertain and rapidly evolving. This is not the first black-swan event, nor will it be the last.
Global miners know the importance of a rapid response to ensure near-term resilience but also to position for the market rebound.
To make the best rapid fire decisions to support these plans, businesses must access the best technical and human resources globally.
So what can you do today to manage the ‘now’ while also preparing for a coming ‘new normal’?
As partners DecisionNext and VCI note, complex decision-making in this economic environment must include four key capabilities across the short and medium-term:
- Near-term price forecasting
- Operational decisions
- Industry scenarios
- Capacity decisions
To make the best rapid fire decisions, businesses must access the best technical and human resources available. This mix of human plus machine is where DecisionNext can bring value, quickly.
- Scenarios can be built to answer questions like:
- When to price – QP optionality, volume optionality
- How to price – fixed vs formula, spot vs contract
- What to price – blend optionality, 3rd party product, swaps & bundlin
And these forecasts and decision-support tools aren’t just predictive, but prescriptive. You can compare portfolios of decisions to quantify upside and downside risks.
As these tools produce decision options, the underlying forecasts can be powered in a variety of ways:
- Time series: Predictive relationships between time series are drawn out by machine learning
- Structural: Econometric models based on regressions are easily created and can be validated
- Hybrid: Capture core econometric relationships in a structural model and improve accuracy by applying a time series model to the residuals
A combination of model-agnostic predictions, trading data, and rigorous back-testing reveals and tests model performance under current market conditions.
And from a longer-term lens, the combination of human and machine learning can direct a variety of actions:
- Hedge: Actions that are value accretive across all scenarios
- Position: Option to move harder on one scenario, should it eventuate
- Move: Invest on the basis that one scenario is of significantly higher probability
The longer-term environment remains uncertain. Technical forecasting beyond 6 -12 months becomes a random walk, so accurate future planning necessitates the utilization of scenarios.
So how does this look in reality? What are some iron ore scenarios where this type of approach works?
In the mid 2000’s, upside models helped predict and accelerate expansion plans as result of the China growth scenario. Significant profits were achieved. And in the early 2010’s, downside trends and forecasts helped a company decide to discontinue with unprofitable greenfield investments.
These examples prove that beyond aiding in high value, high frequency decisions, market simulation tools can help in navigating the longer-term strategic planning.
Mining is unique in its complex blend of time frame, capital risk, stakeholder complexity, and uncertainty. “Timing the cycle” and pivoting based on trends can easily shape outcomes. Therefore, understanding and acting on potential futures is mission critical.
But strategy is ultimately “a contact sport.” Leaders must be biased towards action in taking options on future scenarios developed. Well-crafted scenarios are of no use if there are no meaningful decisions made from them.
Advances in algorithms, data access and sheer computing power mean that the development and evaluation of future scenarios through simulation is a must in today’s volatile economic environment.
This can’t be a one person job, one time a year. It’s a critical capability that should drive strategic decision-making across the organization. The leading mining companies know that ‘what got us here, won’t get us there’ and that adage as a mission will allow them to thrive in this new era and truly stand the test of time.
