Breaking new ground: Why mining is good for innovation

BHP Billiton's Mount Whaleback iron ore mine in the Pilbara, Western Australia

Contrary to popular argument, the mining industry is proving it can be an important source of innovation, as well as natural resources.

By Jason Murphy & David Walker

Singapore has no natural resources. Indeed, it has scarcely any land to seek resources beneath. Yet with per capita GDP of A$71,000 in 2015, the tiny city state is one of the wealthiest countries in the world.

Venezuela, meanwhile, has by some estimates the world’s largest oil reserves – nearly 300 billion barrels. Despite the abundance of energy, in 2016 many Venezuelans are hungry, deprived of basic necessities and have begun to riot in the streets.

The era of petrol at one cent a litre is over, as the oil price crunch forces the brittle Venezuelan Government to slowly change.

These two countries embody the notion of the “resource curse” – the popular idea that there is something about resource-rich economies from Australia to Malaysia to Canada that holds them back from better economic growth.

In their reliance on mining and other commodities, it is argued, these countries are “the old economy”, stuck in low value-added and low-growth activities, lacking in potential for innovation and the application of brainpower.

“Resource industries can be the site of major learning processes that permit sustained productivity and output growth.” Professor Keith Smith, Imperial College Business School

The respected Australian journalist Paul Cleary put the argument most passionately in his 2010 book Too Much Luck. He argued that the abandonment of knowledge-based and innovation-rich industries in favour of reliance on resources was dooming Australia to a poorer future.

“Without stronger and more effective government control, Australia will continue travelling at breakneck speed toward the bottom of the quarry, a journey that will wreak havoc on the non-resource sector and potentially leave many people far worse off … We think we are the lucky country but what we really have is dumb luck … Unless we manage this extraordinary boom more effectively, our good fortune will curse future generations.” 

Others, however, argue that the resource industries will remain a powerful source of economic strength. They point out that resources are not only a source of current-day income, but in some cases an important source of innovation.

In Australia in particular, where, despite low prices, mining industry output is now climbing toward 10 per cent of GDP, understanding the role of the resource industries has never been more important.

A curse on our house?

Professor Keith Smith argues eloquently against the resource curse. Smith, a Tasmanian, is senior research fellow at London’s Imperial College Business School and an expert in innovation policy. He points out that resource-based economies, such as Finland, Norway, Australia, Canada and New Zealand, are some of the richest and fastest-growing in the world.

These economies do not necessarily transform their raw product before it is exported. For instance, “moving up the value chain” – trying to compete in more highly processed products – has not been a roaring success in Australia.

Aluminium smelting and car manufacturing both failed even as resource extraction boomed. Nevertheless, resource industries in many countries apply a deal of expertise to the process of getting it out of the ground and into the hands of buyers.

A study of Australia’s Mining Equipment, Technology and Services (METS) sector – businesses that provide specialised services to the mining industry – estimated that it generated A$90 billion of revenue in 2011. Some 58 per cent of these companies spent money on research and development, it said. It also found that these companies rated “significantly higher” than those in other industries on measures of an innovation culture.

Related: Living in a dematerialised world: The slowing growth of resources

Smith agrees that an economy can innovate without being in high technology industries. Policy that tries to force an economy into such industries may mean it misses out on sectors that are a more natural fit. If a country has an advantage in resources, he argues, it should exploit that advantage and be confident the industries that develop around that advantage will be strong.

“Resource industries can be the site of major learning processes that permit sustained productivity and output growth,” Smith wrote in a study for the Committee for Economic Development of Australia (CEDA) think tank.

He listed activities such as the development of sophisticated seismological knowledge and techniques, the construction of large-scale mining infrastructures, the automation of production technologies and improvement in logistics as innovative techniques that have helped build the output of resource industries over many years.

Best practice through innovation

As the commodity price boom ends, the need for innovation is even more acute. Not only are prices down, but the resources developed in recent years are often those that were less economic to exploit. Meanwhile, older mines are ageing, a process that often makes them more costly to operate. The mining industry is under pressure to make sure it operates as sharply as possible.

And it is responding. Labour productivity in the industry rose by 22 per cent last year, and multi-factor productivity by 5.5 per cent. 

“It’s easier to see things from up high ... so we are finding [drones are] delivering a much safer environment.” Jason Wadsworth, BHP Billiton Mitsubishi Alliance

Former Rio Tinto CEO Sam Walsh is known for bringing innovations like autonomous trucks to the mining giant. During his time at the helm, he says, Rio Tinto adopted and adapted best practice from such diverse sectors as aerospace, oil and gas, manufacturing and agriculture. 

“There was no barrier to our search for best practice,” says Walsh. “If businesses want to innovate, then they will search out best practice and adopt or adapt that from wherever.”

Innovation in resources has been both wide and deep – but, located out in mines far from population centres, it is often overlooked. The following case studies show how resources innovation is happening.

1. Aerial drones

When you drive to a gas well in Far North Queensland, you have to go through a lot of gates. Leave one open, and you’re likely to be dealing with a very cross farmer. This is just one of the reasons the onshore oil and gas industry has enthusiastically adopted aerial drones for maintenance checks of their many wells.

Aerial drones are well established in the resources industry. 

For monitoring wells, the oil and gas industry uses fixed-wing drones with a 3m wingspan that are launched from a truck.

In the mining industry, those same drones are used for measuring the volume of the resource, and smaller quadcopter drones are deployed for a variety of other uses. At BHP Billiton Mitsubishi Alliance’s (BMA) coalmining operations, they use drones to ensure areas are clear of people before a blast. 

“Without stronger and more effective government control, Australia will continue travelling at breakneck speed toward the bottom of the quarry.” Paul Cleary

“It’s a lot easier to see things from up high than on the ground, so we are finding it is delivering a much safer environment,” says BMA program lead for unmanned systems Jason Wadsworth.

And the aerial drone supply industry, led by companies such as Boeing, is adapting fast to meet their needs. 

Companies selling drone services are proliferating in Perth, observes The University of Queensland’s head of mining engineering Professor Peter Knights. They often have a major client in the resources space and other clients, too.

The drones can be modified for other activities, such as fault detection on electrical networks. “So there’s a spillover,” says Knights.

Professional Development: CPA Q&A. Access a handpicked selection of resources each month and complete a short monthly assessment to earn CPD hours. Exclusively available to CPA Australia members.

2. Finance

Not all the innovations that transform the world of mining are found in the pits. The CSIRO has helped develop decision-making tools that could help resources companies substantially lift profits, by making superior choices about when and how to develop and exploit their assets.

Mining's share of the Australian economyThe resources sector has many difficult and expensive choices to make, and they must be made without knowing the future price of the commodity being extracted. Managing risk is central to the business, so it is important that CSIRO has helped adapt real options analysis for the resources sector.

Options analysis is enormously influential in finance. The Black-Scholes equation is one of the first things taught in finance courses. It not only helped to reduce risk in financial trading of options, but also helped to clarify the way risk functions in the market. The work won its inventors the 1997 Nobel Prize. 

The mechanisms of real options analysis are intricate, but CSIRO believes the approach can lift profits by 11 to 12 per cent.

3. Data processing

Woodside’s drilling operations on Australia’s North West Shelf are an enormous logistics exercise. It maintains eight offshore oil and gas facilities in the warm and shallow waters off northern Australia, which send their precious cargo off by pipe.

But they cannot receive cargo by pipe, and so four vessels regularly set off from Karratha, in Western Australia, to resupply everything from chemicals for drilling to breakfast cereal and soap for personnel.

In 2016, the vessels were approaching the end of their useful life, and Woodside needed to figure out how to replace them. To do that, it needed to devise the best schedule to use to visit the eight platforms offshore. The current scheduling was manual, so they called in the experts.

Associate Professor Ryan Loxton, at Curtin University, is part of a project called Resources Data Analytics Project. He threw out the pens and paper and instead set to work modelling the following problem mathematically: at what times, and in what sequence, should the vessels visit the different facilities in order to minimise operating costs and ensure that all cargo delivery and off-take support requirements are completed?

“Rio Tinto adopted and adapted best practice from aerospace, oil and gas, manufacturing and agriculture.” Sam Walsh, ex Rio Tinto

The issue is a modern version of a mathematical puzzle known as the travelling salesman problem, one of the most studied problems in the field and recognised as exceedingly difficult to solve – even in the era of supercomputers. 

Loxton’s models had to deal with a range of restrictions, including night-time loading, vessel equipment limitations and facility closures. The scale of the problem was vast – truly a big data challenge. 

Eventually, algorithms were written that solved the problem and allowed Woodside to create a business case for replacing the existing four vessels with three, potentially saving A$10 million a year.

Analysing the resource curse

The “resource curse” phenomenon – countries with vast natural resources and impoverished citizens – is more than just anecdote. In 1995, economists Jeffrey Sachs and Andrew Warner found that economies that were highly dependent on resource exports in 1971 exhibited lower growth in the period 1971 to 1989. 

Workers install drills at a uranium mine in Niger, AfricaExplanations for the phenomenon included higher exchange rates crippling other industries and corrupt governments trying to capture the benefit of higher commodity prices for themselves.

The resource curse has, however, been challenged by many academics, who see selection bias in the criteria chosen by Sachs and Warner. Some argue for a limited kind of resource curse whereby price volatility causes lower growth.

Commodity prices bounce up and down, and commodity producers’ currencies do the same. This can create trouble for other trade-exposed industries – a problem called “Dutch disease”.

Yet even at the peak of Australia’s mining boom, two researchers – Jonathan Hambur and Neville Norman – found mixed results. They reported in 2013 that some parts of manufacturing, including clothing and transport, had been hit by the commodities boom. Yet others, including food and beverages, seemed to have been lifted. Any conclusion of an economy-wide resource curse is not supportable, they argued.

“There are many speeds in a modern economy ... and many are left relatively unaffected by significant shocks such as mining booms,” the pair wrote.

Mining's first innovations

If you doubt that resources can really spark much in the way of technology or much in the way of growth, then think again. The sector has done it before, at a critical point. The steam engines and railways of the industrial revolution owe their origins to one source: British coalmining in the 18th century.

The reason England’s coalmining industry was such a fertile source of invention was a combination of scale and incentive. Driving mine shafts deeper and deeper below the earth led mine proprietors to confront problems nobody had confronted before, including extensive flooding. So it was that steam engines were first invented and deployed to pump water from coalmines. Moving vast quantities of ore created quandaries that were finally solved by railways.

Unique problems coupled with high costs meant innovation offered big rewards. Those conditions exist still within the commodities industries.

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