The Shape of Things to Come | Highgrade Editorial

Nobody knows what the future holds, but this may be the closest you’ll get - for the extractives industry anyway.

Join the Highgrade Editorial team in conversation as we discuss five key trends that will define the industry in the years to come.

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Highgrade is a not-for-profit organisation that produces interviews and documentaries that identify, capture and disseminate analysis and insights in the field of natural resources and social progress.

Our mission is to provide open and free access to specialist knowledge and to disseminate good practice and innovation in this field. See www.highgrade.media for our portfolio of published material.

With support from the German Federal Ministry for Economic Cooperation and Development, through BGR.

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Interviews mentioned in the episode:

Tom Burke
David Humphreys
The Future of Resource Taxation
Mark Cutifani
Henrik Ager

Transcript

Åsa Borssén:  
Nobody knows what the future holds. But this is the closest you'll get - for the extractives industry, anyway. You're listening to Highgrade, and I'm your host, Åsa Borssén.

Welcome to Highgrade and to our first ever editorial podcast. Today, I'm with my colleagues, Nic Di Boscio and Mark Slade, to bring you a curated view of the industry and the trends that will shape the extractives over the coming decade. Nic, Mark, thank you so much for joining me today.

Nicolas Di Boscio: 
Hi Åsa, hi Mark, very nice to talk with you today.

Mark Slade:  
Likewise, Nic, always good to get together with both of you.

Åsa Borssén:  
And of course, we work very closely in Highgrade. And in every interview and product we've released over the last five years, but it's actually the very first time that we record a conversation the three of us.

Nicolas Di Boscio: 
Yes, so for people to recognise our voices, I am Nic.

Mark Slade:
Which means I must be Mark.

Nicolas Di Boscio:
Mark, you sound a little stuffed today, people will wonder if you if this is how you really sound? Do you have COVID or cold perhaps?

Mark Slade:  
No, I am usually slightly crisper sounding than this. But thankfully, it's just a cold.

Åsa Borssén: 
Good to hear.

Nicolas Di Boscio: 
Glad nothing too bad. So after that little disclaimer, Åsa you mentioned five years doing Highgrade and what a journey that's been, and a privilege, the people that been in the show and all the knowledge they share. So to them, our recognition and our gratitude.

Mark Slade: 
Five years uh, crazy. And yet the first time that you hear the three of us all together. So I suppose that now that Highgrade has benefited from so many guests over the years, it's pretty much long overdue that we share our own thoughts.

Åsa Borssén: 
I agree. So thanks again for joining me guys. Nic, today we're discussing trends in the extractives sector.

Nicolas Di Boscio: 
Yes, and we're putting forward five main trends. And we do this in a world and in an industry undergoing quite dramatic transformation. So we want to explore in what way is global change influencing the extractives - and vice versa. This means that the industry will influence some broad global developments. But also in some cases, it will be the industry that needs to adapt to broader global change.

Åsa Borssén: 
Mark, we limit this to five trends. How do we pick these five trends?

Mark Slade: 
Maybe that's the hardest part, Åsa, not so much recognising the trends, but just picking a top five. Nic and I do though at least have the luxury of a decent vantage point. With our consulting hats on, we experienced first-hand what captures the attention of our clients. And as we often say in the industry, what's important to the client tends to become an obsession to the consultant. Now, to be fair, obsessiveness doesn't tend to help with perspective. So when we want to step back and gain perspective, well, there's always Highgrade as, as hopefully our listeners would agree. And I'd at least argue that having managed to, over the years, capture this wide range of views from the visionary to the to the practical, that yeah, we've got a pretty good sense of those key trends. So maybe, let's not think of this as our Highgrade Top Five, but instead is the curated views of the industry at large.

Åsa Borssén: 
So let's get into it. Trend number one, the ongoing energy transition. This is not new, and it's one that we have featured extensively on Highgrade. Nic, let me start with you. How do you think about the energy transition?

Nicolas Di Boscio: 
Basically, climate change remains at the top of the global policy agenda, and it's not going to go away. If anything, it will continue to gain momentum. There was a bit of a political impasse in the US during the Trump years, but the Biden presidency came with at least a pledge for new commitment. Now, what does this mean for the industry? We can look at this from a perspective of mining or from a perspective of hydrocarbon fuels, and in both cases, it comes with disruption. So for mining, first is the attention to minerals associated with the energy transition. And here there is a sense of an impending supply gap. We hear a lot about copper, but they're all the others as well. And these minerals tend to be more concentrated geographically than in the, in other cases, with obvious implications for the producers, but also in terms of security of supply for the consumer countries. The other big issue is, of course, around energy as an input into mining production. We already seen bold CO2 reduction targets by companies. So the question is, how is this going to impact the cost structure of these companies? For the oil industry, I think it's even more fundamental. It's about survival. How is the oil industry going to adapt and change over the coming decade? I think we will need to follow this very closely.

Åsa Borssén: 
And this is very interesting from the industry's perspective. But ultimately, consumers are key driver of this trend because of their climate change concerns. I remember in our interview with Tom Burke, he said that people like cheap energy, and they like green energy, and they leave it up to business and government to sort it out. Mark, would you say that business and governments are doing enough to meet this social demand for both cheap and green energy?

Mark Slade: 
It's a key question, right? Ultimately, for the world to transition to low carbon electricity, then renewable sources need to be cheaper than fossil fuel. And historically, that just hasn't been the case. So consumers have been left facing a choice between cheap energy or green energy. But renewable sources respond to technological advancement, and fossil fuels generally don't. So year on year, we've seen that solar and wind power in particular continue to get cheaper and cheaper. Now, for me, what's really exciting is that we've reached that tipping point. So in most of the world, powerful solar and onshore wind, in particular, is now cheaper than power from fossil fuels. And that means that that contradiction of cheap and green energy is no longer. But coming back to the question, in so far as both business and government have fostered these technological advances, then I suppose yeah, you can, you can make a strong case that both have been doing their part. But I am inclined to conclude with a degree of caution. There are outliers and important ones at that. Most obviously, although it leads the world in wind and solar installation, China also installed more coal fired capacity in 2020, than the rest of the world retired combined. And as we know that new capacity just isn't going to sit idle. So this speaks, I think, to the challenge of coordinated international action. You know, maybe it's just delaying the inevitable, but important outliers, the China's the India's of the world, they can, and they do have the ability to influence those global trends.

Åsa Borssén: 
Moving on to the second trend, a resurge in resource nationalism. This is a trend that has ebbed and flowed in recent decades. Nic, why is this topical?

Nicolas Di Boscio: 
As ever, these trends don't come from nowhere. There is a global context of political volatility. The US-China trade tensions are playing into nationalism. And we've seen this playing out in international commerce as for example, in terms of access to vaccines. For the extractives in particular, then the question of security of supply has never really gone away. You know, back in the 70s, it was a geopolitical tension around oil, and therefore the Middle East was the battleground. In the early 2000s, the supercycle was really impressed mostly by growth in China, and others to a lesser extent, and affected pretty much all commodities. I remember soya at $600 a tonne, but particularly bulky minerals, you know, the iron ore, the coal.

Åsa Borssén: 
It was all about China, as David Humphreys said in one of our interviews.

Nicolas Di Boscio: 
Exactly. And today, it's still playing out but more linked to the future economy; to rare earth to lithium to manganese to copper. Where, at least in relative terms, China has more of an advantage than say iron ore.

Mark Slade: 
Yeah. Nic, interesting you mentioned iron ore. Remember the supercycle that that finished what a decade or so ago, which proved China's impact as a customer at least. You know, in fact, in commodities like iron ore, they literally rewrote the terms of the industry. The implication, though, of this shift you talk about to battery metals, is maybe that pressure on China to pursue international supply, perhaps it eases given their greater domestic resources have those battery metals. In effect, why chase overseas what you already have at home? That said, to put forward a different view. I did see some research recently that China in the decades since the supercycle actually increased the share of global mining that it controls more than tenfold, which is done by buying resources in places from Serbia to Australia to Peru, etc. And so, Nic, I wonder, do you see that trend of pretty aggressive international expansion slowing down?

Nicolas Di Boscio:  
It's a good point, Mark. Take the last five years, for example of all the mineral assets that changed hands, more than half went to Chinese companies. We are not seeing the end of that trend anytime soon.

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Åsa Borssén: 
I’m with Nic Di Boscio and Mark Slade as Highgrade’s editorial team considers the future of the sector. How is global change reshaping the extractives industry? And the other way around too.

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Åsa Borssén: 
Well, we do have a range of perspectives here. I wonder how you will react to trend number three, pressure on resource taxation. Nic, why is this emerging now?

Nicolas Di Boscio: 
It's not really emerging now, this is a recurrent issue. But conditions are now ripe. Remember that the global economic headline remains that of the post-COVID economic recovery. And so we now live in a world of high levels of debt. And this is both public and private debt. So in mining, high mineral prices, plus fiscal pressure equals, or tends to equal, an opportunity for value grab. Governments will need resources. So I think we can expect increased pressure on mineral taxation. Just as an example, see the rhetoric emerging in Perú with the presidential election of Pedro Castillo. Oil is a bit different. While mineral prices are high, fossil fuels are not particularly so which adds to the economic challenges of oil producer, particularly think Middle East and Latin America.

Åsa Borssén: 
But COVID contributes to this, don't you think, it is playing an important role?

Nicolas Di Boscio:  
In so far as COVID puts pressure on public finances? Yes, it does play a significant role.

Mark Slade: 
Nic, let me let me jump in here. You frame this as government reaction to macro-economic pressures. But what about citizen pressure? Remember last year, we produced a video for the IGF on the future of resource taxation. The argument was that COVID has, in fact, accelerated calls for social change, and that this has a direct bearing on resource taxation. You know, the reality is we live in a world where access to an understanding of the industry's tax arrangements is better than ever. And that's coincided with the new media landscape, social media in particular, which amplifies those previously muted voices. So I'd perhaps argue that it's inevitable that with the increased knowledge and the increased ability to be heard, that there be greater citizen pressure to review those value sharing arrangements. And that's the truth. It's, it's a topic that we see much more prevalent in public debate today. So I think as a result of social frustration worldwide, about topics like inequality, cost of living, etc, that the extractive industries do need to increasingly prove their contribution to society. So, Nic, you and I do agree on the on the trend of increasing pressure. But I think it's important not to overlook the citizen component of that.

Åsa Borssén: 
And the issue of social change brings us back to our fourth trend, heightened social pressure for impact. Nic, with new times come new expectations.

Nicolas Di Boscio:  
Indeed, and there is a new face to social movements, at least in the West, you know, the so-called social justice, which comes with a more reactive activism and increased scrutiny on corporate behaviour. And also comes with a new attention to the issue of inequality more generally, and the distribution of wealth.

Åsa Borssén: 
On that point, we recently ran a social media poll asking our audience what the biggest development challenge of our time was, would it be for example, Climate Change or post COVID economic recovery? Perhaps surprisingly, the most frequent answer was income inequality.

Nicolas Di Boscio: 
Yes, and possibly one implication of this is on the scope of what is the relevant level of corporate impact. I joined the industry at the turn of the millennium, and everything was about paying tax, it was about community programs, and frankly, not messing up the environment too much. Well, social expectations are much, much higher today. And some companies are starting to see competitive advantage in delivering economic benefits beyond the fence. That means really, to secure mineral resources, you sometimes will need to look at economic development beyond mining. This, just to be clear, this was a taboo a decade ago, this was a no-go zone.

Åsa Borssén: 
Arguably Anglo American has taken the lead in this regard, at least in the mining sector. And we recently talked with Mark Cutifani, their CEO, and he explained the strategic importance he attributes to supporting regional development beyond, as you say, immediate operations. Mark, is this lip service? Or do companies really care about these things?

Mark Slade: 
Yeah, I've got to say I too, enjoyed the interview with Mark Cutifani. Now, in the same way that I suggested earlier that the good consultants obsess over what matters to their clients I think it's fair to say that good companies really do care about what matters to their constituents. So you know, I think there's probably two distinct drivers for the need to deliver impact. The first of those comes from beneficiaries themselves. At Ergo, Nic and I, just last year carried out a perception survey in an important African mining jurisdiction. And one of the key insights that emerged was local residents’ ability to clearly distinguish between the socio-economic performance of different companies. And they formed a much more favourable view of companies that acted upon community concerns than those who merely paid it lip service - or worse. And let's not forget, Ernst & Young in their annual survey of business risks for mining companies, yet again, identified Licence to Operate as the greatest risk the industry faces. And in particular, they highlighted the likelihood that broader community contributions will in fact, come into sharper focus post COVID. So, you know, turning this to the practical element, I think this means companies both delivering and better communicating their full contribution to society.

Now, remember, I did mention two drivers. And the second of those comes from investors, who for some time now have been turning up the heat on how companies operate. You know, investor activism really has arrived in earnest. Think of it for example of Rio Tinto last year, and the changes there following the Juukan Gorge tragedy. But what's interesting is that, while we've witnessed increasing investor environmental, social, governance pressure for some time now, its focus has evolved. The main thrust in the early days was undoubtedly environment, but the emergence of COVID and the social impact that we just talked about, it really does appear to have rebalanced somewhat, the interpretation of ESG. And that now includes renewed focus on social performance. You know, not just mitigating adverse social impacts, as has been the trend for years now, but actively contributing to the positive change and demonstrating it. So to me, it's perfectly reasonable that companies like Anglo American, who themselves made considerable efforts to integrate regional development into their strategy are in fact likely to find themselves a step ahead of their peers in relation to this trend.

Åsa Borssén: 
For the fifth and final trend, industry acceleration in the adoption of technology. The extractives have been flirting with automation and robotics for some time, but it's still a conservative industry and it has been a laggard. Nic, is the industry finally catching up?

Nicolas Di Boscio: 
For a decade the industry has been talking, as you say Åsa, about AI, automation, the Internet of Things and those sorts of things. Then COVID came along and in one year, accelerated significantly a number of very practical changes. For example, many of our clients, and I'm talking about large, very large companies here, are now not planning to return to the office. So for a lot of functions home office is here to stay. Now, this is just an example. But I think it is fair to say that while in the past new technology adoption was driven mostly by on-site safety today is also about resilience more generally. Now, it's not denying that this is happening. But at the end of the day, a pit is a pit and a truck is a truck that has not essentially changed. So I think it’s valid to ask the question. To what extent is this particularly new wave of technology is going to fundamentally change the economics of the industry?

Mark Slade:  
Nic, I think you're right. Technology hasn't just boiled down to a matter of safety or cost in recent times, the resilience that you point out is a key dimension. And the very fact that technology has enabled companies to largely keep operating during the pandemic is, I suppose, in in many respects a cause for celebration. But that is just one side of the coin, you know, as with any change, and most certainly with technological changes, there's always going to be a risk of both winners and losers. And in the context of the other trends that we've discussed heightened social pressure, it does seem to me to be critical that we stop and ask ourselves about those who risk being left behind, and what can be done about it. And so, you know, in short, how do we make sure that the costs of change don't end up landing at the feet of the most vulnerable? Now, notwithstanding this risk, I am inclined to conclude on a note of positivity. We recently discussed automation with Henry Ager from Sandvik. And Åsa you'll recall he was he was quite optimistic about the impact of technology on host communities. Despite what we read daily, in industry press releases. I agree with his assessment that the changes just won't happen overnight. And as a result, there is time to adapt. You know, examples include retraining that part of the workforce likely to be affected by technological advances. Now, it's obviously easy to be positive about the future. And ultimately, only time can prove Henrik and I either right or wrong. But I do hope for the industry and all of us involved in it that the both of us are correct.

Åsa Borssén: 
Mark, Nic, it's been a pleasure. Thank you very much for joining me today.

Mark Slade: 
Thanks Åsa, great to talk.

Nicolas Di Boscio:  
Thank you Åsa and Mark. It's been a pleasure.

Åsa Borssén:  
There you have it, the five key trends that will shape the extractive sector in the coming decade: (1) The ongoing energy transition, (2) A resurge in resource nationalism, (3) Pressure on resource taxation, (4) Heightened social pressure for impact, and (5) Industry acceleration in the adoption of technology. It's been a pleasure to have Nic and Mark on the show today, our first editorial podcast. 

As always, thank you to our sponsor, the German Federal Ministry for Economic Cooperation and Development, through BGR. Make sure to subscribe to our channel on whichever podcast platform you're using. Stay tuned for our next episode. Until then, so long!