Sourcing, Compliance, Complexity:
Navigating Successfully into the Future
“The more things change, the more they stay the same.” Unfortunately, this adage appears to be holding true for the Canadian metals and mining industry. In today’s volatile, ever-fluctuating environment of geopolitical influences, regulatory pressures, supply-and-demand levels, environmental scrutiny and more, it seems that the adoption rate of tools that could help metals and mining businesses be proactive continues to lag behind the speed of industry evolution.
The industry is currently dealing with an unprecedented volume and diversity of forces – most of them beyond their control − that will ultimately affect the entire value chain. In the end, however, the fundamental question remains:
As the metals and mining market continues to play a central role in key industrial, construction, and manufacturing processes, are individual businesses equipped to handle the inevitable barrage of ongoing changes while mitigating new risks that emerge, and providing proof of accountability?
The Force of Nature
It’s no secret that traditional energy sources with high carbon emissions still power a majority of mining and production, despite market investments in renewable energy. Unfortunately, customers and end consumers of all types of products are demanding assurance that each stage of a supply chain meet environmental and ethical standards. The automotive industry, which consumes a significant variety and quantity of metals, is just one example of how that pressure impacts the metals and mining industry.
Aluminium production is responsible for only one per cent of global CO2 emissions. According to a recent paper in Science Magazine, steel production emits around 1.7 gigatons of CO2 into the atmosphere each year, the equivalent of approximately five per cent of global carbon dioxide emissions. Nevertheless, the metals industry remains a primary target for environmental regulators and policy makers looking to reduce greenhouse gas emissions.
One impact of the environmental pressure has been the advent of carbon pricing, either through an emissions trading scheme (ETS) or in the form of carbon taxes. According to the World Bank, 42 countries and more than 25 sub-national jurisdictions have already deployed some form of carbon pricing. Not only is carbon pricing here to stay, it will likely increase from its current 15 per cent of global emissions coverage. Major mining countries like Chile and Canada are planning to implement carbon pricing systems, and others, like South Africa, are not too far behind.
However, carbon pricing has the power to affect more than just the back office. As its potential for revenue-generation attracts more and more local and national authorities, metals and mining firms will also be exposed to reputational risks, drops in shareholder value, and noncompliance penalties.
The Power of Politics
Carbon isn’t the only waste product under the environmental magnifying glass. Toxic waste generated at each stage in the metals production process far outweighs total metal extraction by four times; and in an effort to reverse the waste’s negative impact on the environment, policy makers are tightening standards and regulations.
In years past, the metals industry was able to circumvent environmental legislation by moving mining operations or refining facilities to emerging economies with lower regulation standards. However, the resulting increase in waste material has amplified pressures from governmental bodies around the world to develop appropriate mitigation strategies.
Just this year, for example, Queensland Treasurer Jackie Trad re-introduced the Mineral and Energy Resources (Financial Provisioning) bill, which would manage the financial risk to the state if energy and mineral resource tenure holders do not comply with environmental rehabilitation and management requirements. Miners would have to pay, according to risk, into a pool of funds that would be used to rehabilitate the land disturbed by mining activities.
In Columbia, the Ministry of Environment and Sustainable Development has published a draft regulation that would regulate the use of the Colombian Environmental Mining Seal, a certification mark recognized by the Superintendency of Industry and Commerce to demonstrate a product’s compliance with the draft regulation.
These are just two of numerous examples of tightened waste management regulations around the world. The point? In order to comply with these regulations, operational costs have also increased and will continue to do so as more areas reject all but strictly monitored, managed, and audited waste management procedures.
In an effort to maximize operational margins, some companies have integrated mining and/or smelting operations into their supply chain. Doing so, however, not only complicates overall process management, it also exposes these firms to a different set of regulatory regimes, risks, and requirements.
The Answer: Traceability
The obvious key to responsible sourcing, sustainability, reputation management, profitability, and risk mitigation is traceability.
Traceability of sources not only enhances supply chain quality and compliance, it also provides confirmation of ownership, which can be particularly important as commodities change hands throughout the supply chain. Recent scandals surrounding the verification of metals ownership have had a negative impact on the industry and its finance.
With supply chain adjustments, cost structure shifts, regulatory pressures, ethical scrutiny and geopolitical factors forever looming, calculating the true impact of any operational trade-offs is daunting.
Without a holistic view of the enterprise, however, earnings will become more unpredictable, accounting will become more complex, and compliance breaches will become more likely. Metals businesses must remain innovative and establish greater internal controls in order to stay on the right side of both the law and public opinion.
In order to meet traceability standards, market participants must have the tools necessary for real-time portfolio management and reporting to first ensure that responsible sourcing is taking place, and secondly to prove it to the competent authorities.
Effectively Managing Uncertainty with Enterprise CTRM Software
Traditionally, the metals and mining market has been underserved when it comes to the availability of such solutions. Even when commodity trading and risk management (CTRM) solutions with the necessary functionality to manage regulatory risk are in place, they have often fallen short on functionality specifically designed for metals. Home-grown commodity management solutions and manual tools such as spread sheets are even more unsatisfactory as they are resource consuming and expose businesses to greater risk.
Future success of metals and mining businesses will depend on having real-time visibility and full value chain control across front, middle, and back offices. Metals industry participants need a solution that can be easily adapted to individual processes and prepare them for industry changes and business growth. That said, CTRM solutions such as Allegro Horizon, developed for the metals industry, are critical to success in this complex and volatile environment. With Allegro’s agile metals market solution, businesses can efficiently manage emissions pricing, regulatory risk, and traceability – no matter how volatile the market becomes.
The future for the metals industry will be both exciting and challenging. Having the best technology platforms could very well determine which businesses survive and thrive despite market uncertainty.