Cost pressures on supply chains and supply chain management are only going to intensify, a webcast hosted by Australia’s major mining supplier organisation heard this week.
Luke Paterson, a partner with law firm Jackson McDonald, told the Austmine webinar talk of “enormous changes and disruption” to mining supply chains over the past few years was “a bit of an understatement”.
Added to COVID-related disruptions were the “sometimes unintended” effects on markets – labour in particular – of worldwide government stimulus programs, China’s sustained, large-scale lockdowns, surging logistics and freight costs, and growing, broad inflationary pressures.
“At your business level the cost of widgets, the cost of people, the cost of everything, is increasing,” Paterson said.
He said pinning price rises to conventional indices such as a consumer price index was a standard response to cost escalation, but the firm’s commercial lawyers were “seeing many instances where costs of certain inputs are outstripping the inflation rate”, in an environment in which cost-plus arrangements continued to be eschewed and tensions through supply chains were rising.
“And then there’s the effects of delays and disruption.
“Our experience is that the typical legal remedies that you might find in your contract for when things go wrong … [can] give you a convenient mechanism to get things back on track or alternatively get you some compensation, but they don’t deliver the widget or service that you ordered on time.
“A few of our clients have had such significant increases in freight costs that they have … pivoted away from their traditional suppliers, and moved to suppliers that have stocks here. So all of a sudden there’s a massive advantage to those suppliers that have stock in Australia,” Paterson said.
“Through the work we do with a bunch of industrial landlords [we’ve] seen enormous demand for much bigger industrial properties mostly because people want to onshore inventory.
“All these sorts of things drastically change how you might go about procuring goods and services.”
Austmine members tuned into the webcast heard about typical counterparty due diligence pitfalls, particularly related to private companies. Paterson said a key mistake he saw was good due diligence not being reflected in procurement contracts.
“We see that all the time,” he said. “The risks … are often addressed sufficiently at a commercial level but don’t make their way into a contract.”
However, market and regulatory shifts inside and outside mining look set to increase the risk assessment load through the industry’s supply chains.
Paterson said acceleration of technology adoption in mining and the increasing level of tech-company activity in the industry presented a “whole bunch of gnarly commercial challenges” around IP licensing, confidentiality, and anti-competitive conduct – stuff fairly loosely captured in contract clauses that not so long ago had “everyone’s eyes kind of glazing over a bit”.
Now, for technology developers and those deeper in the supply chain an “additional layer of diligence” is often needed.
Assessing and accounting for the cyber-resilience of supply network members and, increasingly, their ESG credentials, can only be presenting new coatings of cost.
“Data [and] data collection … is going to become far more critical when a lot of large principals start looking a lot harder at their scope 3 emissions,” Paterson said.
“The challenge really is that carbon accounting can be a little bit opaque [and] hard to audit. The format of the data is not consistent. You might have some upstream decarbonisation reporting obligations, but downstream through all your subbies, and indeed yourself, you might find it hard to gather, store, collect and share that information.
“Like anything in your supply chains there are things you’ll need to take [on] and things you will need to pass on. Carbon abatement costs and decarbonisation obligations absolutely fall into that bucket.
“Not to be cynical, but decarbonisation measures will come at a cost and to the extent you’re already struggling with spiralling costs, if you can push those costs upstream or downstream that’s fabulous.
“But if you need to bear it yourself, on what terms do you need to do so?”
Austmine says it represents about 630 mining equipment, technology and services (METS) companies with operations in Australia.