March 28, 2018
FT Commodities Global Summit 2018 – Five key takeaways
As a sponsor of the 2018 FT Commodities Global Summit, Spencer Stuart was delighted to invite a number of senior leaders from across the commodities sector to participate as speakers. From our privileged conversations with them and others at the Summit we identified five key themes that we expect to be preoccupying leaders over the next twelve months.
1. The return of realism
“What goes up does come down; it’s just a matter of when,” commented one CEO from the podium. “Leaders have become more rational.” This sentiment was echoed by a panel of CFOs reflecting on changes over the past 12 months during which the commodities industry has seen a more cautious approach to capital deployment. Energy transition, tighter margins and greater price transparency are resulting in consolidation, and the consensus is that competitive advantage will come from scale and vertical integration in the foreseeable future. The world is moving towards more sustainable supply chains; technology investments are bearing fruit with new, real-time management tools for the front desk and new cost control mechanisms; and the impact of digital transformation is evident among the trading community with an increased use of data analytics, algorithms and predictive analytics. With digitization comes greater transparency, which brings with it both opportunities and threats, as reflected in varying attitudes to blockchain. Progress in adopting this technology remains slow, hampered by a lack of standardization in paperwork and contract conventions. However, there are signs that the move to fully digitized documentation is only a matter of time – a number of large-scale transactions have successfully used the technology and 2018 is likely to see the first production-ready blockchain platform.
2. The EV revolution has begun
The commodities sector is gearing up for an exponential growth in the demand for metals that will be used in the making of electric vehicles (EVs). Chief among them are aluminium and – most critically – cobalt for use in lithium ion and other types of battery. The Chinese government, with its relentless focus on stability, has made a long-term commitment to EVs of all kinds (China currently accounts for 98% of world sales of electric buses, for example). German and US auto makers are likely to fall behind China, which is looking to secure stable supplies of cobalt from the Democratic Republic of Congo. The DRC is responsible for a large majority of the world’s cobalt production, making the country a vital strategic partner for the global car industry. However, as one mining CEO remarked: “The motor car industry has not woken up to the fact that 75% of the world’s cobalt is based in DRC. Why not? Because until now the auto industry has never had a supply problem. Companies have always been able to squeeze their suppliers. No longer.” The current output of 100,000 tons of cobalt per year will need to double, say experts, which will in turn require further investment in infrastructure and logistics. However, DRC encapsulates the VUCA world of commodities. The government’s controversial new mining code is putting added pressure on miners such as Glencore, Ivanhoe, Randgold and China’s MMG who are already operating in an unstable socio-political environment, despite massive investments in the country by the mining industry in recent years. What’s more, the everyday reality of mining in the DRC, such as poor environmental practices, artisanal mining and the use of child labour, have exposed the cobalt supply chain – and the government – to intense scrutiny. Since multiple industries are competing for the world’s limited supply of cobalt, the price is expected to climb further over the next few years. What scares the auto industry, however, is not price, but volatility of supply.
3. Sustainability
Sustainability was a recurrent theme at this year’s Summit. CEOs were keen to show leadership in this complex arena, covering a wide range of concerns from deforestation and biodiversity to human rights and urban pollution. Securing the social licence to operate is an essential success factor for any upstream or in-country operation and leaders are putting more effort into embedding a sustainability mindset in their organizations and driving sustainable practices throughout the whole supply chain. As one agri leader put it, “the only future-proof business model is producing food in a sustainable way”. Unfortunately, many countries are still not interested in a more sustainable supply chain and there are substantial transition costs for those that are. While the decarbonisation imperative is fuelling continued investment in natural gas and renewables, the reality is that developing nations will be burning coal for a long time in the absence of alternatives. Mark Cutifani, CEO of Anglo American, pointed out the opportunities that responsible, large-scale mining brings to local communities: five jobs are created in in the community for everyone in the mine, while other businesses can piggy back on the roads, water and energy infrastructure. He also remarked that industry leaders must address the mining industry’s “tarnished reputation”, doing a better job at creating on-the-ground partnerships, explaining its contribution and engaging in dialog with NGOs. From agri to mining, technology and automation are playing a vital part in the creation of more sustainable supply chains, increasing efficiencies in locating resources and leading to substantial reductions in water and energy use. Cutifani remains bullish about the continued impact of technology in the mining industry, although his remarks are relevant to the entire commodities sector: “If you can’t see another 30% if improvements as a CEO, it’s time to go,” he said.
4. Protectionism
Last year we reported on an optimistic mood at the Summit, despite a general acceptance that there will be no return to the high growth that preceded the financial crisis. There may be no prospect of another super-cycle on the horizon, although most agreed that the industry is at the start of a new cycle. Nevertheless, geopolitical uncertainty remains and fears about nationalism, protectionism and trade tariffs are being realised. We are living in a totalitarian world,” said one chairman, “and this will inhibit private enterprise.” It is too early to say whether current skirmishes will give way to a full-scale trade war, but industry speakers known for their free-trade beliefs were convinced that if that happens US consumers will be adversely affected. Meanwhile, China’s trade development policies run counter to the growing rhetoric of protectionism and look set to boost the country’s economy and global influence. As Robert Friedland, executive chairman of Ivanhoe Mines, said to Summit attendees, “The Belt and Road Initiative is the most significant issue this audience isn’t paying attention to.” Over the coming year, it is clear that commodities leaders will find themselves drawn into increasingly difficult negotiations with governments and NGOs as they look to secure supplies of commodities such as copper in tougher and tougher jurisdictions.
5. Diversity and inclusion
As we reported last year, the commodities industry is a long way beyond other industries when it comes to diversity and inclusion at the senior management level; at the Summit the proportion of men to women on stage and in the audience was in the region of 9:1. As companies seek to broaden their talent pools, they will also need embrace all forms of diversity, including gender, nationality, ethnicity, culture, age and background. Commodities companies do not have a good track record on gender diversity in many western markets and are also struggling to attract the brightest talent out of university, despite becoming high-tech businesses. One leader on the digital commodities panel commented on the difficulties of attracting and retaining leading-edge technologists, while another remarked that “what is missing is engagement with the customer – finding the platforms on which to build communities and engage with them.” It may be that digital transformation and a growing focus on customer engagement will be just the catalyst needed to bring about a step change in diversity.