1
www.uj.ac.za/ccred
Regional Industrialisation Research Project: Case Study on the Mining Capital
Equipment Value Chain in South Africa and Zambia
Judith Fessehaie (CCRED) 1
[email protected] 10 December 2014
1 Fieldwork in South Africa for this project was undertaken by Reena das Nair & Phumzile Ncube
(CCRED) and Sithembiso Mtanga (TIPS). Fieldwork in Zambia was undertaken by Dr Godfrey
Hampwaye, Wisdom Kaleng'a, Gilbert Siame (The University of Zambia, UNZA)
file:
C:/Users/antheap/Google%20Drive/CCRED/Admin/Working%20Papers/www.uj.ac.za/ccred
mailto:
[email protected]2
Contents
Executive Summary .............................................................................................................. 5
1 Introduction ................................................................................................................... 9
SECTION 1: BACKGROUND ............................................................................................. 11
2 The global mining value chain ..................................................................................... 11
2.1 Global context ....................................................................................................... 11
2.2 Market dynamics for mining capital equipment suppliers....................................... 12
3 The regional value chain for mining capital equipment ................................................ 17
3.1 Historical profile of the mining inputs clusters ........................................................ 17
3.2 South Africa- Zambia trade flows .......................................................................... 20
3.3 Mapping the regional mining inputs supply chain .................................................. 24
4 Policy framework ......................................................................................................... 27
4.1 Zambia .................................................................................................................. 27
4.2 South Africa .......................................................................................................... 28
SECTION 2: FINDINGS ...................................................................................................... 30
5 Data collection ............................................................................................................. 30
6 Entry and upgrading in the mining supply chain .......................................................... 31
6.1 Entry into the mining supply chain ......................................................................... 31
6.2 Value addition and upgrading ............................................................................... 35
7 Competitiveness .......................................................................................................... 39
7.1 Critical Success Factors........................................................................................ 39
7.2 Regional competitiveness ..................................................................................... 41
7.3 Industry trajectory ................................................................................................. 43
8 Extent and nature of regional linkages ......................................................................... 44
9 National and regional constraints ................................................................................ 47
10 Summary conclusions and policy implications ............................................................. 49
11 References .................................................................................................................. 52
3
Figure 1: IMF Metals price index, Jan 1980-April 2014 ........................................................ 11
Figure 2: Copper prices, Jan 1980-April 2014 ..................................................................... 12
Figure 3: Critical Success Factors in the capital equipment supply chain ............................ 15
Figure 4: Mining CAPEX composition, 2008-2014 ............................................................... 16
Figure 5: Mineral composition of mining industry, selected years (%) ................................. 18
Figure 6: South Africa’s machinery and equipment sub-sector: Real output (R million) and
formal employment, 1970-2012 ........................................................................................... 19
Figure 7: South Africa’s capital equipment exports to the world and Zambia, 2005-2012 .... 20
Figure 8: Zambia’s inward FDI stock (1990-2012, US$ millions) ......................................... 21
Figure 9: Sectoral distribution of Zambia’s inward FDI flows, 2011...................................... 22
Figure 10: South Africa’s mining supply chain ..................................................................... 25
Figure 11: EPCM model ...................................................................................................... 33
Figure 12: Mineral processing OEMs - value added ............................................................ 36
Figure 13: Conveyor system OEMs - value added .............................................................. 36
Figure 14: Pumps and valves - value addition ..................................................................... 36
Figure 15: Offroad special vehicles – value addition ........................................................... 36
Figure 16: OEMs manufacturing strategy ............................................................................ 37
Figure 17: CSFs according to South Africa-based EPCM firms ........................................... 39
Figure 18: CSFs ranked by South Africa-based OEMs, by product group ........................... 41
Table 1: Capital equipment requirements across the mining value chain ............................ 12
Table 2: Mining and processing operations: SIB capital vs. initial capital ............................ 16
Table 3: Top ten export markets for South Africa's mining capital equipment industry, 2012 (R
and %) ................................................................................................................................ 21
Table 4: Zambia's import from South Africa in selected product clusters, US$ '000 ............ 23
Table 5: South Africa’s market share in Zambia for selected product clusters (%) .............. 23
Table 6: South Africa's exports to the rest of the world for selected product clusters (US$ '000)
........................................................................................................................................... 23
Table 7: Estimated composition of Zambia's mining procurement expenditure, 2012 (US$ ‘000
and %) ................................................................................................................................ 26
Table 8: Categories of respondents, June - October 2014 .................................................. 30
Table 9: Main EPCM firms operating in the Southern Africa region ..................................... 34
Table 10: Key suppliers for EPCM firms .............................................................................. 34
Table 11: Zambia South Africa inter-firm linkages ............................................................... 46
Table 12: South Africa-based OEMs contribution to local knowledge intensification ........... 46
4
Acronyms
B-BBEE Broad-based Black Economic Empowerment
CAGR Compounded growth annual rate
CAPEX Capital expenditures
COMRO Chamber of Mines Research Organisation
CSFs Critical success factors
DAs Development Agreements
DMR Department of Mineral Resources
DRC Democratic Republic of Congo
DTI Department of Trade and Industry
ECIC Export Credit and Insurance Company
EPC Engineering, Procurement and Construction
EPCM Engineering, Procurement, Construction and Management
FDI Foreign Direct Investment
GVC Global value chain
HDSA Historically Disadvantaged South Africans
ISO International Standard Organisation
JV Joint Venture
LHDs Load Haul Dumps
LME London Metals Exchange
LSTK Lump Sum Turnkey
M&As Mergers and acquisitions
NDP National Development Plan
NSI National system of innovation
OEM Original Equipment Manufacturer
PGMs Platinum Group Metals
R&D Research and development
RMG Raw Materials Group
SABS South Africa Bureau of Standards
SADC Southern African Development Community
SARS South African Revenue Services
SIB Stay-in-business investment
TCO Total cost of ownership
TNCs Transnational Corporations
ZABS Zambia Bureau of Standards
ZCCM Zambia Consolidated Copper Mines
ZCCZ Chambishi Zambia-China Economic and Trade Cooperation Zone
ZMLCI Zambia Mining Local Content Initiative
5
Executive Summary
The mineral commodity price boom has led to a significant expansion of the demand for mining
capital equipment. Equipment requirements vary significantly by stage of mining operation,
type of mining (open pit/underground) and mineral. Global mining houses have focused their
procurement strategies on reducing Total Cost of Ownership (TCO) and require suppliers to
help them reduce operational costs, increase productivity, and improve worker health, mine
safety and environmental management. The implications for the equipment industry are many-
fold. Original Equipment Manufacturers (OEMs) are expected to offer ‘solutions’ rather than
simply products, hence they have entered into partnerships with the mining houses to find
innovative technologies and are investing continuously R&D and product improvement. OEMs
are also acquiring startups and established firms for a variety of reasons: to enter new
markets, reduce competition and
oaden product portfolio. Lastly, as greenfield investment
is slowing down, aftermarket services have become critical in order to reduce TCO for buyers
and to increase/stabilise revenues for the OEMs.
South Africa’s mining inputs cluster has historically developed on the back of strong demand
from the mining sector for technological solutions to deep level hard rock mining, and has
een characterised by high levels of investment in R&D and human capital. Notwithstanding
changes post-1994 to the mining industry and the macro-economic environment, South
African OEMs have found niche markets in which they are globally competitive. Indeed, mining
capital goods are the most dynamic section of the capital goods sector and represent more
than 50% of total capital goods exports. Erosion of R&D and skills base constitutes the most
pressing challenges for the long-term competitiveness of the sector.
From the 1990s onward, following the end of nationalisation and import substitution policies,
Zambia’s mining inputs cluster shrank significantly in size and value added content. Whilst the
entry of new investors, including from Asia, injected much needed capital into its copper mining
sector, only few local suppliers managed to seize new market access opportunities. Without
the support of interventionist industrial policies and faced with competition from imports, most
manufacturers struggled and exited the supply chain. Many suppliers turned into importers of
capital equipment as subsidiaries, agents and traders. The challenges to supply firms include
weak firm technological competencies, low skills base, costly access to finance and a very
high cost production structure.
South Africa exported R 32 billion worth of mining capital equipment in 2013. The regional
market is very important, in particular Zambia is South Africa’s largest export market and South
Africa is Zambia’s largest source of capital equipment. Zambia’s imports from South Africa are
concentrated on few products: from structures to earth moving equipment, from mineral
processing equipment to excavating machinery, to pumps and conveyor belts. For both South
African and international OEMs, South Africa is a platform to operate in the regional market.
From a policy perspective, both Zambia and South Africa are increasingly committed to
increase local content in the mining sector. In Zambia, local content measures were put place
when the mines were privatised, but these were hardy implemented. More recently, though,
suppliers, under the um
ella of their business association, have been spearheading a more
ambitious local content initiative which is receiving support from the mining companies, the
government and donors. South Africa’s industrial policy is facilitating some categories of
suppliers through skills development, credit facilities, etc. Moreover, its export credit agency
has linked its financing to local content requirements. The country is also in the process of
implementing the local content provisions of the Mining Charter, which conflagrate local value
addition and BEE ownership issues. In both Zambia and South Africa, the private sector has
to play a major role if local content policies are to succeed. Indeed the suppliers’ business
associations are actively involved in these processes. Exploring the scope of their role in the
6
national and regional industrialisation projects would be important in formulating policy
ecommendations for the case study.
The study is based on interview data collected across suppliers and OEMs, ECPM firms and
institutional actors in South Africa and Zambia. The research focused on four product clusters:
mineral processing equipment, offroad special vehicle, conveyor systems, and pumps and
valves. The findings highlighted that in South Africa new entrants may struggle to enter the
egional mining supply chain given the size and competitiveness of incumbents, but there
could be significant opportunities for lateral migration of technologies, hence for OEMs
cu
ently active in other resource and non-resource sectors to enter the mining value chain,
and for mining OEMs to expand their markets beyond mining. In Zambia, ba
iers to entry
were somehow lower because most suppliers were traders and faced low capital and skills
entry ba
iers.
EPCM firms coordinated entry into the regional mining supply chain, especially for mineral
processing equipment. They largely tapped into the South African mining inputs cluster for
national and regional projects, with no preference given to South African OEMs. There was
some evidence that OEMs supplying directly to the mining companies were finding it easier to
offer more innovative products. Zambian suppliers were largely cut out from the EPCM firms’
procurement strategy.
In general, South Africa-based OEMs were characterised by significant degrees of local
content, value addition and upgrading efforts. Nevertheless, international OEMs had
externalised considerable levels of R&D and manufacturing high-IP content components to
their parent companies, and relied on low cost global suppliers for manufacturing of generic
components. South African OEMs had higher degree of value addition, but devised various
strategies to cope with import competition, including distributing foreign products and
importing components. Zambian suppliers were positioned at the bottom of the regional value
chain in terms of specialisation, local content and value addition.
As expected, the regional value chain for mining capital equipment was driven by quality and
TCO market parameters. Aftermarket services and full package capabilities were increasingly
important and were found to be important elements in shaping the trajectory of the industry.
Because they focused on TCO and quality, South Africa-based OEMs were able to withstand
Chinese low-cost competition. For valves, however, which was a cost-driven value chain, cost
eduction strategies were more important. Lead times for aftermarket services in the
Coppe
elt were critical.
Localisation requirements in Zambia were becoming increasingly stringent and there was
evidence that employment requirements were already shaping the human resource strategies
of OEMs in the Coppe
elt. Localisation requirements in South Africa were discouraging some
South African players to move into the regional markets.
As pointed out in the literature review, South Africa was a hub for the regional value chain for
mining capital equipment. The OEMs’ internationalisation strategies in the Coppe
elt showed
two patterns. Firstly, there was a considerable amount of trial and e
or in selecting modes of
entry; secondly, there was a progression from direct exports, to working with an agent or
setting up a JV, to establishing a subsidiary. The study found that South Africa-based OEMs
supported their subsidiaries in multiple ways: back up services, training of local staff in the
egion and a
oad, joint marketing, and access to credit lines. Zambia-based subsidiaries
provided aftermarket services, but relied on the South Africa-based OEM for complex services.
The OEMs which selected other entry modes, such as agents, JVs and direct exports,
provided very little support to upgrade local capabilities in Zambia.
7
Manufacturing and R&D linkages were weaker for any type of firm. There was very little sub-
contracting and for very simple inputs, there was no joint product development and no R&D
udget for the Zambian operations. Even in cases where the South Africa-based OEMs
cooperated with the mining companies in the Coppe
elt to innovate or customise products,
there was no significant involvement of local subsidiaries or agents.
Suppliers in the region faced a range of constraints at national level, from poor infrastructure
and policy inconsistency in Zambia, to skills constraints and scarce resource for regional
marketing in South Africa. At regional level, two constraints stood out: inconsistency between
local content policies in South Africa and Zambia, which made it difficult for firms to create a
coherent strategy for investment and value addition, and difficult access to the DRC mining
supply chain. The DRC was particularly important because Zambia was seen as a sub-
egional hub for Central Africa.
The findings of this study suggest that there is significant scope for cooperation at regional
level in the mining capital equipment value chain. A regional strategy to increase value addition
in South Africa and Zambia should rest on two pillars:
1) Building a regional market across South Africa-Zambian Coppe
elt-DRC Coppe
elt.
2) Intensifying linkages between South African and Zambian mining inputs clusters.
Zambian and South African suppliers are already using the Coppe
elt as a basis to participate
in the DRC mining supply chain. OEMs find the DRC too risky to invest in a solid market
presence there. The DRC Coppe
elt therefore offers an opportunity for Zambian suppliers to
acquire larger economies of scale. This in turn implies that South Africa-based OEMs have
more incentives to increase the value added content of their activities in the Zambian
Coppe
elt. This strategy however requires removal of ba
iers between South Africa, Zambia
and the DRC. Such ba
iers include high transportation costs, and tariffs imposed by the DRC
as a non-SADC FTA member. Lowering transportation costs requires regional cooperation in
oad and railways investment as well as on trade facilitation issues. Zambia and South Africa
should facilitate the establishment of bonded warehouses. The latter would allow South Africa-
ased OEMs to move larger stock of equipment and spares to the Zambian Coppe
elt to
supply the regional market. It would lower transport costs thanks to bulk transport, and shorten
lead times in supplying clients.
Linkages between South Africa-based OEMs and Zambian suppliers played an important role
in supporting firm upgrading in the Coppe
elt. A regional value chain strategy should leverage
on this, and provide incentives to South Africa-based OEMs to build their market presence in
the Coppe
elt. Elements of this strategy should include cluster initiatives in South Africa and
in Zambia to address constraints to firm upgrading, and establishing a regional approach to
local content requirements which reduces conflicts in national local content incentives and
support a win-win outcome. South African established OEMs and startup companies should
e supported by DTI in establishing their Coppe
elt subsidiaries and increasing their local
value added content. This would be mutually advantageous: OEMs would become more
competitive in terms of aftermarket services and lead times, and Zambia would benefit in terms
of, among others, employment, skills development, knowledge transfer, and sub-contracting
opportunities. On the Zambian side, this strategy requires that local content policies are part
and parcel of a
oader industrialisation strategy. Multiple stakeholders, in particular the
mining companies and the OEMs, need to be involved. Employment localisation requirements
need to be complemented by an aggressive skills development strategy through technical and
vocation schools and apprenticeship programmes. Particular support should be given to
manufacturing companies to become Tier 2 suppliers to the OEMs, even if for simple, low
value added components and spares initially. South Africa should have a forward looking
policy and support Zambia’s strategy in these areas. In the longer term, regional cooperation
8
could target cooperation in technology innovation and R&D and higher value added activities
in South Africa and the Coppe
elt.
9
1 Introduction
This study is part of a research project on regional industrialisation commissioned by South
Africa’s National Department of Trade and Industry and TIPS and has been undertaken by the
Centre for Competition, Regulation and Economic Development (CCRED) - University of
Johannesburg.
This study investigates the regional value chain for mining capital equipment in South Africa
and Zambia. In particular, it focuses on the following specific research questions:
• What is driving South African Original Equipment Manufacturers (OEMs)
competitiveness in the Zambian market?
• Mapping regional linkages: how do South African and other foreign OEMs with a
egional presence internationalise in Zambia? What is driving their strategies? What
are the implications for Zambia?
• Is the regional supply chain supporting knowledge intensification and local value
addition processes in Zambia? How?
• What role do the Engineering, Procurement, Construction and Management (EPCM)
firms play in the regional supply chain?
• What are the opportunities to deepen and expand regional linkages?
• What is the role of industrial policy in South Africa and Zambia?
The study is firmly situated within a Global Value Chain (GVC) analytical framework.
Developed from the 1990s onwards, GVC literature has focused on changes in the
organisation of production of goods and services and on the impact of such changes on
developing countries’ industrialisation processes. In other words, the literature has sought to
understand the globalisation of the world economy, a fast-changing process which began in
the 1960s and accelerated in the 1980s, in which geographically dispersed activities have
een functionally integrated and organised within complex transnational production networks,
inclusive of both visible and invisible trade (Gereffi, 1994). In this respect, understanding
linkages between firms and countries becomes important to understand how global value
chains arise and change.
Upgrading at the firm, regional and country level is critical to allow firms and regions to move
into more sustainable, remunerative stages of the global value chain (Kaplinsky and Mo
is,
2001). Upgrading should be understood as improvements in the production process, for
example through re-organisation of the production systems or new technologies (process
upgrading); moving into higher more sophisticated product lines (product upgrading); moving
into higher-skills content functions (functional upgrading), and moving into new production
activities (inter-sectoral or chain upgrading) (Humphrey and Schmitz, 2002).
A fundamental proposition of GVC research is that opportunities for upgrading are shaped by
the characteristics of the sector (technological intensity, product cycle, entry ba
iers, etc), by
the industrial strategies of developing and industrialised countries and by value chain
governance by lead firms (Bair, 2009). Value chain governance becomes an important
analytical tool to understand how global value chains operate: the nature of linkages and how
they are governed opens up or shuts down specific opportunities for growth and upgrading to
firms and countries. Gereffi (1994; 1999) identified two types of governance structures:
producer-driven and buyer-driven value chains. In producer-driven value chains,
manufacturers controlled the organisation of the value chain, backwards, with large networks
of components suppliers, and forward, into distribution and retail. These value chains were
found in capital- and technology- intensive industries, such as automobiles and computers.
Buyer-driven value chains, typical of labour-intensive, consumer goods industries, were
dominated by retailers and trading companies, which coordinated vast, decentralised
production and trade networks, largely based in low-cost developing countries. Whilst in
10
producer-driven value chains, profits were generated by economies of scale and R&D, in
uyer-driven value chains, these accrued from design and marketing activities that met the
demand of fast-changing consumer markets. Whilst this dichotomy is somehow dated, as new
and more complex relationships between firms have emerged, the governance function
exerted by lead firms in a GVC remains important for analytical purposes: deciding what is to
e produced, selecting participants in the value chain and determining their roles, determining
how to handle the flow of products and services along the chain, setting key performance
standards, monitoring and, in case of failure, sanctioning or assisting suppliers. The lead firms’
strategies not only determine how value and rent is distributed in the GVC, but also whether
the upgrading process of suppliers will be supported.
With few exceptions (Bridge, 2008; Fessehaie, 2012; Mo
is et al., 2011), the GVC for
extractive industries remain under-researched. Hence, this study on the mining capital
equipment value chain in South Africa and Zambia contributes to the empirical literature on
GVC on extractive industries.
The study is divided in two sections. Section one provides a background on the global and
egional value chains for mining capital equipment and draws on literature review (academic
publications as well as grey literature) and analysis of trade and industry data. In particular,
chapter two discusses the dynamics of the global value chain for mining capital equipment,
while chapter three turns to its regional dimension, including analysing trade flows between
the two countries, and a preliminary mapping of inter-firm linkages across the two countries.
Chapter four presents the policy frameworks concerning upstream linkage development in
South Africa and Zambia.
Section two is based on interview data and presents the findings of the study. In particular,
chapter six analyses issues related to entry into the supply chain, value addition and firm
upgrading. In chapter seven, the study turns to the competitiveness of South Africa and
Zambia-based supply firms and the dynamics which will shape tomo
ow’s firm
competitiveness. Chapter eight focuses on intra-regional linkages, in particular looking at the
internationalisation strategies of South Africa-based OEMs in the Coppe
elt province, their
elationships with Zambia-based suppliers and the impact on local value addition and
knowledge intensification in Zambia. Chapter nine discusses national and regional level
constraints faced by mining suppliers. Chapter ten concludes and elaborates on the policy
implications.
11
SECTION 1: BACKGROUND
2 The global mining value chain
2.1 Global context
The price boom for mineral and energy commodities in the early 2000s has underlined major
changes in the global mining industry. Following a decade of relatively depressed prices in the
1990s, 2003 marked the beginning of a steep rise in world prices. Between 2003 and 2007,
the IMF metals price index trebled from 61 to 183 (Figure 1). The price crisis between the last
quarter of 2008 and the first quarter of 2009 was short-lived, and by 2010, metal prices had
ecovered above pre-crisis levels. Since 2012, world prices have weakened but are still
substantially above the 1990s annual averages. Turning to a metal of particular importance
to this case study, copper, Figure 2 shows the LME spot price since the 1980s. Copper prices
followed the general pattern discussed above, with a surge from 1,779 US$/t in 2003, to 7,132
US$/t in 2007. Even after 2009, world prices did not fall below 7,000 US$/t. The world copper
market experienced the lowest price volatility and one of the highest price surges amongst
hard commodities.
Figure 1: IMF Metals price index, Jan 1980-April 2014
Note. Index based on 2005 (average of 2005 = 100). Group indices are weighted averages of
individual commodity price indices. Source: IMF Primary Commodity Price Data retrieved from
http:
www.imf.org/external/np
es/commod/index.aspx in May 2014.
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Figure 2: Copper prices, Jan 1980-April 2014
Note: Copper, grade A cathode, LME spot price, CIF European ports, US$ per metric ton.
Source: IMF Primary Commodity Price Data retrieved from
http:
www.imf.org/external/np
es/commod/index.aspx in May 2014.
The hard commodity price boom has spu
ed an investment surge in Africa’s extractive
industries, which has prompted significant debate among African policy makers on the role of
their extractive industries in promoting
oader-based economic development. This led,
among other initiatives, to the adoption of the Africa Mining Vision in 2009. Within this context,
upstream linkage development strategies are seen as increasingly attractive platforms to
promote industrialisation. Policy makers and researchers are interested in understanding the
extent to which TNCs procure locally manufactured capital goods, consumables and inputs,
and on strategies to increase local value added content. The regional dimension of upstream
linkage development then becomes critical. In the Southern African region, harnessing
egional value chains offer the opportunity to develop complementary industrial capabilities,
promote technology and skills transfer, and create integrated markets which provide the
economies of scale and scope required for a thriving manufacturing sector.
2.2 Market dynamics in mining capital equipment
The mining value chain requires a
oad range of capital equipment, with variations according
to stage of mining operation (exploration, mine development, extraction, processing), type of
mining (open pit/underground) and mineral (Table 1).
Table 1: Capital equipment requirements across the mining value chain
Stage of the GVC/
Type of mine
Capital equipment
Exploration Exploration drilling equipment
Development Development drills and rigs
Shafts
Loaders, trucks
Electrical equipment
Pneumatic and hydraulic equipment
Open-pit mining Drills and rigs
Conveyors
Excavators
0
2000
4000
6000
8000
10000
12000
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http:
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13
Loaders, trucks, trains
Rolling stock
Draglines
Hoists, winders, cages
Coal cutters
Power shovels
Wall and roof bolting systems
Underground mining Drilling equipment
Bulk materials handling (conveyors, locomotives, scrapers)
Pumps and valves
Head gear (motors, chains, cables)
Ventilation equipment
Minerals processing Crushing and grinding equipment, storage tanks, chemicals and
eagents, liquid-solid separation equipment, materials handling
(conveyors, pumps)
Crushers, screens, mill balls
Grinders, rollers Storage tanks
Materials handling (conveyors, pumps)
Agitators
Power generation systems
Tanks
Vessels
Silos, bins
Smelting Furnaces
Dryers
Refractories
Classifiers, thickeners
Mixers, filters flotation tanks, washers, scru
ers Separators
Dewatering systems, water purification systems
Pumps
Electronic process control systems
Refining Thickeners
Conveyor belts
Filters
Tanks
Dryers
Source: Various sources
While most of South Africa’s output originates from underground mining, Zambia’s mines are
oth open pit and underground. Underground mining is more expensive than open pit mining
hence expenditures on capital equipment are higher. Moreover, the share of mining equipment
in total CAPEX if often higher in underground mines, in coal mining for example this share
doubles compared to open pit (Virgo, Armstrong and Alftan, 2013).
In GVC analysis, studying market requirements is important to understand what makes some
firms more competitive than others and how industrial policies should be designed in order to
promote value chain upgrading. Market requirements are defined as critical success factors
(CSFs), which are sub-categorised as order-qualifying and order-winning criteria (Kaplinsky
and Mo
is, 2001). “Qualifiers are those criteria that a company must meet for a customer to
even consider it as a possible supplier” (Hill, 2000, p. 36), whilst order-winner criteria make it
possible for suppliers to succeed by out-performing the competition, maintaining market share
and growing. Both sets of criteria are market and time specific (Kaplinsky and Mo
is, 2001).
14
As a general trend, global mining houses have been under pressure to reduce costs and
increase productivity. In order to do that, they have rationalised their supply chains by reducing
the number of suppliers and developing more intense buyer-supplier relationships with fewer,
more capable suppliers. With these suppliers, which tend to be OEMs and technology
suppliers with a global reach, the mining companies have stipulated alliances which assist
them in finding solutions to their mining requirements across different environments. The
mining companies’ procurement strategies focus on Total Cost of Ownership (TCO) that is
inclusive of capital, maintenance and operational expenses. As a result, Original Equipment
Manufacturers (OEMs) face the following order-qualifying CSFs: cost competitiveness,
product quality to ensure durability and performance, quality of after-market products and
services, and lead times.
Because suppliers are expected to provide ‘solutions’ to increase productivity of the mining
operations, rather than merely sell products, firm dynamic capabilities in terms of innovation
and learning have become order-winning CSFs. Moreover the mining houses are under
pressure to improve the health, safety and environmental conditions of their operations.
Hence, competition among suppliers focuses on innovations to make safer equipment,
including solutions for autonomous operations, and energy saving and environmentally
friendly equipment and processes.
International standards, both mandatory and voluntary, have been found to be important in
other GVCs in determining entry ba
iers for local suppliers and their competitiveness in global
markets. In critical supply links such as mining capital equipment, ISO certification for the
products is often a requirement. Compliance with process-related standards in terms of quality
assurance, environmental and occupational health and safety management systems is also
equired in most instances. The relevant international standards are ISO 9001.2008,
concerning quality management standards; ISO 14001.2004, concerning environmental
management; OHSAS 18001 concerning occupational health and safety management.
The capital equipment market is also influenced by non-market parameters, such as local
content policies. In Zambia, the local content provisions in the Development Agreements (see
chapter 4.1) have been barely enforced. There has been however political pressure to grant
some level of market access to small local businesses which has influenced to some extent
the sourcing decisions of some mining houses. This however has had little impact on the
procurement of high cost, critical supplies such as most capital equipment. In South Africa,
the mining houses have to comply with the Mining Charter requirement to give B-BBEE
companies prefe
ed supplier status, but a review in 2009 showed very little progress in this
espect.
Figure 3 summarises at the conceptual level the CSFs for the capital equipment supply chain.
In section two of this study, the interview data has been analysed to co
oborate whether these
CSFs were aligned to those of buyers in South Africa and Zambia.
15
Figure 3: Conceptualisation of Critical Success Factors in the mining capital equipment
supply chain
Source. Author’s analysis
The mining capital equipment industry is characterised by the increasing importance of three
strategic factors: technological innovation, aftermarket segment, and mergers and
acquisitions.
Technological innovation
As the mining houses focus on their core business, equipment manufacturers have become
the key source of innovation in the industry, mainly in the form of incremental product
innovation (Bartos, 2007). Investment in R&D is dominated by OEMs and engineering firms,
public institutions and various private-public partnerships, rather than the mining houses
(Walker and Minnitt, 2006).
Therefore global OEMs allocate very large budgets to R&D.2 Moreover, they have
internationalised their R&D activities across the globe in order acquire new technological
capabilities and to tap into local knowledge.3 OEMs R&D target energy efficiency, enhanced
operational productivity, increased worker safety and health, and lower environmental impact,
often in cooperation with the largest mining conglomerates.
2 Sandvik invests over US$ 400 million each year in R&D and quality assurance and employs 2,700
people in this area. It has 8,000 patents and intellectual property rights. Atlas Copco spends more than
2% of revenues on R&D; in 2012 this amounted to more than US$ 300 million. There are around 2,500
employees conducting research, design and development. Caterpillar invested around US$ 2 billion in
R&D in 2013, employs more than 8,000 engineers holds more than 4,000 active patents (Company
Reports 2012).
3 Sandvik’s largest R&D centres are based in Finland, Austria, Germany, the UK and the US, but it has
opened new centres in India and China. Atlas Copco has also expanded its R&D hubs beyond Sweden
and Europe into India, China, Brazil, and North America. Caterpillar has research centres in the US,
Japan, China and India.
Order-qualifying CSFs
Total Cost of Ownership:
- cost competitiveness
- product quality
- quality of aftermarket products and
services
- lead times
- reliability
Product-related standards
Process-related standards
Order-winning CSFs
Innovation and learning
Innovation in the areas of health, safety
and environment
Compliance with localisation or BEE
policies
16
After-market sales
2012 estimates of the value of greenfield projects put them at US$ 124 billion, of which US$20
illion worth of underground mining project (RMG and Parker Bay Mining, 2012). Increasing
greenfield,
ownfield and Stay-in-business (SIB) investment will drive aftermarket sales
(Virgo, Armstrong and Alftan, 2013). The CAPEX component of SIB investment is bound to
increase because there are larger equipment fleets purchased in previous periods of
expansion – a 30% CAGR in CAPEX in the 2009-2012 period.
Figure 4: Mining CAPEX composition, 2008-2014
Source. Virgo, Armstrong and Alftan, 2013
Table 2 compares the SIB expenditures/initial capital investment ratio per unit for a range of
capital equipment items.4 These figures provide a snapshot of the size of after-market
evenues compared to the initial capital cost of the equipment. Processing plants offer overall
the highest aftermarket opportunities in particular for grinding mills, cyclones and pumps
(because of large numbers of units installed) and crushing plants. In mining, LHDs and
continuous mining machines have the highest SIB/initial capital ratio.
Table 2: Mining and processing operations: SIB capital vs. initial capital
Mining
equipment
Initial Total
SIB
Ratio
SIB:initial
Processing
equipment
Initial Total
SIB
Ratio
SIB:initial
Underground
loaders
(LHDs)
1.9 27.0 14 :1 Grinding
mill, rod &
all
5.5 197.6 35 :1
Shovels,
hydraulic
15.9 179.3 11 :1 Cone
crushers
4.0 65.0 16 :1
Continuous
miners,
u/ground
3.2 35.9 11 :1 Mobile
crushing
plants
1.2 17.7 15 :1
Roof bolters 1.4 16.5 11 :1 Gyratory
crushers
13.0 170.0 13 :1
4 Assumptions as follows: SIB capital calculated as sustaining capital cost and operating capital cost
on a per unit basis. Mining operations of 350-360 days per year, two shifts of 12 hours each, with 80%
utilisation rates and 85% equipment availability, resulting in c5,700 hours of operation per year, or
171,000 over a 30-year LoM. Processing operations of 365 days per year, two shifts of 12 hours each,
90% utilisation rates and 95% equipment availability, resulting in c7,500 hours per year and c225,000
hours over a 30-year LoM.
% 0
% 20
% 40
60 %
80 %
100 %
2008 2009 2010 2011 2012 E 2013 E 2014
Expansion & exploration Sustaining
17
Tunnel boring
machines
19.0 210.9 11 :1 Grinding
mill, SAG
13.5 181.7 13 :1
Rotary
lasthole drill
igs
3.0 30.3 10 :1 Stackers,
conveyor
20.5 120.4 5 :1
Continuous
miners,
surface
4.9 49.7 10 :1 Mill drives,
gearless
18.8 97.0 5 :1
Backhoes,
hydraulic
17.0 164.9 9 :1
$, 000s
Bucketwheel
excavators
7.1 56.1 7 :1 Cyclones 26
1.0 39 :1
Wheel
loaders
7.7 58.9 7 :1 Slu
y
pumps
84 2.1 25 :1
Shovels,
cable
23.0 127.5 5 :1 Electric
motors
185 3.6 19 :1
Underground
ore & coal
haulers
1.6 8.4 5 :1 Screens 403 5.4 13 :1
Draglines,
crawler
5.5 24.5 4 :1
Trucks, rear-
dump (40t-
400t)
6.5 29.6 4 :1
Draglines,
walking
184.5 523.5 2 :1
Source. Virgo, Armstrong and Alftan, 2013
Mergers and acquisitions
The mining capital equipment industry is highly concentrated, with few players dominating
several product markets at global level. For example, Sandvik, Atlas Copco, and Caterpillar
dominate the market for Load Haul Dumps (LHDs), trucks, drills and bolters (RMG and Parker
Bay, 2012).5
Global OEMs have pursued M&As as an avenue to acquire new intellectual property and
innovation capabilities, expand their range of products, complement their pre-existing offering,
access regional markets and reduce competition. This is illustrated by the examples of Atlas
Copco’s significant market presence in North America, through the acquisition of US-based
Wagner, and Caterpillar market presence in Australia through the acquisition of Elphinstone.
3 The regional value chain for mining capital equipment
3.1 Historical profile of the mining inputs clusters
South Africa is the mining supply hub for Southern Africa. Its mining inputs cluster has over
time developed high levels of technological competencies and in some areas has become
globally competitive. This has been the result of a relatively long history of mining, during
5 Other important global players in mining and processing equipment are Furukawa (underground and
surface drilling equipment), Joy Global (open-pit mining equipment), Komatsu (mining extraction and
haulage equipment), Boart Longyear (underground and exploration drilling equipment, rock drilling
tools), Metso (grinding mills), Weir Minerals (pumps and liners), Outotec and FLSmidth (grinding mills).
18
which suppliers had to find innovative solutions to the geological and metallurgical challenges
of hard rock, deep level mining which characterised the South African mines. Such innovative
efforts were driven by the Chamber of Mines Research Organisation (COMRO), which
undertook significant levels of ‘blue sky’ R&D. A very dynamic national system of innovation
(NSI), with strong linkages between mining companies, suppliers, research centres,
universities and technical and artisanal schools, underpinned the cluster. Intense cooperation
was accompanied by fierce competition at the supplier level.
The gold sector spu
ed the initial technological innovations in mineral processing (dry versus
wet crushing, outside versus inside amalgamation, chlorination versus cyanidation, and
electrolytic versus zinc precipitation), and deep mining (rock mechanics, shaft sinking,
efrigeration, ventilation, pumping and hoisting systems, drilling and blasting) (Walker and
Minnitt, 2006). With the decline of gold in South Africa’s mining sector, supplier firms’
technological capabilities subsequently migrated to other mineral commodities, such as coal
and chrome, and more recently to PGMs.
Figure 5: South Africa’s composition of mining industry, selected years (%)
...