News Risk Management19 Sep 2018

Geopolitical tensions worsen mining sector volatility-Willis Towers Watson

19 Sep 2018

Rising geopolitical tensions impacting on supply chains are increasing volatility in the mining sector, according to the 2018 edition of Willis Towers Watson's Mining Risk Review.

While there had been some encouraging signs that commodity prices were on the rise earlier this year, things are looking bleaker approaching 4Q2018, said the broker. Falls in key commodity prices such as copper have recently disappointed investors and concerns are mounting in respect of inflation and higher raw material costs.

As the Review went to press, copper miners in Chile were out on strike; the threat of an all-out global trade war was very much in prospect, threatening the supply chains of miners throughout the world; while the eventual impact of the Trump administration on the US coal industry continued to remain unclear.

Meanwhile, the mining industry continues to face hostility from environmentalists and different communities around the world--besides geopolitical factors, the reports also highlights environmental and social pressures on mining companies.

However, global coal consumption remains at well over 5bn tons, with China accounting for nearly half of this figure, fuelling demand.

“While capital expenditure in the industry is on the rise, there’s no doubt that managing mining industry risk remains as challenging as ever,” said Willis Towers Watson.

The annual review highlights several other significant industries facing the mining industry, including:

  • The need to consider integrating Enterprise Risk Management into the industry’s risk culture, at a time when regulatory frameworks around the world are beginning to insist that companies demonstrate such processes are adopted within their own organisations.
  • The need to pay greater attention to managing project delivery-- avoiding overruns and delays helps make a significant contribution to a mining company’s bottom line.
  • The impact of some major (re)insurers’ retreat from coal underwriting. Finding alternative sources of risk transfer capacity is likely to become increasingly challenging in the months and years ahead.
  • The rise in regulatory pressures in certain regions, such as Latin America, means investors in these areas need to do their homework to avoid a regulatory headache.
  • A possible change in mining insurance market dynamics, as Direct and Facultative (D&F) capacity becomes more restricted following recent losses. Miners may have to look to alternative strategic risk partners in the market to avoid future volatility in mining insurance market pricing.

Head of downstream natural resources in London Graham Knight commented, “Increased geopolitical tensions are clearly posing significant uncertainty for the industry, as is the retreat from thermal coal risks by certain sectors of the insurance market.”

“And as D&F market capacity becomes more restricted, our mining clients may need to look for alternative solutions if they want to mitigate any future volatility in insurance market pricing.”

The Review also outlines key losses over the past five years, noting a reduction in major claims from 73 in 2017 to 30 in 2018 (to date). It also observes that the 2017 Nat CATs have not had the dramatic impact on insurance market pricing that was anticipated 12 months ago.

For more information, the report can be accessed here.

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