Train drivers employed by Rio Tinto Group to haul iron ore across Australia’s outback make about the same money as surgeons in the U.S. It’s little wonder the mining company will replace them with robot locomotives.
The 400-plus workers in the remote Pilbara region who earn about A$240,000 ($224,000) a year probably are the highest-paid train drivers in the world, according to U.K.-based transport historian Christian Wolmar. Australia’s decade-long mining boom has sucked up skilled workers, raising wages for engineers to drivers at Rio, the second-largest exporter of the mineral, and its closest competitors, Vale SA and BHP Billiton Ltd.
The three companies that control about 59 percent of the $145 billion-a-year global iron ore trade are automating to bolster margins and squeeze out extra capacity as they boost supply to a record to feed steel mills in China, the biggest buyer. The push by Rio, which aims to move about 290 million metric tons on its rail network by next year, is expected to be the biggest driver for cost cuts in its iron ore unit after currency swings, according to Deutsche Bank AG.
“All producers are chasing better margins and stronger returns,” said Chris Drew, an analyst in Sydney with Royal Bank of Canada. “Rio is ahead of the competition in terms of automation of trucks and trains,” Drew said in an interview after touring its ore operations in the mostly arid Pilbara, home to Western Australia’s biggest deposits for export.
The pace of automation is picking up as the seaborne market is poised for at least four years of gluts. The price of ore, which rose as much as eightfold in the past decade as China added $6.8 trillion to its gross domestic product, will drop to $80 a ton in 2015, according to a Goldman Sachs Group Inc. forecast. It closed yesterday at $131.40 a ton.
Rio, which last year approved spending of $7.2 billion to expand the iron ore operations, is aiming to have the world’s first, fully automated, long-distance and heavy-haul rail system operating in 2015. Its automated rail will have 1,500 kilometers (930 miles) of track, 10,000 wagons and individual train sets 2.3 kilometers long, according to Credit Suisse Group AG. The company is spending $518 million on the program that was announced last year.
“You need to have quite a significant amount of scale” in fleet and volumes to benefit from automation technology, said Evy Hambro, manager of BlackRock Inc.’s $7.7 billion World Mining Fund.
Regulators in Canada and the U.S. are reviewing rules for transporting hazardous materials after a runaway train carrying crude oil derailed and exploded on July 6 in Lac-Megantic, Quebec, killing 47 people and incinerating 30 buildings. The train was operated by a single engineer, who parked the train for the night and left it unattended.
Rio’s rail, port and truck movements are all watched over from a control center in the Western Australia state capital of Perth, 1,500 kilometers to the southeast, that has about 250 controllers working three shifts a day. The rail automation is part of the company’s push to use technology to improve productivity and safety and wring out extra capacity from existing assets, Simon Prebble, general manager for Rio’s automated trains project, said in an interview yesterday.
The trains have on-board systems that check speed, signals and operate the brake, Prebble said. Rio has installed a new radio-based network to communicate with the trains as well as close-circuit television at every public level crossing, he said. “We also have an obstruction detection system which uses laser scanners to continually look for any obstructions.”
The competitiveness of some iron ore mines in the Pilbara as well as some future projects is set to improve with the adoption of the new technologies on trucks and trains, Australia’s Bureau of Resources and Energy Economics said yesterday in a report.
Iron ore will remain the dominant earnings driver for BHP and Rio as rising production offsets falling prices, Citigroup Inc. said in a Sept. 13 report. The mineral accounted for 78 percent of Rio’s earnings before interest, depreciation and amortization last year, and 92 percent for Vale, according to data compiled by Bloomberg. BHP had 43 percent Ebitda from iron ore in fiscal 2013, the data show.
“It’s going to provide a healthy return on investment for Rio,” Adrian Wood, a Sydney-based analyst with Macquarie Group Ltd., said by phone. “They’re trying to squeeze out those extra few tons a year by automating it.”
Rio’s Ebitda margin per ton of ore is forecast to drop 43 percent to $43.99 in 2015 from $70.01 in 2013, with BHP’s set to fall 42 percent to $40.68 and Vale by 61 percent to $23.11, according to Goldman Sachs.
Rio also plans to automate about 40 percent of its Pilbara truck fleet by 2016. The goal is to reduce costs to $15.60 a ton by 2020, from $23.10 a ton in the first half of this year, Paul Young, a Sydney-based analyst with Deutsche Bank said in a report after touring operations last month, citing Rio data. Automation is set to help shave $1.90 a ton off costs and boost output by 20 million tons, or 5 percent, he said.
Each train driver earns about A$240,000 a year, according to Credit Suisse. Surgeons based in the U.S. earned a mean annual wage of $230,540 last year, according to data from the Bureau of Labor Statistics. New York state lawyers on average earned $151,000, according to the data. Rio spokesman Bruce Tobin declined to comment on train drivers’ salaries and the potential cost savings from the company’s automation drive.
“The position we’ve taken is that you’re never going to win the argument against technology,” said Gary Wood, Western Australia district secretary for the Construction, Forestry, Mining and Energy Union, which covers the drivers. “We’re going to work to be involved the protection of as many jobs as possible as a result of any changes in technology.”
Ironing Out Bugs
Rio may be able to cut its wage bill for train drivers by about A$100 million annually should it reduce train driver numbers by 400, CIMB Australia Ltd. analyst Michael Evans said last month in a report following the tour. Total net operating costs for all units in 2012 were $37.5 billion.
The automation is a long-term project that won’t produce quick results, said Tim Schroeders, portfolio manager at Pengana Capital Ltd. in Melbourne.
“The type of work does lend itself to automation but ironing out the bugs and integrating the driver-operated machinery, understanding scheduling, will take some time,” Schroeders said in a phone interview. “Realistically, it’s not going to change the mining business significantly in the next three to five years.”
The miners, which began driving down costs last year after the 10-year China-led commodity price boom began to peak, are also seeking to cut the number of truck drivers, with Rio’s biggest iron ore mine now almost entirely operated by driverless trucks, according to CIMB.
Vale is building the $20 billion Serra Sul project and will be the first to fully replace in-mine trucks with conveyor belts 23 miles long and building a second railway through the Amazon to cut costs, according to the Rio de Janeiro-based company. BHP, the world’s biggest miner, started a trial of 12 driverless trucks at its Jimblebar iron ore mine this year and opened its own remote operation center in Perth in July.
“Once Rio has cracked it, I wouldn’t expect BHP to be that far behind,” Paul Phillips, a Melbourne-based fund manager with Perennial Growth Management Pty that holds BHP shares. “Vale has slightly different issues in that they have a multi-user railway, to try and automate that for a single-user iron ore operation, it gets much harder because you have the interaction with the other players.”
–With assistance from David Stringer in Melbourne. Editors: Keith Gosman, Todd White, Madelene Pearson