Bulk billing delivers for Xstrata


The real value of bulk export logistics is in the contribution that planning and great service can bring to commercial performance, Anna Game-Lopata writes

Bulk billing delivers for Xstrata
Bulk billing delivers for Xstrata

At Xstrata Copper’s Ernest Henry copper and gold mine, near Cloncurry in north-west Queensland, things were starting to wind down.

Production was looking to be less than half the current rate from the soon-to-be-exhausted open-cut operation.

But the life of Ernest Henry is vital to the continued supply of copper concentrates to Xstrata’s copper smelter at Mount Isa and, in turn, its copper refinery in Townsville.

So Xstrata came up with an innovative $589 million plan to develop an underground mine at Ernest Henry which will extend copper and gold output to about 2024 with a new revenue stream from magnetite, a low-grade iron ore mineral.

Xstrata is forecasting annual production of 50,000 tonnes of copper and 70,000 ounces of gold concentrates when the underground mine takes over from the open-cut operation.

Construction of the underground mine and plant is well underway, with first production planned to start by late 2011 and full-scale operations planned for early 2013.

According to Xstrata General Manager Refinery, Ports and Logistics Mark Roberts, who is based in Townsville, the operation will produce 1.2 million tonnes of magnetite a year for export to Asia.

Roberts’ role cuts across different disciplines, as the Townsville operations include the copper refinery, port operations, commercial sales administration, shipping and logistics for inbound mining consumables for both copper and zinc at Mount Isa and outbound requirements for mineral concentrates and metals.

While Roberts describes the new project as relatively insignificant compared to those in the Pilbara, it nevertheless requires its logistics, comprising movement from Ernest Henry to the Port of Townsville for export, to be low cost and efficient.

"Being a low-value high-volume product used predominately in steel manufacturing, the magnetite supply chain poses a number of different challenges to that of other commodities," Roberts tells SupplyChain Review.

Magnetite concentrate will need to be road-hauled from Ernest Henry to Cloncurry some 40km away requiring a new road haulage contract.

Yet to be tendered, Xstrata plans to go to the market once tonnage profile and dangerous goods legislation is confirmed.

The project also means Xstrata has to make some significant changes to its logistics network.

"We need a new rail load-out facility to store and train the load which will hold one weeks of railing under cover," Roberts explains.

"The product needs to be kept undercover to maintain its moisture content – too dry is too dusty, too wet leads to safety and product handling issues.

"There must also be a weighing system to ensure maximum wagon loading and environmental requirements."

In addition, a new rail access and haulage agreement had to be negotiated - which ultimately went to Pacific National.

"The focus here was to maximise payload per train path which will be done by increasing train lengths from 700 to 1,000 metres, limited by passing loops, and reducing the tare weight of wagons," Roberts says.

"Pacific National will also develop a staging area in Townsville so the train can be split to get access to our port storage and shiploading facility."

Roberts says storage capacity at the port had to be increased to accommodate vessel parcel size, for a nominal amount of 40kt.

"Storage buffers are critical to mitigate take or pay contractual requirements for the rail agreement, which eats into the margins of a low-value, high-volume product," he says.

"We’re currently working with shipping lines and customers to finalise the necessary agreements."

For companies that move bulk commodities like Xstrata, supply chain impediments can be many and costly.

"Rail is obviously the biggest challenge," Roberts says.

"The current rail network from Isa to Townsville is narrow gauge, prone to flooding in the wet season and heat. It requires significant upgrades to improve reliability.

"Capacity is constrained due to narrow gauge, 20t axle loadings and current 750 metre train lengths," he says.

"This makes it impossible to move the tonnes at a rate competitive to that of WA’s (Western Australia’s) iron ore provinces."

Roberts says a maintenance program has been in place for a couple of years to improve reliability, including approval from the Queensland government earlier this year for an investment of $106 million.

"Minor capital is currently being spent to increase passing lane lengths for 1,000 metre trains and the quantity of passing lanes," Roberts says.

"Additional capital will be required should it be necessary to accommodate trains longer than 1,000 metres."

Access through Townsville port is another major issue. "The rail network master plan incorporating the Eastern Access Rail Corridor is supposed to allow longer trains to have access to the port with no impact on the community," Roberts says.

"However the capital required is considerable, making it near impossible for one project to underwrite it and be viable at the same time."

Roberts argues significant lobbying of the state government and federal Infrastructure Australia program has had no success on this count to date.

However, as election fever hots up, stakeholders including the Townsville City Council and lobby group Townsville Enterprise are angling for greater leverage.

They hope a number of priority projects earmarked for the region will be given the nod, including $180 million for the Eastern Access Rail corridor linking Mount Isa to the Port of Townsville.

Meanwhile, the handling of increased volumes of bulk materials at the Port of Townsville in close proximity to town and Great Barrier Reef will require considerable efforts to remain viable while satisfying community and environmental requirements.

BEST LAID PLANS

Clearly supply chain planning is key to staying on top of daily complexities arising from the export of bulk commodities.

Anglo American Metallurgical Coal Logistics Manager and Queensland Supply Chain Conference speaker Greg Smith says effective planning is not just a number crunching exercise, but a skilled mix of business understanding using the correct tools and good judgement.

"Regular planning means identifying the correct frequency of re-planning," he says.

"Too much planning creates noise that distracts the operation. Planning that’s too infrequent results in missed opportunities and issues can become locked inside decision lead times and fire fighting.

"The most critical timeframe to understand in supply chain planning is the decision lead time," Smith says.

"This is the planning period beyond which there is enough flexibility to make necessary changes while allowing sufficient certainty to be able to make effective decisions."

"In the coal industry, it is essential to have an understanding the physical constraints and to ensure all infrastructure owners sign off on their forecast capacities. All stakeholders must be able to sit at the same table to resolve issues in a timely manner," Smith says.

Smith also points to the major impact of weather. "Having a highly visible supply chain across multiple markets allows decisions to be taken as late as possible so product can be positioned to best capitalise on weather-related changes that can happen quite rapidly," he says.

Roberts concurs. "I guess the process starts with what volumes do you want moved and where to," he says.

"You then need to review all the nodes that are required to move those volumes, identify the risks, costs, potential bottlenecks and opportunities."

While measures relating to overhead and direct cost are relevant, Roberts maintains to truly assess the performance and value of a logistics operation, other factors must be considered.

"Meeting inventory levels and the cost of work in process is essential," he says, "along with scheduling port or end user requirements and capacity, and meeting the cost of demurrage."

"It’s also crucial to factor in product losses or the impact of weight or stockpile adjustments and have the flexibility to respond to change."

"Considering these points, you then develop your strategic plan.

"You also need to look how other organisations do things and be open minded about how that may work with your business," Roberts says.

"Competition or the threat of competition drives innovation."

WORKING TOGETHER

Despite the need for joint planning in the export of bulk products, Roberts admits collaboration with providers is an area that needs improvement.

"In the past companies like Xstrata would sign a 10-year rail haulage agreement and once the agreement was signed the focus would be ensuring the provider moved the contracted tonnes at the contracted rate," he says.

"Very little discussion is related to developing relationships or continuous improvement. This was made more difficult with the rail provider having a monopoly on the corridor until recently.

"It is extremely important that relationships are developed with both the supplier and customer understanding each other’s key business drivers," Roberts adds.

"Structured performance agreements must be put into place where all parties decide on a series of KPIs [key performance indicators] of which at least one should be based on continuous improvement."

Smith believes the silo mentality still abounds.

"In some cases this is supported by concerns about ACCC restrictions, regarding what kind of relationships can be fostered without breaching the Trade Practices Act," he says.

"Improved collaboration could occur in large international commodity supply chains if commercial and operational factors are separated so that parties can share information without compromising business-related sensitivities."

In one example, Queensland Rail’s bulk business rail haulage provider ARG strives to develop strong, collaborative working relationships with customers that provide maximum benefits for both parties.

The company currently has contracts in place with Xstrata, BHP Billiton and Incitec Pivot which cover the transport of a total of 2.3 million tonnes of bulk export product from the Carpentaria Minerals Province in north-west Queensland to the Port of Townsville.

ARG Bulk Eastern Marketing and Business Development Manager Tony Cantarella says along with infrastructure capacity and reliability, variations to customer demand is a significant issue.

"While, most of our contracts offer a base level of capacity, global commodity prices and increases or decreases to production at a customer’s mine or plant production means a level of flexibility in capacity must be provided," he says.

"This is difficult to provide, given the high capital cost of above rail assets, train crew resource issues and ad hoc train path availability on the corridor."

"In these cases, we work together to develop innovative solutions to supply chain challenges that provide improved operations and/or reduced cost.

"Obviously, we would like to foster this type of relationship with all of our customers and, to this end, we are just starting to roll out a methodology that allows us to sit down with our customers and talk about how we can best work together to ensure that their strategic business objectives are met through the provision of services by ARG," he says.

Ultimately, Roberts says the value of logistics can be determined by a number of methods but ‘value’ like ‘beauty’ is often in the eye of the beholder.

"The value of logistics might be quantified by considering the cost per tonne it takes to manage the logistics function or the direct cost of transport," he says.

"Too often the ‘beauty’ of logistics is smeared by focusing on the above two measures alone.

"Logistics is not just about moving product from A to B but delivering real value to the bottom line."

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