2017 started with improved valuations for commodity producers as investors realized they neglected this sector too much. The miners have not had such good market performance since 2008 and the oil & gas sector looks equally good. But behind the scenes, the deliberate efforts to improve margins remain the critical play. There is no fundamental reason to believe that price increases will bring external relief.
We believe that following structural investments to impact unit costs, the best sustainable management activity this year will be to continue transforming the sector towards digital. This is a complex call as the elements of such a transformation are not just NPV calculations. As Warren Buffett so famously said “No insight is required on the quantitative side – the figures should hit you over the head with a baseball bat. So, the really big money tends to be made by people who are right on the qualitative decisions.”
Digital transformation includes a culture change towards speed and agility, and a process change towards fully visualizing how work is executed in the organization. Technology can then enable the continuous improvement of work practices that result in higher margins.