Gerard Holden: Mining must dig itself out of a hole

Commodity markets are once again characterised by analyst downgrades, lower earnings forecasts and volatile shares. Just as mining companies can rise on the crest of unprecedented consumption, so they can fall when the wave crashes into the trough of a downturn.

This time, the normal res-ponse of the industry to economic downturn – cutting production, reducing costs and consolidation – may not be enough to ensure a long-term future for mining, which faces another big challenge apart from falling demand for metals and minerals. It needs to fight for legitimacy. It needs to convince all its stakeholders that it can balance the need for its products with the often- negative perception of its environmental and social impact.

Last year, the World Bank sent a clear signal that the industry must address the issue of sustainability. The bank is reviewing its policies on loans to extractive industries – no surprise given that 40 per cent of the complaints it receives relate to mining. As the indus- try's projects are highly visible and often targeted by environmental groups, it is vital it stems the tide of concern.

Globally, 50 billion tonnes of ore are mined each year, the equivalent of digging a one-metre-deep hole the size of Switzerland. Mining, done prop- erly, can bring benefits like local economic development. But it has often had a negative impact on the areas it touches, from the threat to gorilla reserves in the Congo, to the environmental disasters at the Guadalquivir river in Spain.

Low returns and a poor social-environmental record make mining a risky business, with companies finding it hard to raise finance and maintain an acceptable market value. Add in the decline in commodity prices and it becomes even more important to manage this risk and tackle the issue of sustainability.

The evidence over the past few years is that mining companies which embrace environmental issues are more efficient, have superior management and represent a lower- risk profile. The prize is competitive advantage through continued access to capital, potentially lower-cost borrowing, and almost certainly lower insurance premiums.

To achieve this, the industry needs to establish a set of standards or global rules to show all its stakeholders that these issues are being properly managed. It also needs procedures to decide whether a particular action complies with these standards, and a set of carrots and sticks to encourage compliance.

In the age of globalisation, a collective approach is the only way for structures and standards to be delivered. The best chance to shape a more sustainable future is via processes such as Mining Minerals and Sustainable Development (MMSD), an independent project that analyses how the industry touches millions of people.

MMSD has initiated a productive debate on an unprece- dented scale. For the first time, individuals, institutions and companies – often opposed in the past – are coming together to identify and address the critical issues.

Part of the problem now is that the price paid for metals and minerals does not include the full social and environmental cost of extracting them. Those most unable to bear the burden often carry that cost at the local level.

The industry is producing too much and its sale prices are too low to support sustainability. Industry, government and pressure groups need to act now to manage the balance between our demand for metals and the full cost of extracting them. Unless action is taken, the mining sector may be on borrowed time.

Gerard Holden is global head of mining and metals, Barclays Capital.