The international mining sector faces unprecedented challenges as economic uncertainty combines with political volatility and the demands for commodities ebb and flow, according to global broker Willis.

Its Mining Market Review for the year ahead says cost pressures, mainly caused by labour costs, continue despite weakening commodity prices. As a result workforces are being cut and mines closed.

Infrastructure and supply chain issues are increasingly important factors in the success of projects, the report says. In many resource-rich countries in the developing world, infrastructure constraints increase project risk, limit development and make business interruption insurance a crucial issue.

Increased pressure from indigenous populations for a greater share of the spoils of mining are leading to unrest and questions over the industry’s social licence to operate. So strong is this trend that resource nationalism is rated the number one risk for the industry by consultants Ernst & Young.

Pollution and environmental damage risks are also significant for the resource sector and can often exacerbate local opposition to projects. Liability and directors’ and officers’ insurance are important considerations for dealing with such risks.

Terrorism is another area of concern highlighted by the recent attack by Islamist insurgents on an Algerian gas plant. Terrorism cover remained static last year, but is expected to grow 10% this year, Willis says. However, political violence capacity is limited in areas experiencing the most unrest.

Supply chain interruption risk was highlighted by the Japanese tsunami disaster and the 2011 Thai floods. Understanding the risks associated with the locations of suppliers is vital and allows companies to adopt risk management strategies like dual supplier adoption, the report says.

Willis says pirates around the Horn of Africa present unique risk issues for shippers of commodities, with the pirates now demanding a portion of the cargo as payment.

However piracy rates have fallen to all-time lows.

“Our over-arching conclusion is that mining companies need to review their risk and insurance requirements more frequently and more dynamically,” Willis Mining Practice Leader Andrew Wheeler says.

“The trading and financing environment is changing so quickly that decisions made in the recent past may no longer be effective in relation to uninsured versus insured risks and the optimum risk retention point for mining companies, or where they transfer risk.”