Global commodity prices have fallen off the cliff. ThyssenKrupp AG, Germany’s largest steelmaker, recently stated that not since the end of the Second World War has the demand for steel fallen so rapidly. Steel is the fundamental building block of all infrastructure and manufacturing activities.
These are extraordinary economic times, so we all knew this was coming.
Yet no one was prepared to see Xstrata Nickel chop its Sudbury workforce in half – 686 layoffs and 210 early retirements. Like most in the community, I am shocked and very, very angry. This kneejerk reaction from Zug, Switzerland has two serious repercussions that will affect the Canadian mining sector for a long time. The first is this: should Canada have allowed foreign companies to take over such a strategic resource as the Sudbury Basin with such weak controls on jobs and investment and, second, how will these severe employment cutbacks impact impending labour shortages in the mining sector?
To be fair, regardless of who owns the two nickel miners, the fundamental issue is that you cannot continue operating if it costs $6 to mine a pound of nickel and you can only sell it for $5. In July 2007, the price of nickel exploded to US$25 a pound while yesterday’s price was hovering a tad under US$5.
Yet even in the darkest days of 1977, when employment levels in the Basin were at around 20,000 union workers, or in October and December of 1998, when the London Metal Exchange price for nickel plunged to $1.76 a pound (US), the lowest level ever, if you factor in inflation, Inco or Falconbridge did not need to cut its workforce in half. At both times nickel stockpiles were considerably higher than today.
Just for the record, when Investment Canada gave Xstrata the green light for the takeover of Falconbridge, a July 25, 2006 company news release stated, “Xstrata is confident that its acquisition of Falconbridge will have a positive impact on long-term employment stability and growth as a result of improved diversification by commodities, countries and currencies, as well as improved access to capital.” Xstrata had also committed to no layoffs for three years, which would have expired on July 2009.
Let’s be crystal clear, these excessive layoffs are not due to the current recession, but to an overly aggressive acquisition and growth strategy at the top of the commodity boom.
It is common knowledge that Xstrata CEO Mick Davis is under tremendous pressure, by hedge funds and investors, to reduce the company’s US $16.3 billion (Dec/2008) debt. Since then Xstrata has raised US$5.9 billion in a rights issue to pay down its debt – completed at an astonishing 66 per cent discount to the previous day’s stock price. There was also some rather dubious financial arrangements with Glencore International which owns roughly 35 per cent of Xstrata PLC that did not please many analysts.
Although the implosion, greed and ineptitude of Wall Street has shaken my free market principles to the core, I am still leery of calling for the nationalization of Xstrata Nickel. However, I would be very comfortable if the federal government purchased 10 per cent or 15 per cent minority interest in Xstrata PLC to ensure a seat on its board of directors. With present share values deeply discounted, it would be a tremendous investment for the taxpayers.
Surely this would be a better response than that of federal Minister of Industry Tony Clement’s tepid reply in a statement issued Monday, in which he highlighted Xstrata’s commitment to invest US $250 million in capital expenditures to bring the Nickel Rim South mine to full production by 2010. Many industry analysts consider the Nickel Rim South as one of the lowest cost and richest mines in the history of the Sudbury.
For Clement, to try to “spin” this investment as compensation for cutting the workforce in half is an incredible insult to the people of Sudbury. Giving Xstrata a federal “pope’s dispensation” from the original Investment Canada agreement is one thing, but please remember you are addressing people in the richest mining district in North America – people with more than a century of technical and financial expertise who have weathered many booms and busts. We know mining and we know political spin.
Notwithstanding the current financial difficulties, the greatest problem facing the mining sector is the impending labour shortages of experienced workers. In Canada, 40 per cent of the industry’s workforce will retire by 2014.
Last October, Ernst & Young published a new report stating that labour shortages threaten Canada’s mining industry. According to its report, Canada will need an extra 70,000 new workers over the next decade to meet the sector’s projected growth.
“As the supply of skilled workers continues to fall and demand continues to rise, mining and metals companies will need to get creative to solve this problem,” said Bruce Sprague, Ernst & Young partner and human capital practice leader in British Columbia. “If mining companies want to deliver the growth they have planned, they need to rethink the way they recruit and retain talent. Otherwise, the shortage of skilled labour could become a significant strategic threat to the industry.”
Sprague further commented, “…it’s more likely that the credit crisis would trump labour issues. However, the current focus on the financial industry doesn’t take away from the fact that the labour shortage issue is expected to persist in the years ahead…”
How on earth are we now going to convince the next generation of high school students to enter the mining sector? What are the odds that enrolment in university mining engineering, metallurgy and geology programs are going to decline faster than the current price of nickel after Xstrata’s wonderful demonstration of the value they place on its workforce? These are the same people who worked incredibly hard to produce as much US $25 a pound nickel as possible, allowing head office to make ill-timed acquisitions.
We are still in a commodity supercycle and this recession will eventually come to an end. Goldman Sachs continues to remind investors that we are witnessing an exponential explosion of the middle class in China, India and other developing countries that will desperately need the nickel, copper and platinum group metals that are dug out the ground in the Sudbury Basin.
Billionaire Seymour Schulich – one of Canada’s most astute investors and mining men – recently said in a National Post interview, “I am amazed at what happened to the commodities, how quickly the prices have come down. … when the demand does pick up there will be enormous shortages, and the price levels on the next cycle will make past levels pale by comparison. You’ll get US $300 oil, US $50 nickel and US $10 copper. But I don’t know if next time will be three-four-five years away.” He was also highly critical of the behaviour of hedge funds.
Regardless of the current pain, shock and anger in the community, Sudbury is still one of the luckiest cities in the country. When commodity prices recover, the entire world will once again depend on the minerals and technical expertise this region has in abundance. After a century of booms and busts we know how to get through these tough times.
Xstrata PLC may get some short-term financial gains, but when the economy recovers, its 19th century, bi-polar hiring-firing frenzy will haunt it for years to come.
Stan Sudol is a Toronto-based executive speech writer and communications consultant who writes about the mining industry. [email protected]