America is losing one of its most basic industries
Just south of Tucson, a two-lane highway rolls through the desert to Mexico. Along one 26-mile stretch, it skirts five open-pit copper mines amid the saguaro cactus, mesquite, and ironwood. This is U.S. 89, known as el camino de la muerte – “road of death” – for the toll it has taken on drivers zooming north of Nogales. But the macabre name might just as easily refer to the mines that line this lonely road. Once the workplaces of thousands, they are now either closed or up for sale – a stark reminder of the sad state not only of U.S. copper companies, but of most of the rest of the North American metals mining industry.
The recovery of the 1983-84 largely bypassed producers of copper, iron ore, nickel, lead, zinc, and molybdenum. Now, after a prolonged period of painful losses, these companies are reeling from what are clearly chronic problems: shrinking markets, huge debt, and depressed prices. Three or four major metals producers may even be forced out of the business over he next few years. In a very real sense the industry is dying.
The pangs of mining are the latest example of what may be an industrial megatrend: the inexorable shift of the production and processing of all basic materials from the industrial countries to the Third World. Like steelmaking, metals mining is vulnerable to some fundamental forces. It is an industrial activity in which, these days, the developing nations have an almost unbeatable pair of economic advantages: cheap labour plus very low cost reserves.
The industry’s plight ripples far beyond the dozen or so companies that dominate metals mining in North America. Just four years ago, metals mining in the U.S. was an $8.9 billion enterprise. By 1983, it has shrunk to just $5.9 billion. Mining employment already down to 44, 800 at the start of this year form 109,000 in 1981, could fall a further 30% over the next two to three years. The contraction is already creating modern-day ghost towns in mining regions of the country. And while lower metals prices do mean at least a short-term benefit for manufacturers and consumers, some observers are concerned that the industry’s problems may one day put national security at risk. “We need a copper industry, for defense purposes if nothing else,” asserts Representative Morris K. Udall (D.Ariz.), chairman of the House Interior Committee.
REAL DANGER. For all these reasons, metals mining could become the next cause celebre in Washington’s continuing debate over industrial policy. Many officials within the Commerce, Defense, and Interior Depts., as well as in Congress, now believe the U.S. may soon have to choose between forgoing major segments of its minerals-producing capability and subsidizing them. “We are in real danger of losing 75% of our copper industry and 40% to 50% of our iron-ore industry,” warns Robert C. Horton, head of the Bureau of Mines. All across the mining spectrum the signs are plain:
• The largest copper producers – Kennecott, Asarco, and Phelps Dodge – are deep in red again this year. Phelps Dodge lost $50 million in the first nine months. Kennecott Corp.’s $41 million operating loss in metals during the third quarter brings its total loss in the business since 1981 to $483 million. Asarco Inc., which suffered a net loss of $70 million in the first nine months of 1984, had to cancel its fourth-quarter dividend.
• The major oil companies – which once rushed into metals as the next best thing to oil – are already giving up. Last month, Pennzoil Co. took a hefty $100 million write-off to reflect the decreased value of Duval Corp., its copper and molybdenum mining subsidiary. Three months earlier, Atlantic Richfield Co. took a $785 million write-off on Anaconda Minerals Co., a copper and metals fabricator it purchased in 1977 for $680 million. Both companies have put their metals operations on the block.
• In iron ore, U.S. Steel Hanna Mining, and Pickands Mather announced in November yet another round of temporary mine closings that will shut down most of Minnesota’s iron-ore Mesabi Range this winter. Days later, Canadian steelmaker Stelco Inc. announced that it was permanently closing its Griffith Iron Ore Mine. That added a further 1.5 million tons of ore-producing capacity to the 25 million that has been shut down for good in the U.S. and Canada since 1980.
• In nickel, zinc and lead, the scene is much the same. Toronto-based Inco Ltd., a giant nickel producer, has posted 13 consecutive quarters of operating deficits. Noranda Inc., a major zinc and lead producer, lost $38 million in the Third quarter, wiping out its first-half profit.
A series of factors accounts for mining’s malaise. The industry is hobbled by a worldwide excess of capacity that shows no sign of abating. Despite disappointing demand for most metals. Third World countries, eager to exploit more of their natural resources, keep opening giant new mines that incorporate the latest recovery techniques. The strong dollar makes their low-cost products particularly appealing to U.S. buyers. Underlying all this is a weakening geological base: Many of the richest base-metal reserves are coming close to depletion, while the low-grade ore that remains is becoming too costly to recover.
In their day, North American mining companies ranked among the world’s industrial elite. Amax, Anaconda, Asarco, Kennecott, or their forerunners helped settle the West. Huge family fortunes derived from mining, including the Hearsts’ and the Guggenheins. Mining companies were among the first U.S. multinationals, dominating the world markets during the boom that followed World War II. Amax Inc. once held 50% of the Free World market for molybdenum, a metal used in everything form light bulbs to jet engines. Inco once supplied 90% of the world’s nickel.
WILD FLUCTUATIONS. Things began to change in the 1970s. Copper and iron-ore mines in South America and Africa were expropriated. The North American industry was hit with large environmental expenditures. New competitors from the Third World appeared, many of them state-owned and blessed with abundant reserves. Price-setting, once the province of the North American oligopolies, shifted to the floors of the world’s commodities exchanges, chiefly the London Metals Exchange. Steady prices yielded to the wild fluctuations now the norm in the business. Demand for iron ore, nickel, and molybdenum stared to wobble as the biggest customer for all three metals – the U.S. steel industry – faltered.
But the most devastating blows came with the recession of 1981-82. After hitting record, or near record, levels in 1979 and 1980, earnings of the North American producers collapsed. From 1982 through this year’s third quarter, 10 of the largest independent North American mining companies reported net losses totaling $1.8 billion. At the start of 1981, their debt amounted to 36% of their capitalization; by the end of this year’s third quarter, it was close to 41% – at least 10 percentage points above the average for U.S. industry. Return on shareholders’ equity, which stood at 18% five years ago, is likely to end up this year at minimum 1%. On average the shares of the U.S. metals mining companies in the group sell for 36% below book value.
The situation has grown so grim that Interior Secretary William P. Clark, who last fall tried to win import relief for copper producers, is now publicly voicing his alarm. Worried about U.S. dependence on foreign minerals, Clark has appointed a 25-member task force to search for ways to preserve the nation’s remaining mines.
In mid-November, the panel, headed by retired Rear Admiral William C. Mott, issued its first substantive proposal. It called for the U.S. strategic metals stockpile to be placed in the hands of a Comsat-type, quasi-government corporation instead of several agencies. A single entity presumably could make decisions more smoothly than the present mix of overseers can.
ROCKS IN WATER. The industry’s most visible problem is prices, which have lately had all the buoyancy of rocks in water. Even though strikes have curtailed 63% of U.S. lead mining capacity since summer, lead has nonetheless fallen an additional 5 cents a pound since July. Although inventories of copper on the London and New York exchanges have dropped 50% since January and world demand for the metal may hit a record 8.3 million tons this year, copper is now 61 cents a pound – 9 cents below last April.
“These are not normal economics as we have known then,” says Asarco President Richard de J. Osborne. “Based on the fundamentals and on historic precedent, we should now be several quarters into a price recovery.” Yet in real terms, the price of copper is lower now than at any time in this century except during the trough of the Depression.
Industry executives lay much of the blame on the mighty U.S. dollar, which has allowed foreign producers to offer metal to U.S. buyers at low prices and to maintain – or even fatten – profit margins in their own currencies. Grumbles Inco’s Chairman Charles F. Baird: “The U.S. dollar is killing us.” Some executives are hoping the dollar will soon weaken. But even if it dies, it may be too little, too late. “The concept of currency devaluation is overblown,” argues Brain E. Felske, a Toronto-based mining consultant. “A 10% decline will do some good, but it isn’t going to bring copper producers back to profitability.”
Moreover, a declining dollar does not necessarily mean that the price of copper, lead, and molybdenum will rise, notes Firoze E. Katrak, a vice-president of the Boston commodities research firm Charles River Associates Inc. The reason: Even in times of glut, world producers set their prices on the direct operating costs of the most expensive mines – which happen to be in the U.S. A lower dollar would thus affect neither production costs nor market prices in the U.S. – and would also have no bearing on worldwide supplies or demand. Although Katrak believes prices just might rise moderately over the next few years, he thinks they will more likely languish near present levels. He predicts that copper will sell for less than 90 cents a pound, in constant dollars, through the rest of the century and that nickel and lead prices will stagnate into the 1990s. The price of molybdenum, he predicts, will remain weak through 1987.
A significant increase in volume also seems far off. Metals experts almost all agree that demand will hold steady, or at best grow modestly, over the next decade. Cleveland-based Hanna Mining Co. is forecasting that North American consumption of iron-ore pellets will average no more than 74 million tons a year thorough 1990 – a far cry from the 109 million tons consumed in the peak year of 1979. Demand for copper, nickel, lead, and zinc is seen increasing by only 1% to 2% for the next 10 years.
A host of factors is curbing growth. New materials, such as plastics and optic fibers, are replacing metals in many product lines. Katrak estimates that, by 2000, technological advances will enable manufacturers to use only two-thirds as much copper per unit of output as they do today. Lead is being banished from gasoline, its second-biggest market, while longer-lasting, lighter batteries are slowing consumption in its primary market. More and more metal recycling is occurring almost everywhere.
In the few markets where demand continues to grow respectably, supplies keep growing as fast or faster. According to Katrak, world molybdenum consumption may increase 3.5% a year through 1990. But so many new molybdenum mines have opened up during the past five years that annual capacity is now 69% greater than the 166 million pounds expected to consumed next year.
For many struggling producers of North America, the telling factor is the decline in the grade of their ore. “The high-grade, easily accessible deposits have been mined out” in the U.S., says John W. Goth, Amax’s senior executive vice-president. Most of the richest deposits now are in developing countries. That is a major reason why the giant Corporacion Nacional del Cobre de Chile (CODELCO) is the world’s foremost producer of copper.
Similarly, Cia Vale do Rio Doce, the Brazilian state-owned mining company, will be the world’s premier iron-ore producer when its giant Carajas mine comes on stream next year. Not only does Carajas contain 20 billion tons of the world’s richest iron ore, but Brazilian labour costs are 78% lower than those at U.S. mines. By 1988, output could hit 35 million tons a year – nearly as much as the entire U.S. produced last year.
UNCONSCIONABLE LOAN. It is unlikely that Carajas ore will flood the U.S., since domestic steelmakers have a huge investment in North American iron-ore mines and processing facilities. But Japanese and European steelmakers have signed long-term contacts that should allow them to buy Carajas ore for even less than this year’s Brazilian price of $17 per dry metric ton, and that will pressure U.S. producers to make even more drastic cost cuts. Says Robert McInnes, president of Cleveland’s Pickands Mather & Co.: “Importation of subsidized or low-cost foreign ore is, without question, one of the gravest threats our industry faces.” Equally ominous, the chap Carajas ore will cut the production costs of some foreign-made steel, which already claims more than 20% of the U.S. market.
The Carajas mine project particularly galls U.S. executives because its $5.1 billion price tag was underwritten with a $500 million loan from the World Bank. “The world did not need Caraja,” snaps Hanna Chairman Robert F. Anderson. Adds S.K. Scovil, chairman of Cleveland-Cliffs Iron Co.: “It was unconscionable [that] they made that loan.”
Given so many adverse forces, it seems only a matter of time before the North American metals mining industry suffers a major casualty. Analysts contend that Phelps Dodge Corp., the second-largest U.S. copper producers is especially vulnerable because it relies on copper for almost all its revenues. The company has lost $187 million since 1982, and “unless the world copper price improves very sharply throughout the rest of the decade, it is difficult to see how the company can survive,” says William G. Siedenburg, an analyst with Smith Barney, Harris Upham & Co.
GETTING TOUGH. The day of reckoning also may be nearing for Kennicott, the copper mining giant acquired by Standard Oil Co. (Ohio) three years ago for $1.8 billion. Sohio has been mulling over a proposed $1 billion modernization for Kennecott’s huge Bingham Canyon mine in Utah but has not approved the expenditure. That mine “is not something you’d lightly turn your back on,” says Sohio Chairman Alton W. Whitehouse Jr. “But we just aren’t going to take [Kennecott’s] losses indefinitely.”
As Big Oil backs out of metals mining, the independents are struggling to survive. While some are closing down high-cost operations, others can’t even find the money to meet the steep severance and shutdown costs without eating into the cash they need to pay their debts. Corporate staffs are being cut. Falconbridge Ltd., a Canadian nickel producer, has slashed white-collar employment so much that top management now occupies one floor instead of the three in its Toronto headquarters. Chairman William James even shares a secretary.
Mining companies are also getting tough with their unions. The most dramatic example is Phelps Dodge, which in July, 1983, accepted a strike at its Arizona mines and smelters rather than settle for the terms other copper producers agreed to. The company has replaced the strikers with nonunion workers and now awaits court rulings on decertification votes. In October, Pennzoil’s Duval subsidiary unilaterally imposed anew labor contract on workers at its Sierrita (Arizona) mine, cutting wages 15%, dropping cost-of-living adjustments, and increasing work time for all employees by two shifts a month.
These cost-cutting measures have resulted in impressive productivity gains. The cost of producing copper in the U.S. has dropped 25% in the past three years. Inco has lowered its breakeven point for nickel 12% this year alone, to $2.30 a pound, and Chairman Baird’s goal is to get down to $2 next year.
NO FAT. More gains are needed. “We’ve reduced costs, but not at the same precipitous rates as metals prices have declined,” says Kennecott President G. Frank Joklik. But making further headways will be tough. “The mining companies don’t have any more fat to shave off,” says Canadian consultant Felske.
Because they see diversification as a way out of their troubles, some base-metals mining companies are rushing into gold – so many, in fact, that North American gold production is expected to jump 50% by 1989. “The only thing worth developing now is a good-grade precious metals deposit,” say Alfred Powis, chairman of Noranda. His company is spending $230 million to develop its Hemlo stake in Northern Ontario, a gold vein that eventually could add $38 million to the company’s annual profits.
Other companies are looking further afield. Newmont Mining Corp. intends to add a “fourth leg” to its copper, gold, and energy businesses, says Chairman Plato Malozemoff. Hanna is on the diversification trail too, but it will be cautious: It has been burned by bad moves in the past. Some 85% of its $28.8 million loss last year resulted form energy businesses it acquired in the late 1970s.
Amex, which had eight separate metals divisions, is restructuring all its mining operations to make them more market responsive. The company also wants to expand into more specialized products such as molybdenum chemicals, ceramics, and plastic composites. “That’s the only way,” says Chester O. Ensign Jr., who heads the company’s strategic planning and development group, “to make sure Amex doesn’t perish.”
Consultants agree such changes are necessary. “Metals companies have got to become more market-driven,” says Frank Schwab Jr., president of Fenvessy & Schwab Inc., a management consulting firm in New York. He also urges companies to get more involved in commodities trading to help offset the volatility of their business. Finally Schwab advises his North American clients to enter joint ventures, especially with foreign partners. “Somehow,” he says, “our companies have to develop a workable program to finance the development of ore reserves outside the U.S.”
Here and there, mining companies are beginning to embrace such strategies. But even insiders acknowledge that the industry as a whole is changing too slowly, because of what some see as an anomaly in the th8nking of many metals mining executives: While they are rarely adverse to the risks of developing new ore deposits, that same spirit usually does not extend into the marketing and financial aspects of their business. “The industry is dominated by guys who bring things to the surface,” says consultant Felske. “They have to become more sophisticated in the commercial side of the business.”
REDEMPTION? Some believe the redemption may be found in high technology. The Colorado School of mines has launched what could become a $25 million research effort to adapt automated factory techniques to mining. In October, Inco created a separate equipment company to develop machinery for continuously mining and transporting ore, now done in batches. But the potential of such innovations is limited. Concludes Noranda Chairman Powis: “There’s not going to be one technology that will change the economics of this industry.”
The chance of getting much government help is dim. Mining companies lack political clout because their constituency is relatively small and they have been unable t put together a unified lobby. Moreover, a growing chorus of voices argues that a shortfall in U.S. metals productions is not necessarily a problem. After all, notes John A. Cordes, head of the Mineral Economics Dept. at the Colorado School of Mines, “countries like Japan and West Germany have very, very strong economies with very low levels of metals self-sufficiency.”
The U.S. is rapidly heading in their direction. Indeed, if another broad-based recession were to hit the U.S. in 1985 or 1986, it would probably sound the death knell for an industry that is already permanently bedridden.
By Patrick Houston in Toronto, Zachary Schiller in Cleveland, Sandra D. Atchison in Denver, Mark Crawford in Washington, James R. Norman in Houston, and Jeffery Ryser in Sao Paulo
Why Chile is the King of Copper
If Chile is the Saudi Arabia of copper, Corporacion Nacional del Cobre de Chile (CODELCO) is the Petromin of Chile. Formed as the successor to five mining companies nationalized in 1971, this state-owned giant is blessed with more than 25% of the world’s known copper reserves. Its gargantuan Chuquicamata mining and processing complex yields ores with 1.65% copper – 2 ½ times what a typical U.S. deposit contains. At 44 cents per pound, CODELCO’s production costs are the world’s lowest. Not surprisingly, it accounted for 16% of all copper mined by non-Communist countries last year.
While sheer size gives CODELCO operational advantages, its rock-bottom labour costs are what make competitors weep. Although its 26,000 workers earn only a tenth of what U.S. copper companies pay, their wages are much higher than average for Chile, where 25% of the work force is idle.
1n 1983, while the North American mining industry was deep in the red, CODELCO netted a respectable $220.6 million on sales of $1.8 billion. This year, in spite of severely depressed copper prices, it is expected to earn $140 million. Profits would be even higher were it not for a government decree that diverts 10% of copper revenues to the Chilean armed forces.
As U.S. copper producers see it, CODELCO’s success comes mainly at their expense. Last year the company shipped a record 330,000 tons to the U.S. – 46% of copper imports and 15% of all the copper used by U.S. manufacturers. Clearly, the strong dollar was a factor. But U.S. companies say CODELCO’s refusal to scale back despite bulging world inventories is the prime reason world copper prices are so low.
While U.S. mines are typically operating at 40% of capacity, CODELCO continues to run flat out. Douglas J. Bourne, chairman of Duval Corp., Pennzoil Co.’s mining subsidiary, charges that this is a deliberate attempt to drive U.S. companies out of business.
RADICAL BREAK? CODELCO officials respond that their operation is the chief prop under a teetering economy. Chile depends on CODELCO for 46% of its foreign exchange. The government’s 1983 interest payments on $20 billon in debts consumed all of the $678.5 million the company handed over to the state in taxes that year. Chile’s military strongman, Augusto Pinochet, is likely to impose additional unpopular austerity measures to maintain debt payments, so the pressure will remain on CODELCO to keep production and exports high. The company is authorized to spend $1.4 billion by 1986 to expand its mines. Outsiders estimate that by 1990 it could be mining 40% more copper than the 1.1 million tons it now producers a year.
Simon D. Strauss, a former Asarco Inc. vice-chairman who is now a consultant, concedes that the Chilean government has monumental problems. But he believes that both CODELCO and Chile would be better off in the long run if they cut copper production to raise prices. That would ultimately bring in more foreign revenue, he says, while slowing the depletion of Chile’s most important resource.
Chilean officials point out that for such a strategy to work out, CODELCO would have to move in concert with other Third World producers, who are also spewing out copper at an accelerating rate. Given the developing world’s plight, such cooperation is questionable. And that sort of planning would mark a radical break with Santiago’s 11-year reliance on the free market. Some CODELCO executives even arguer that copper’s reign as a key metal is limited, so Chile should sell all it can before the market shrinks.
By John O’Brien in Santiago and Patrick Houston in Toronto
There’s Not Much Joy in Leadville
For more than a century, Leadville, Colo., has mirrored the ups and downs of the mining industry. The town, then called Oro City, was devastated in 1865 when its gold mines played out. Twenty-eight years later, it was racked by the great silver crash, which turned local kings into paupers overnight. Now molybdenum has dealt Leadville a cruel blow.
Four years ago, Amax Inc.’s Climax mine employed 3,000 and had a payroll of more than $80 million. Then demand for molybdenum plummeted. Amax closed the mine, and Leadville’s unemployment rate leaped to 40%.Although Climax has since reopened with some 800 employees, the company has made it plain that the mine will never again employ thousands.
So residents of historic Leadville are now courting tourists and small businesses. This, the town hopes, will open up 2,500 jobs in 5 to 10 years. If it does, Leadville could provide a prototype for other withering mining towns.
BAWDY HOUSES. Leadville has a wealth of Old West lore. Molly Brown got rich on its gold; Oscar Wilde outdrank the miners at a local silver mine. Once known as “the wickedest town in the West” because of the bawdy houses that lined Stillborn Alley, it still boasts unspoiled gingerbread cottages and Victorian commercial buildings.
After Amax shut down Climax, Leadville hired a full-timer to head its Chamber of commerce, launched a series of summer events that included gold panning and a 100-mile ultramarathon along the Continental Divide, and invested $40,000 in a nultimedia presentation ballyhooing its assets. By yearend the town will have spent $100,000 marketing itself, and its merchants have approved a $900,000 bond to upgrade the sidewalks and lighting.
As a result, says Elaine Kochevar, executive director of the Chamber of Commerce, tourism jumped 75% last summer, and revenues from the local sales tax rose nearly 25%. She expects more of the same this winter. With an $850,000 grant from the state, Leadville’s ski area, Ski Cooper, has expanded. This year it will offer lift tickets at $12 a day – half the prices at nearby Vail. Visitors are invariably reminded that a three-bedroom house in Leadville – just two hours from Denver – typically costs $45,000, a fraction of the price at other Colorado ski resorts.
Big investors have taken notice. Dallas’ Trace Investment Inc. plans to purchase six buildings, including the 1885 Vendome Hotel, where President Benjamin Harrison once trod a lobby floor inlaid with silver dollars. The company will pay about $1.5 million for all six buildings and intends to spend $10 million restoring and converting them to modern hotels or condominiums.
Revving up tourism may prove easier, however, than attracting new businesses. One reason: Two-mile-high Leadville, situated just below the timberline, seems desolate to many outsiders. Winters are so long that locals quip that Leadville has only two seasons – this winter and last.
The days are gone in Leadville when the Guggenheims could build a small fortune starting with one small smelter, or a David May could launch a nationwide department-store chain. “We’re not going to land a Sperry Rand,” admits Kochevar. Still, she adds, small manufacturers and distributors could be drawn to Leadville, with its ready labor and easy access to a railroad, airport, and interstate highway.
MELTDOWN. Eight new enterprises have stated up in the past two years. To draw still more, the town has formed the Leadville Improvement Group with $50,000 in state assistance. This office is now applying for a $250,000 grant from the U.S. Housing & Urban Development Dept. To be matched by local banks, the money would finance low-cost loans to new businesses.
Compared with some previous schemes for reviving Leadville, the current plan looks eminently workable. Following the depression of 1893, for example, the town built a three-acre ice palace, complete with ballroom. It did a booming business – until a warm spell began melting its ice blocks.
By Sandra Atchison in Denver