Posted by Greater Sudbury Northern Life
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.
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.
"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 produces a pro-mining blog:www.republicofmining.com.