The global mining industry is experiencing turbulent times. Mine employees want their share of the historically high earnings that companies in this sector have been enjoying because of record high prices for copper and other metals. After a 25-day strike involving labor unrest, workers at the Escondida copper mine in Chile, the world’s largest, agreed on the terms of a labor contract that is unprecedented in that country. Experts consider it a model for coming negotiations in the sector. Meanwhile, paralysis at the mine kept the New York and London metals markets on tenterhooks because of its impact on supply; Chile produces one-third of the world’s copper. Tensions continue as other employees make their demands known in distant parts of the globe, from Canada to Africa, and from Peru to Poland. Experts warn of growing pressure on companies’ production capacity even as the upward trend in the price of copper and other minerals continues.
Copper prices were only 80 cents a pound when negotiations between labor and management took place three years ago at Escondida, which is located at an altitude of 3,200 meters in the heart of the Andes of northern Chile. Today, conditions are very different. In May 2006, the price of copper reached a record high $4.08, spurred by high demand from rapidly growing economies such as Chile and India. Another factor is the tight supply of the copper produced by the mining companies, which are operating at maximum capacity. The average annual price of copper has been above $3 a pound, almost double the average price in 2005 when it was $1.67 a pound.
In the middle of the strike, the company that controls Escondida, Anglo-Australian BHP Billiton, reported its earnings for the second half of the fiscal year. The company announced a 77% increase in revenues. The company’s net profits attracted the attention of its workforce because they amounted to $6.1 billion, practically twice what it earned the year before. The rising price of copper also contributed an extra $1 billion to Rio Tinto, the other Anglo-Australian firm that is a large shareholder in Escondida. All of these numbers were studied at the negotiation table, where hard bargaining continued through practically all of August. Workers finally signed a collective agreement with the company on September 1. The new contract calls for a five percent salary increase and for the company to pay a bonus of nine million pesos (some $16,700) to each employee, along with other health and education benefits. Apart from the $64 million that the new contract will cost BHP Billiton, the company announced that it had lost $250 million because of production cuts caused by the strike.
Far from northern Chile, at least other six negotiations involving new labor contracts are expected for the near future. One such case involves Highland Valley, the largest copper mine in Canada, located in British Columbia. It belongs to Teck Cominco, the mining giant. The workforce at Highland Valley will vote on whether to call a strike if they find management’s next offer unacceptable. The company’s current labor agreement expires on September 30, and talks are already under way for a new pact. The mine produced 179,000 tons of copper concentrates last year. The same thing could occur in other negotiations slated to take place in Peru and Poland, and in some conflicts in Africa that have still not gotten to the negotiating stage.
It’s not just the demands of workers that are shaking the foundations of companies nowadays. In other impoverished mining communities, employees are hoping that mining companies, considered the engine of their economy, will make a greater contribution to the working community. This is already happening in Peru, where the copper industry contributes a little more than half of the country’s entire export revenues. This year, the government is forecasting copper exports valued at $22.28 billion.
Peru is the world’s third-largest producer of copper and zinc, and the fifth-largest producer of gold. An agreement between its mining companies and the government has yet to be signed, sealed and delivered. Negotiators have yet to agree on the size of the contributions that will be made by the more than 30 companies in Peru in this sector. Initiatives that would require mining companies to make extraordinarily large contributions are the result of growing discontent in communities that live near the mining regions and of protests by slum dwellers who demand more ‘social investment.’
A Scarcity of Specialized Labor
According to experts, the events at Escondida could easily serve as a model for other mineworkers around the globe. These events will have a direct impact on the next collective bargaining negotiations undertaken by both Andina and Codelco Norte, which are divisions of Codelco, the Chilean state-owned giant. “Given the importance of Escondida, which is responsible for eight percent of all global production, the results of the negotiation process [at Escondida] will have a great deal of impact on other collective negotiations we face in the future,” says Juan Carlos Guajardo, managing director of the Santiago, Chile-based think tank known as the Center for Copper and Mining Studies (Cesco). Guajardo anticipates that the negotiation process will be intense because of current prices. Mining “has a cyclical pattern of behavior. We need to remember that only five years ago, prices were at their historic lows, and collective bargaining negotiations had a completely different tone as a result.”
Marcos Lima, director of the Catholic University of Chile’s program for mining economics, believes that it is natural for workers to make these demands. “Let’s not make this into some sort of exceptional situation. When a company is doing well, it’s logical that the people who work there will aspire to get a larger piece of the surplus. This is what is happening in the global mining sector.” If the owners of these companies are earning higher profits because of higher prices, why shouldn’t workers also share in the benefits? Lima asks.
“The same thing happens with suppliers who increase their prices to the mines,” he notes. “This has to happen. There is nothing about this process that does not reflect the fundamental rules of the economy. On the other hand, when prices are going down, the opposite process happens. Everyone involved suffers lower profits and workers do not receive the kinds of increases they are used to receiving. Shareholders are the ones who suffer the most because a company can wind up closing its operations.”
The events at Escondida also result from an ongoing shortage of specialized workers in Chile and other mining regions around the world. Some experts have been talking about this problem for some time. Julian Ortiz, professor at the mining engineering department at the University of Chile, is one of them. Ortiz says, “Because of this [shortage], workers not only have the protection that they want, but labor organizations realize that they have quite a lot of power when they are negotiating with companies. It is hard to replace the labor force in a mine without having a significant [negative] impact” on the company.
Because Escondida belongs to a foreign company, will these issues wind up providing a disincentive for foreign investors? Ortiz does not think so. “Mining in Chile continues to be extremely attractive for foreign investors because of the returns they get, the high level of knowledge about mining deposits in mining regions, and the stability of the rules of the game,” he says. Lima agrees. “Whether it is a good pact or a bad pact, the fact that an agreement has been reached reflects the rationality that rules in labor relations. At the end of the day, this is a problem about how to cut up the pie; nothing more. It has no other connotation of an ideological or other character. Chile is an example of the rules of the game, and a favorable environment for global mining. This is not going to change.”
Despite labor unrest in Chile, the mining industry continues to have great expectations. This is reflected in the business confidence index produced every month by CIEN, a business research center in Santiago. The mining sector recently earned a positive grade of 26.5 on the scale, where minus 100 is the worst possible grade and plus 100 shows the highest degree of confidence. One reason is the perception of mining companies that installed capacity is insufficient, explains Massiel Guerra, the economist who runs CIEN. “On the one hand, labor conflicts have made the companies realize that they were pinning their expectations on production capacity that was very much below optimal levels, at least for now. However, this was in the context of very dynamic global demand, and forecasts of prices higher than in previous months,” says Guerra. For that reason, 75% of big companies covered in the index project that they will make new investments during the next three months. That’s 25 percentage points higher than the numbers registered in the previous month.
A Fair Slice of the Pie
It is a question worth wondering: Do Chilean mining companies pay fair salaries? Over the long term, Lima believes that workers in the Chilean mining sector have income levels comparable to those in other countries. “They are neither the best-paid workers nor the worst-paid; they are close to the average.” Lima believes, “It is hard to say that in Chile the pie is not sliced up in fairly.” A second factor to consider, he explains, is that the range of incomes in this sector is normally relatively narrow. “You cannot say that Escondida is paying twice the salaries paid by other mining companies or that salaries are shooting up at Codelco. They are all within a narrow range because the mining sector has become very competitive. If one company pays poorly, people will go over to the other side, where they pay better.”
The best approach is one that does not lead to any pressures on corporate costs. In such an approach, mine owners, whether they are public sector or private shareholders, along with executives and workers all share in the benefits whenever the mining sector enjoys healthy earnings. Ortiz outlines a series of mechanisms for doing that, including performance bonuses that rise whenever production costs are lower, accident rates are lower or other business goals are fulfilled. “When bonuses vary as a function of a company’s profits and they reflect the entire interconnected efforts of all participants (executives and workers), everyone is allowed to share in the strong results that the mining companies enjoy,” adds Ortiz.
Prices Continue Their Upward Trend
The labor negotiation processes that will take place in coming months will attract considerable attention from investors and analysts in metals markets. If a strike were to take place in the six mines where contracts are scheduled to expire, it would endanger 18% of the global supply of copper, according to a recent Merrill Lynch report about raw materials.
The most often-used phrase used by specialists in the global copper market is that it “is very tight.” According to Guajardo, the limits on supply that the industry faces at present “will not be overcome for at least a couple of years.” What’s more, Guajardo anticipates that, as long as demand does not relax, there is no way that prices can decline in coming months. “On the contrary, I would even anticipate significant pressure toward higher prices,” he says.
The next contractual negotiations, especially those in Chile, will tell a great deal. “I believe that upward pressure is going to continue, at least for this year, because of the coming negotiations at Codelco, which are very significant,” says Guajardo. “The expectations of workers (at the state-owned Chilean firm) should not be different from those shown by workers at Escondida. The truth is that the outlook until October or November is very challenging.”
A report published by Santander Investment early this month projects that, given the tightness in the copper market – especially because of persistent demand from China and Japan – the average annual price will hover between $3.06 per pound in 2006, and $2.87 per pound in 2007. The report notes: “We expect a more drastic decline in mineral product than has been projected. In our view, the negative balance of supply and demand in the global copper market will continue in 2006.”
Chile’s copper board, known as Cochilco, anticipates the same situation. It puts total demand for refined copper at 2006 at about 17,658,000 tons, and it forecasts total supply at only about 17,505,000 tons. In other words, it forecasts a deficit of 153,000 tons. This is the fifth year in row in which there is a deficit in refined copper, and inventories will be at critically low levels. Cochilco forecasts total inventories of 914,000 tons at the end of this year, the equivalent of about 2.7 weeks of consumption. For next year, its forecast is a bit more comforting. Cochilco anticipates a slight surplus of 56,000 tons of copper because some new mining projects are coming on stream and because it [Cochilco] anticipates more moderate growth in demand, as growth slows in the major economies.’’