Eroding share of world nickel market deals a blow to Sudbury miners
Nickel gives strength and corrosion resistance to steel.Unfortunately for Inco Ltd., the world's largest miner of nickel, the production of nickel hasn't done the same thing for its profits.
Earnings have fallen from the peak set seven years ago, its share of the world nickel market has eroded steadily, and morale at the company is reported to be low following an eight-month strike at its main mine in Sudbury. In 1979 net earnings were $141.7 million on sales of $2.4 billion, compared with $299 million on sales of $1.7 billion in 1974. In 1978 earnings were a dismal $77.8 million on sales of $2.1 billion.
However, Inco has learned a lot during this difficult period.
for example, in the last recession in the mid-1970s, Inco continued to produce nickel at near capacity, resulting in a 13-month supply of nickel in its inventories. During the recession this past year, Inco closed a mine in Guatamala and lowered production in Canada rather than continue producting nickel. Inco is now operating at 60 to 65 percent of rated capacity.
Inco has also learned that it has to remain competitive if it wants to retain its share of the world market. In the past, Inco ignored the pricing strategies of its competition, allowing its share of the world market to slip from 70 percent in 1960 to 29 percent today. With demand weak, some producers have lowered their prices and Inco has followed by offering customers a 6 percent discount from the listed price.
And, according to Charles F. Baird, the company chairman, Inco learned a lot from the strike. "We've tried to improve communication with the unions and tried to be up front with them," he said in an interview. "We tell them what's happening and what are the pressures on the company."
The pressures on Inco in recent years have been great. World nickel production capacity has been steadily expanding. In 1950 only three companies, Inco, Falconbridge, and Societe le Nickel, produced nickel. Canada accounted for 95 percent of the world's production. Today, the metal is mined, processed, or refined by about 33 producers in 18 Western nations as well as 7 communist bloc countries.
At the same time, the growth in nickel demand has slowed. Until the early 1970s, nickel demand had been growing at a 6 percent annual rate. By 1979 this growth had slowed to 1 percent per year.
Much of this cutback can be traced to the large inflation problem that has beset the West. Consumers have curtailed purchases because of soaring costs, and corporations have scaled down capital projects because of high interest rates. About one-third of all nickel production is used in consumer durables such as dishwashers, and two-thirds is used in the manufacture of capital goods.
While Inco's markets were under pressure, costs were also rising. Energy, labor, and environmental expenses rose sharply. Prices, by contrast, remained low.
In spite of all these problems, Inco has many advantages. First, it is the lowest-cost producer of nickel in the world. Its nickel deposits in Canada are in sulfide ores, which means that energy consumption to process the nickel is much lower than nickel deposits in what are called lateritic ores. Higher energy costs have added as much as 75 cents a pound to the price of laterite nickel production. Every time the price of a barrel of oil rises by $1, cash operating costs rise by about 5 cents per pound.
However, Inco gets 17 percent of its energy from hydroelectric power and enjoys the lower price of Canadian oil and gas. In Ontario and Manitoba, the cost of energy in all forms at current prices represents 12 percent of total cash operating costs. In many other projects, energy represents up to 60 percent of cash operating costs.
Another Inco advantage are the byproducts found with its nickel deposits. After mining the nickel, Inco can produce 400,000 troy ounces of platinum, 1.35 million troy ounces of silver and 3.5 million tons of cobalt. These byproducts should result in revenues of $180 million to $200 million in 1980 and have a high degree of profitability.
In the Sudbury district, Inco also mines copper, which during a normal year produces revenues of over $200 million.
Mr. Baird says Inco is also looking at investing in some potential gold-bearing properties and would like to buy a platinum mine, if a good one could be found.
To stimulate demand for nickel products, Inco has done a lot of research on potential nickel use. It pioneered the use of stainless steel in autos and many appliances -- often opening the door for its competition as well.Today, it is working on the use of nickel products in jet engine fan blades, pollution control installations, and a nickel-zinc battery for small electric cars. General Motors hopes to have 100,000 electric cars on the road by 1985 and Mr. Baird estimates that the battery could eventually use up to 1 percent of world nickel production.
Inco has tried to diversify to flatten out some of the peaks and valleys in its business picture. So far these attempts have not been too successful. In 1974 it initiated a hostile takeover attempt of ESB Ray-O-Vac Corporation, a US battery company. The Department of Justice delayed the merger for 3 1/2 years and ESB didn't join Inco until Jan. 31, 1978. ESB was immediately reorganized but its financial results still haven't improved. Sales have been flat and earnings disappointing.
The battery company has closed three plants in a consolidation, and is watching Chrysler, a major customer, carefully. Recently, says Mr. Baird, the company has changed its marketing personnel. Without its own lead supply, the battery division also was hurt when lead prices soared this past year. Even so, Mr. Baird defends the division's record by noting, "Eveready and Mallory [ competitors] are losing money in this business too."
One of the brightest spots for Inco is its venture capital investments, begun in 1976 at a cost of $15 million. Since then Inco has sold off part of the investment for $11 million and the rest of the companies have a market value of its 24 percent stake in Biogen, a Geneva-based genetic engineering firm. "The purpose of the investments," he states, "was to give us a window on the world to keep up with new technology. Our ultimate goal is to make some money on them.
With all of its problems, Inco's stock has plunged from a peak of $48 a share ten years ago to $19 a share in mid-December. This has prompted some securities analysts to view the company as a potential takeover target. Anyone with $1.5 billion could probably buy the company, purchasing a major concentration of natural resources. In fact, the Bronfman family has been mentioned as a pot ential buyer.