Chile’s Codelco vows to lead as copper industry faces pay battle

Flanked by oil paintings in the executive dining room of Chile’s state-owned copper producer, Oscar Landerretche, chairman of Codelco, returns time and again to how he balances two competing aims: reducing costs while avoiding the labour unrest that has crippled production at rivals across the industry.

From this top floor perch of Codelco’s stone headquarters in central Santiago, Mr Landerretche’s balancing act will be closely studied as it mirrors the struggle private copper miners face as the market recovers from the worst downturn in decades.

“Every one of these decisions requires tough love,” Mr Landerretche tells the Financial Times, when asked how he has cut costs during copper’s slump. “It requires saying no to somebody. It requires making decisions that inevitably create winners and losers.”

His comments about the delicate task of addressing labour concerns at the national copper champion could have come from many of his private peers, who gathered at the CRU world copper conference in Santiago last week.

Many spoke of little else beyond pay and working conditions after two months when labour unrest shut production at BHP Billiton’s giant Chilean copper mine, Escondida.

Being the government-appointed head of the world’s largest copper producer, Mr Landerretche believes Chile’s state-backed national champion must lead by example, having successfully negotiated more than a dozen labour deals in the past year.

“We need to admit to ourselves that we need to provide some security, some more long-term perspective to reduce risk and uncertainty [for] our workers,” he says.

Bonuses for workers, which reached levels well above the average wage in the boom years, have been cut to less than half. But the entire industry could face calls for rising wages and higher payments for contractors as the copper price recovers from last year’s nadir.

Iván Arriagada, chief executive of London-listed copper miner Antofagasta, says mining workers in Chile needed more flexibility given the need to increase productivity, especially with jobs threatened by growing automation in the industry.

“We still have to develop a framework which is much more geared towards confronting the reality of today and the future workplace,” Mr Arriagada says.

Chile is the world’s largest producer of copper, the industrial metal used in everything from household wiring to power grids that enjoyed an unprecedented boom last decade as China industrialised.

But the boom triggered a supply surge that saw the price slump as low as $4,300 a tonne early last year and it has only recently recovered above $5,700 a tonne — a little more than half its all-time peak.

Codelco was hard hit by low copper prices, in part because it must pay 10 per cent of it sales to the military, according to Chile’s law. It wants to hold debts at about $14bn while investing $18bn over next five years to extract copper from its dwindling deposits such as Chuquicamata.

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With the refined copper market expected to be in a small deficit this year any supply disruptions in Chile could have a large affect on prices.

Industrial negotiations are taking place against the backdrop of a new labour law brought in by Chile’s centre-left President Michelle Bachelet aimed at favouring unionised employees. That could add a further test of mining companies’ abilities to secure agreement with their workers.

As many 15 labour contracts will be negotiated this year in Chile’s mining industry, including at Codelco mines and those owned by Anglo American and Antofagasta.

Workers at BHP’s Escondida agreed to return to work last month but without a new labour contract or any signing bonus, in hopes of negotiating again in 18 months, under the new law.

“There were no winners, only losers,” one mining executive said of the strike.

Daniel Malchuk, head of Americas for BHP, said the company was working to restore production at the mine and was confident of restoring relations with the union.

“We are trying to ensure that the return to production allows us to ensure the levels of performance we had before the strike,” Malchuk told reporters in Santiago.

Controlling labour costs is key to Escondida, because BHP has had to invest billions in a desalination plant and a new concentrator just to maintain output at the mine. At a cost of $4.3bn the plant brings water in two 112-mile pipelines across the driest desert in the world to the mine, at 3,200 meters above sea level. The fall in copper prices has increased pressure on the company to deliver a return on the asset.

While Chile’s new labour laws gives more power to unions, miners are confident about upcoming talks, saying the strike is specific to Escondida and not a sign of deeper nationwide dissatisfaction at the country’s mining unions.

“We can’t ignore it [Escondida] it has set emotions,” says Hennie Faul, head of copper at Anglo American, whose Colluahuasi mine is due for negotiations before October.

“But it is a different context and different company and different union. We’ve seen quite different approaches in the last 18 months to two years of different unions and their advisers. To me there’s no consistent pattern. I don’t see it sets a precedent for every other negotiation.”

Mr Landerretche admits Codelco’s status in Chile gives it an advantage over private mining companies in negotiating with its unions. Codelco was created out of the nationalisation of the country’s copper industry in 1971 under former president Salvador Allende and its board includes a representative from the company’s unions, currently Raymond Espinoza.

Still he adds it has taken two years of work with the unions as well as ruthlessly cutting contractor and management costs to be able to deliver on its target of achieving $2bn in cost savings by 2020.

The company’s cash cost has fallen by about 8 to 9 per cent a year for three years, he says, now below the average of the industry in Chile. At the beginning of the next decade Codelco aims to be in the lowest quartile in terms of costs of global copper producers, he says.

“In the end you have to find a smooth process that gets you there,” Mr Landerretche says. “It’s not always thumping the chest that gets you there.”