Commodities

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Here's something to give a fresh shot in the arm to copper, the second-best-performing base metal over the past three months: the prospect of strike action at its biggest pit.

Management at BHP Billiton Ltd.-run Escondida in Chile have rejected union demands for a 7 percent pay rise and 25 million peso ($37,300) bonus, and talks are ongoing ahead of a vote by workers on a final proposal Jan. 24, Bloomberg News reported Wednesday.

Shiny Stuff
Copper has been the second-best-performing base metal over the past three months
Source: Bloomberg
Note: Rebased. Oct. 11, 2016 = 100.

As Gadfly argued in September, the risk of industrial action is one of the major supply-side factors supporting copper at the moment. Escondida accounted for about 1.2 million metric tons of mined copper in 2015, so any stoppage could sharply tighten a market that Bloomberg Intelligence estimates will see a 453,000-ton surplus this year.

It's worth stepping back, though, and considering that the more feisty attitude Chile's copper miners have shown of late isn't simply a spot of local trouble. Instead, it's a symptom of factors that touch every corner of the commodity market, and ultimately play a part in rebalancing global prices.

Labor, quite as much as diesel oil, dump trucks and conveyor belts, is an essential input to any mining operation. When commodity prices rise, miners do their utmost to expand production as quickly as possible, creating more demand for workers and machinery, and driving up prices wherever supply is unable to respond quickly enough. When prices fall, employees, as much as machinery and fuel, are liable to get laid off.

When the mining boom was at its height, high-school dropouts were able to command $200,000-a-year pay packets -- more than then-Federal Reserve Chairman Ben Bernanke -- to work in Australian pits. Mining employment in the country nearly doubled over the five years to 2012.

That sort of gold rush couldn't last forever, and sure enough, prices subsequently fell, giving miners the justification they needed to trim bloated workforces and get rid of their most well paid employees. 

Gold Rush
Australia's biggest retailer employs almost as many people as its entire mining industry
Source: Australian Bureau of Statistics, company reports, Bloomberg
Note: Mining figure is for May; Wesfarmers figure is for June. Mining figure is a trend number.

In the four years since 2012, Australian mining employment fell by about a fifth, to the point that the entire industry now employs barely more people than Wesfarmers Ltd., the nation's biggest retailer.

Big miners have played their part. Helped by the spinoff of South32 Ltd., BHP has shed nearly half its staff since 2013, going from 49,496 workers to 26,827 over its four most recent fiscal years. Rio Tinto Group dropped some 16,000 people from its payroll over the equivalent period, while Vale SA's loss numbers 11,205.

Where's My Bonus?
Personnel expenses as a percentage of operating costs have fallen sharply at the world's big three miners
Source: Company reports, Gadfly calculations
Note: Companies have different year ends. "FY 2015" for Rio Tinto and Vale ends on Dec. 31, 2015. The "FY 2015" data for BHP Billiton relates to its 2016 fiscal year, ended June 30, 2016.

In all, the big three have got rid of close to a quarter of their combined labor force over the past four years -- and wages, benefits and pensions, as a proportion of operating expenses, have plunged as a result.

There are long-term factors that may make this process different in future, such as the spread of automated trucks, drills and trains that are increasingly replacing human labor in the massive iron-ore mines of northwestern Australia. But automation is hardly a new development in mining -- we're already more than two centuries on from the time when the world's first railway journey was used to haul iron around South Wales.

Much though management and shareholders would no doubt like to keep wage bills under control, it's probable that over time, the pendulum will swing back from capital toward labor, ultimately driving up cash costs and setting the next great commodity cycle in train. Higher commodity prices play their part in this process: Those Chilean miners' 7 percent pay demand doesn't seem quite so much when you consider that copper prices are up 31 percent over the past 12 months.

Mine managers trying to fight the latest round of wage demands should bear that in mind. While they strive to get the best price for their minerals, union bosses are bidding up the value of their labor. The commodity cycle giveth, and the commodity cycle taketh away.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net