Friday, August 11, 2006

Chilean copper mining labour strike:The importance of long run contracts (I)

The Labour strike which is taking place on the most important private copper mining firm in Chile , “Escondida” ( roughly 10% of world copper production),is expecting to last weeks. This is so because of the negotiations differences, actually making a deep gap between both sides. While the labour union is asking for a wage increase of 13%, the firm is offering 3%,and while the labour union is asking for a bonus per worker of almost USS 30.000,the firm is offering near USS13000. Actually the average workers in “Escondida” earn a monthly salary of about USS2700 , (including both the fixed and variable part), well above the national average worker wages of USS 500.The whole labour package would cost to the firm in the two year period of expected collective contract ,USS 640 million. However from the labour negotiation team point of view, that cost would be USS 375 million in the same period.-
Although it is usual in each negotiation to have initial gap, in this case it looks like it will take longer time to close it . The differences are too high, to expect a quick solution to this conflict. The so called bargaining zone which each side focus on, allows to have a divergence between both sides, such that while the negotiations is under way that gap is expecting to be narrower than at the beginning. However, this imply each side willingness to make concessions ,which are more feasible when that gap is not that much wide, as it is in the “Escondida “ labour negotiations .-
The effects of this strike over firm ´s production are already clear. Actually “Escondida” is producing 40 % of its 3500 ton of daily copper production. This means, each day of labour strike have a gross cost of around USS 16 million, considering current copper prices USS3,5 /lb. The impact on prices, will be given by the period of time the labour force is on strike .The longer that period and the deeper the reduction in production , the higher the expected impact on copper prices. However, the impact on world copper prices will also be influenced by inventory levels. So, at the beginning, it is probably a moderate increase in world copper price.
Before this strike, the trend on inventory levels was to increase , and prices were near a stable trend. Forward copper prices were declining. However, all of this is under keen scrutiny right now. The state owned firm “Codelco” is also with productions problems, which will also put additional pressures on the short run higher copper prices.So, later on the actual situation ,the probability of substantial copper prices increases is relevant.
Since the year 2002(January) the annual average copper prices has increased from USS 0,70cts/lb to almost USS3,5 lb in the year 2006( July ).The labour expectations with the new contract (2006-2008) were obviously high concerning the copper price trend, and the expected benefit level for everyone ; the firms and the workers.
Was this strike avoidable? .It is hard to say from outside the firm, but it is obvious that given the actual copper price trend, the labour expectation for this negotiation would be high . From the strategic point of view ,firm ´s management should have anticipated this scenario, working a set of options to put forward in a period longer than the two years self restricted scenario.
The key point on this issue is the length of labour contract , which is usually settle down for two years. This means that every two years, the management process is under stress because of the probability of failure on each negotiation.
What would be the case with long run labour contracts?. In this case, negotiations would be for a longer period, let say four years,(assuming that four years make equal the marginal benefit with the marginal cost of such length in labour contracts ) such that the expected ups and downs of business activity during that period are considered as a part of the negotiations throughout flexible clauses which anticipate such eventualities. This means that each firm includes in every negotiations the eventual situation of ups and downs on business activities during the relevant period (four years),to negotiate it in advance the way to deal with each one of them, It is like a forward price contract, except the fact that even the eventuality framework scenario, can be revisited according to how it fit the real situation.
But there is already something on the table to deal with, which is much more than the current expiring contract . This negotiation format is quite useful under uncertainty conditions concerning competitions, prices trends .
In the “Escondida” case, whether it would have applied this long run format in the negotiation of 2004, when copper prices were increasing but there was no clear indication to be around USS3,5 /lb, it would have allowed the firm to have a better conditions to solve the workers expectations .

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