FACTORS LEADING TO CLOSURE OF THE TACOMA SMELTER
R. Cough Tin
U.S. Environmental. Protection Agency
Region 10, Seattle, Washington
March 1985
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FACTORS LEADING TO CLOSURE OF THE TACOMA SMELTER
Executive Summary
The announcement by ASARCO that its Tacoma, Washington, copper smelter
would close permanently in 1985 raised the issue of the degree to which
environmental regulation contributed to the closure decision, since the
smelter had been the source of continuous negotiation and litigation
between ASARCO and local, state and federal environmental regulators.
This paper analyzes the situation of the smelter, utilizing publicly
available information" to attempt to determine the circumstances that
resulted in closure.
Principal findings:
1) The Industry: Although world demand for copper has been growing,
domestic consumption and mine production have dropped. Growth of
smelting capacity in producing nations and integration of domestic
production have resulted in substantial excess U.S. smelting
capacity. Prices have been falling since 1979, and U.S. producers
are often at a disadvantage in competing for concentrates with newer,
larger smelters abroad.
2) The Firm: ASARCO, formerly predominantly a custom smelter with
broad foreign interests, has been integrating its production
processes, emphasizing its U.S. production role, reducing and
modernizing its capacity. Consolidation of three copper refining
operations in a single new plant and the modernization and expansion
of its integrated Hayden, Arizona, copper smelter are major
components of the altered operating strategy.
3) The Tacoma Smelter: The last of the nation's tidewater smelters,
the Tacoma plant survived primarily by smelting foreign concentrates
that were too contaminated to be accepted by others and by processing
southwestern concentrates in excess of the capacity of ASARCO's
Hayden and El Paso plants. Closure of a Peruvian mine, diversion of
a Philippine mine's concentrates to an indigenous smelter and
expansion of the Hayden plant have substantially stripped the Tacoma
smelter of its previous sources of feedstocks.
4) Environmental Regulation: Although substantial investment would
have been necessary to bring the Tacoma smelter into conformity with
environmental regulations, ASARCO negotiated and delayed compliance
until loss of contaminated foreign concentrates and completion of new
capacity at Hayden made the plant redundant. The fact that the
replacement capacity includes state of the art pollution controls
supports the judgment that it was the location of the plant relative
to feedstock sources and not environmental regulation that led to the
Tacoma closure.
'Sources used for this paper are described on page 20.
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The Industry
Since the imposition of the Arab oil embargo in the fourth quarter of 1973
the U.S. copper industry—like much of domestic heavy industry—has
undergone a series of spasms of consolidation and contraction. The two
largest firms, Kennecott and Anaconda, and smaller Cyprus Mines as well,
have simply disappeared, becoming minor adjuncts of cash rich petroleum
firms. A majority of smelters and of major mines have operated
intermittently or have been idle since 1980. The erosion of the industry
is outlined in its production record.
Table 1
Copper Production, 1972-1983
Production, In 100 Metric Tons
Source
Year
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
Refined Copper
2052.9
2102.2
1 942 . 4
1612.2
1720.3
1691.1
1805.5
2091.0
1783.9
2175.9
1797.2
1752.5*
Domestic Ore
1527.6
1543.9
1291.7
1169.3
1293.4
1282.7
1280.8
1411.5
1121.9
1430.2
1064.8
1003.7
Foreign Ore
175.3
154.7
212.5
142.9
106.0
77.5
112.9
103.9
89.0
113.8
162.2
178.8
Scrap
350.0
403.6
438.2
300.0
320.9
330.9
411 .8
575.6
573.0
631 .9
570.2
NA
Smoothed Annual
Shift -8.1(r= -.16)
Mean rate of
Shift -.11,
* Scrap estimated to be 570
-31.4(r= -.65) -2.9(r= -.25) 27.8(r=.77)
-2.77. 4.0% 6.7%
decline in domestic copper
physical capital. The Bureau
of thirty-five principal mines
fifteen primary smelters,
secondary smelters or
It is difficult to associate the general
production with specific configurations of
of Mines reports that the industry consists
that account for over 987. of production,
thirty-three refiners, and forty-three
smelter-refineries. But the metals industries are notoriously sensitive
to price fluctuation, and price-induced intermittance is a prime
characteristic of copper production schedules. At any given time a
substantial portion of the industry's physical capital may be idle. The
operational status of capital is, then, a matter of intense interest to
competitors, labor, and government. Thus the knowledge that a particular
plant or mine is idle or working at a given moment is an indifferent guide
to its future, and reported sources of idleness are to be received with
reservations.
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It should be recognized, then, that the Bureau of Mines catalog of the
industry is no more than an approximation of potential capacity at
conditions of high prices and maximum output at any time in the last
decade. A portion of currently idle mines, smelters, and refiners will
probably never return to production. Mines, once closed, flood and
collapse. Factories deteriorate, become obsolete. The Bureau of Mines'
appraisal gives us at best the outside limits of capacity rather than
current effective capacity.
What is certain in the case of mines is that inventoried domestic capacity
of 1.8 million tons of copper per year has been substantially unchanged
over the last decade and a half, while the utilization rate has been
declining irregularly but persistently.
Table 2
Mine Production of Copper and Utilization Rate
U.S. Production
Year 100 Metric tons Percent Utilization Indicated Capacity
1970 1560 93 1700
1971 1381 80 1700
1972 1510 88 1700
1973 1559 86 1800
1974 1449 80 1800
1975 1282 71 1800
1976 1457 80 1800
1977 1364 75 1800
1978 1358 75 1800
1979 1444 78 1850
1980 1181 64 1850
1981 1538 89 1700
1982 1140 65 1700
1983 1046 60 1700
Smoothed -26(r= -.66) -1.6(r=-.69)
Annual Shift
Mining capacity is at best a flexible datum, composed from judgments
concerning fixed capital in place, metals concentrations, and metals
price. Capacity can increase rapidly in response to price change or
exploration, but the degree to which it contracts as a consequence of
adverse price experience or depletion is uncertain. The experience of the
last decade has been such that one must approach the Bureau of Mines
estimate of domestic copper mining capacity with caution. What is
interpreted as a decline in rate of utilization may in some degree
represent a permanent—or at least long range—reduction in U.S. copper
mining capacity.
That is unquestionably true of the Bureau's tally of fifteen U.S. copper
smelters. Last year (1983) only six of the fifteen operated without some
extended period of shutdown and none operated at rates approaching
capacity. The experience of the 1980's, to date, has been that little
more than half of domestic copper smelting capacity has been required to
fully satisfy U.S. demand for copper. Indeed, even at curtailed
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production rates, inventories appear to have expanded. Though the U.S.
Department of Commerce no longer routinely reports inventory levels,
stocks of refined copper, making use of the last information available,
climbed from 243,000 metric tons in November 1979 to 688,000 tons in
November 1982 in the face of declining output.
A review of the
January 1, 1983,
those smelters.
production status of the fifteen domestic smelters at
reveals distinctly the current excess of capacity among
Table 3
Production Status of U.S. Smelters at 1-1-1983
Firm
ASARCO
Anaconda
Cities Service
Inspiration
Magma
Kennecott
Phelps Dodge
White Pine
Total
Location
El Paso
Hayden
Tacoma
Anaconda
Copperhi11
Miami
San Manuel
McGill
Hurley
Hayden
Garfield
Douglas
Morenci
Ajo
White Pine
TX
AZ
WA
MT
TN
AZ
AZ
NV
NM
AZ
UT
AZ
AZ
AZ
MI
Annual Capacity Metric Tons
Active
100,000
100,000
100,000
200,000
78,000
80,000
300,000
85,000
1,043,000
Idle
130,000 (includes expansion
in progress)
200,000 (partially dismantled)
16,000
150,000
80,000
90,000
196,000
77,000
939,000
Trade and Price Considerations
It would be a mistake to review the circumstances of any element of the
domestic copper industry in isolation. Copper is actively traded in
international markets, and the conditions that have created contemporary
excess domestic capacity trace in large measure to the evolution of the
world copper industry.
The formation of that industry was well under way by the turn of the
century. European firms aggressively developed overseas mining
concessions, primarily in Africa but also in Latin America and the
Orient. Similarly, U.S. firms, spearheaded by the Guggenheim interests,
moved massively into Latin America mining and more modestly into the
Philippines. The ventures.were classically colonial. A substantial share
of mines and concentrators were located in what we have come to call the
Third World. Smelters, refineries, and fabricating plants were restricted
to the mother countries. Thus the U.S. and western European nations
developed metallurgical and metal working capacities far in excess of
local mining's feedstock potential. Metallurgical factories
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were typically on tidewater, emplaced to receive concentrate shipments
from abroad.
The system survived World War I, which scarcely affected the integrity of
European and North American physical capital, but began to come apart
after World War II, when a great part of Europe's industrial base had to
be restored or replaced. Raw materials, skilled labor, and energy were
all in short supply. As a consequence, European metals firms—notably The
Rhodesian Selection Trust, Roan Antelope, and Union Miniere du Haute
Katanga—abandoned traditional patterns of distributed production and
began to integrate in expanding African copper production. Several
smelters, more efficient and larger than any in Europe, were constructed
in the early 1950's. Smelter expansion continued after the collapse of
colonial regimes, and in the sixties broad investments in refineries
followed.
U.S. mining firms adopted a similar pattern in Latin America. The host
nation supplied resources and a share of capital, the U.S. firms provided
additional capital, management, and technical skills. Latin American
smelting capacity swelled through the 1950's and 1960's, as di-d refining
capacity after about a ten year lag.
Though the largest share of worldwide expansion in copper production was
based on established African and Latin American mining areas, it was by no
means restricted to them. In Eastern Europe both the Soviet Union and its
satellites added significantly to all phases of the copper production
cycle. And in Asia, Japan, an insignificant factor in world copper
production before World War II, built a group of smelters and
refineries—based primarily on Australian and Philipine concentrate
shipments—that not only gave her production parity with the U.S.,
U.S.S.R., and Chile, but also established the current state of the art in
copper metallurgy.
The U.S. was largely isolated from postwar growth of copper output and
consumption. Output has been virtually static for three decades,
demonstrating no growth and shifting only with business cycle vagaries.
Aluminum, plastics, ceramics provided substitutes for copper in its major
markets—construction, transportation, and electrical and electronic
applications. Miniaturization and metallurgical improvements also
constrained growth by reducing the amount of copper required in many of
its applications.
The industry evolved in the direction of integration, smelters and
refiners expanding in southwestern states where the dominant mines are
located; while the tidewater toll and custom smelters and refiners were
allowed to become obsolete, their effective capacity dwindling.
Though it did not grow, neither did the U.S. copper industry suffer in
those years between 1946 and 1973. Metallurgical capacity throughout the
period exceeded mine production; and since the smelting and refining
abilities of third world nations consistently lagged mining expansion, a
steady supply of imported concentrates could be counted on to keep
American smelters in operation. Further, a two tier price system was
developed to sustain U.S. copper consumption. Where most of the
world—planned as well as market economies—planned and operated copper
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Table 4
Comparative Growth of Copper Output
Mine
Mean,
U.S.
Canada
Chile
Peru
Phil ipines
Zaire
Zambia
Other Market
States
Pciland
USSR
Other Planned
States
Production 1000 Metric Tons
1955-59
909
324
485
50
36
250
429
468
8
400
86
1964
1133
450
632
175
61
278
674
596
15
700
213
1983
1050
600
1250
330
320
490
580
1280
350
1000
460
World Total
3445
4927
7960
Smelter Output 1000 Metric Tons
U.S.
Oth. N.
Chile
Oth. S.
U.K./W.
America
Ameri ca
Europe
Australia
Japan
Oth. Asia/Oceani
USSR
Oth. E. Europe
Zaire
Zambia
Other Africa
987
375
456
37
363
55
112
ca 67
400
66
250
418
55
1217
422
587
155
451
81
283
150
700
140
278
644
117
1021
482
1047
338
612
180
1045
449
1095
577
466
585
258
Percent of World Total
1955-59
26.4
9.4
14.1
1.5
1.0
7.3
12.5
13.6
0.2
11.6
2.5
1964
23.0
9.1
12.8
3.6
1.2
5.6
13.7
12.1
0.3
14.2
4.3
1983
13.2
7.5
15.7
4.2
4.0
6.2
7.3
16.1
4.4
12.6
5.8
Percent of World Total
27.3
10.4
12.6
1.0
10.0
1.5
3.1
1.9
11.1
1.8
6.9
11 .6
1 .5
23.3
8.1
11.2
3.0
8.6
1.6
5.4
2.9
13.4
2.7
5.3
12.3
2.2
12.5
5.9
12.8
4.2
7.5
2.2
12.8
5.5
13.4
7.1
5.7
7.2
3.2
World Total
3618
5227
8153
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industries on the highly variable basis of auction transactions conducted
on the London Metal Exchange, administered pricingC'the domestic
producers' price") was employed by U.S. copper firms to provide a
relatively stable basis for decisions of copper producers and consumers
alike.
The domestic producers' price was for more than twenty years the
cornerstone of American copper policy, and the measure of U.S. dominance
in world copper production. The largest consumer of copper, the U.S. was
also—and by a substantial margin—the largest producer at the end of
World War II. Its mines were entirely capable of supplying internal
demand for copper: its metallurgical plants could process all of that
domestic consumption requirement and a substantial fraction of the rest of
the world's need. As world production soared, prices shifted erratically
to reflect stages of the business cycle and the series of sequential
supply plateaus caused by the intermittent appearance of a new smelter
some place in the world. The American industry and its customers operated
in an environment relatively free of price uncertainty. The prevailing
administered price was characteristically lower than the world price,
though in periods of sharp price breaks it floated above the world price.
The effect was to discourage substitutions and to steer capital toward the
higher, if less certain, returns available abroad. Thus the domestic
industry and its customers enjoyed relative stability. Individual metals
firms were able to participate in the demand growth and higher returns
available abroad through direct foreign investments and through the
provision of toll smelting services.
The system collapsed from the price effects of the Arab oil embargo.
When OPEC increased the price of crude petroleum by an order of magnitude
at the same time that cutoff of Arab oil made it possible to enforce the
new price regime, the whole world's price structure rapidly shifted upward.
The reactions occurred in series. When oil's price rose, the price of
alternative fuels moved up immediately. Prices of coal and natural gas
went up even faster than the price of petroleum, as producers and
exporting nations exploited the initial shortage of oil to implement a
policy of BTU-parity.
Increased energy costs drove the prices required to produce and transport
every conceivable manufactured good upward. Incremental costs, and
consequent price movements, were greatest in first stage production of raw
materials, where the relative cost of energy was greatest, as compared to
the cost of labor and/or capital in place. Agricultural products, timber,
and—especially—metals posted almost weekly price increases from the
fourth quarter of 1973 into the third quarter of the next year.
Industrial consumers, seeking to protect themselves from the effects of
rising prices, built inventory without regard to short term demand,
seeking to accumulate raw materials in advance of price increases. The
years 1973 and 1974 produced unparalleled profits for producers of copper
and other industrial commodities, as the artificial demand induced by
inflation kept mines and plants operating at capacity, and prices
escalated in the absence of competitive constraints.
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The bubble burst in the fourth quarter of 1974. Incomes had not inflated
to match prices, so final demand began to fade. Swollen inventories
necessitated production cutbacks and layoffs. The recession was sudden,
steep, and world wide. Copper and other first stage producers were
hardest hit. Inventories were excessive at every stage of the
production/exchange process, and the inventory reduction mechanism took
longest to work its way back to primary producers. Price cutting was
widespread in 1975. U.S. copper producers were, for the first time in the
postwar period, significantly affected by foreign price reductions; and
the domestic producers' price became an effective casualty of inflation.
Foreign sources of refined copper had simply become too abundant not to
affect the metal's American consumer's choice.
Prices moved upward once more in 1976 as western economies began to work
their way out of recession, but it was no longer the runaway raw materials
inflation of 1973-74 that prevailed during the relative prosperity of
1976-79. OPEC posted annual price increases that were relatively modest
until the Iranian revolution induced fear of shortage and a second
petroleum price explosion in 1979. Interest rates rose uninterruptedly,
in part as a consequence of inflationary expectations and demand for
funds, in part as a consequence of deliberate monetary policy. So energy
and capital costs were rising. But the copper price changes engendered by
those rising costs were less than proportionate.
A new factor had been introduced into the inflationary price formation
equation after 1975.
Massive capital infusions during the period of raw materials inflation had
greatly enhanced international capacity to mine and smelt copper. Much of
that capacity had come on stream in economies that produced the metal
entirely for export. Faced with persistent inflation of interest charges
on the international loans they had to float to secure the foreign
exchange they required to purchase—at rising prices—the petroleum
necessary to fuel their societies, Peru, Zambia, Zaire, and especially
Chile, failed to pass on increasing costs, or actually cut prices, in
order to hold their copper markets.
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Thus the industry has suffered since 1975 from a condition of persistent
relative price weakness stemming from worldwide excess capacity and
competition affected by exchange imbalance. And the effects on all
elements of the domestic industry have been severe.
Traditionally, the burdens and opportunities of price risk have devolved
principally on mining. As prices fell, the less efficient mines, or the
ones with lower metals concentrations, stopped operating when the price
they received for copper became less than the variable costs of
production. When curtailed output caused consumers to once more bid up
prices, production could resume. Smelting and refining operated as
service industries with prices fixed by production costs, and those prices
were largely unaffected by metals prices. Operating profits in
metallurgical processing varied according to the volume of metal presented
for processing, not according to its price. As a consequence, revenues
were far more stable than for mining, closures less frequent and of
shorter duration.
Two characteristics of the international copper market since 1975 have
acted to dissolve the relatively protected status of U.S. metallurgical
processing.
Mines in third world nations have continued to produce at near capacity
levels—and Chile had increased its output—through the period of. fall ing
prices. The abundant supply on world markets has protracted the closure
of American mines, and has forced additional mines to close, since
production has never dropped sufficiently to allow prices to recover.
The adverse effect on smelters of this sustained reduction of domestic
feedstocks had been amplified by the second novel feature of the
contemporary condition of excess supply and falling prices. For the first
time in history copper mining nations have more than sufficient indigenous
smelting capacity. As a consequence, concentrate imports have not been
available to offset the loss of domestic feedstocks. To the contrary,
there is competition among smelting firms and nations for the available
concentrate supply. And U.S. smelters are at a distinct disadvantage in
head to head competition with newer, more efficient, foreign smelters. So
concentrate imports have fallen, and for the first time, some American
mines are shipping their concentrates abroad.
And so there had been a fundamental change in the U.S. posture toward
copper. Historically, the U.S. imported ore and concentrates, exported
refined copper. By the late 1960's the growth of foreign metallurgical
processing industries had brought about an approximate balance in trade of
refined copper, but we remained a net importer of concentrates. Within
the last decade the historical relationship had been reversed. Today the
U.S. is on balance an exporter of concentrates, and importer of refined
copper.
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As table 5 demonstrates, the effect on copper prices of the fierce
international competition after 1979 has been extreme.
Table 5
Mean Annual U.S. Copper Price, 1972 - 1983 vs. Index of Prices of
Industrial Commodities.
Year Copper, cents per pound Industrial Commodities, 1967=100
1972 51.2 117.9
1973 59.5 125.9
1974 77.3 153.8
1975 64.2 171.5
1976 69.6 182.4
1977 66.8 195.1
1978 66.5 209.4
1979 93.3 236.5
1980 102.4 274.8
1981 85.1 304.1
1982 74.3 312.3
1983 79.3 315.8
For the full twelve year period the two price series are positively
correlated (r = .68), their relationship such that a one point rise in
commodity prices was associated with 0.14?! per pound rise in the price of
copper. If both series are reduced to index numbers with a common base
year of 1972 for the sake of comparability, the correlation is such that
each one dollar increase in the overall price of industrial commodities
includes only a thirty-two cent copper price increase.
But, as the discussion above argues, the period under observation includes
three distinct sub-periods with very different copper price increase
characteristics.
Over the years 1972-1974, with commodity prices generally escalating, the
correlation between movements in the price of copper and industrial
commodities generally was positive and compelling (r = .99), such that
each one point move on the index of industrial commodity prices was
matched by a 0.7 per pound shift in copper prices. On an equivalency
basis, the price of copper rose $1.62 for each one dollar rise in
commodity prices.
In the years between 1974 and 1979 that positive correlation weakened
(r = .51), and the accommodation of copper prices to other price movements
was softer. A point shift in the index was associated with a less than
0.20 per pound corresponding shift in the price of copper, the equivalent
of 44?! per dollar of general price movement.
Since 1979 the correlation has been negative (r = -.72). Copper's price
has tended to fall almost a quarter of a cent a pound with each point rise
in the commodity price index. Expressed as equivalents, the relationship
has been such'that each one dollar rise in average price of commodities
has included a 56£ drop in the price of copper.
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Table 6
U.S. Trade Balance
Year
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
Smoothed Annual Shift
in Commodity Copper
1000 Metric Tons Contained Copper
Refined Copper
Imports
189.8
199.9
313.6
146.8
384.1
394.0
463.4
217.9
431.8
359.3
259.8
486.4
Exports
182.7
189.4
126.5
172.4
113.1
52.7
109.3
80.5
17.4
28.1
35.0
87.5
Net Exports
-7.1
-10.5
-187.1
25.6
-271 .0
-341.3
-354.1
-137.4
-414.4
-331.2
-224.8
-398.9
Concentrate & Scrap
Imports
233.8
225.7
294.1
183.2
163.3
134.1
154.1
123.4
88.5
143.2
258.9
228.3
Exports
85.0
152.6
183.4
158.7
136.9
167.6
212.3
228.3
312.7
312.5
346.1
189.7
Net Imports
148.8
73.1
110.7
24.5
26.4
-33.5
-58.2
-104.9
-224.2
-169.3
-87.2
38.6
-31.7 (r- -.72)
-21.9
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The Firm
ASARCO, originally the American Smelting and Refining Co., was formed in
1899 by the consolidation of several U.S. metallurgical firms. It was the
heyday of the giant trusts; and ASARCO, under Guggenheim sponsorship was
apparently an effort to create the same sort of industry dominance in
non-ferrous metals that Andrew Carnegie's U.S. Steel Co. had achieved in
steel.
The world's largest non-ferrous metals firm at its birth, ASARCO used joint
ventures and portfolio investment to extend its influence into metal
fabricating and mining. In the process it established effective price
leadership in U.S. markets for lead, zinc, and copper.
ASARCO's preeminence began to fade after the second World War, as changes in
the economics of metals made toll and custom smelting a less commanding
base. Integrated production—of copper in the American southwest, in
Africa, in Latin America, and of lead in the Missouri lead belt—made the
role of custom smelting increasingly marginal. Availability of feedstocks
became relatively uncertain, and ability to dictate price was curtailed.
As a consequence, ASARCO has guided its investments over the last three
decades in a manner designed to reposition its capital in conformity with
the realities of contemporary metals markets. Participation in
mining—initially abroad, and more currently in the U.S.—has gradually
reduced dependance on custom smelting. The firm has withdrawn from its
place in domestic metal fabricating. New smelter capacity has been brought
on stream in mining areas and, one by one, the old tidewater smelters and
refineries have been closed.
At this time ASARCO remains the world's largest custom smelting firm; but it
is also a major presence in mining. In 1983 ASARCO—directly, and through
its share of associates' production—accounted for 147. of free world mine
output of silver, 8% of copper, 11%. of lead, and 97. of zinc. The firm's
assets include a lead smelter at East Helena, Montana, a lead refinery at
Omaha, Nebraska, a lead smelter-refiner at Glover, Missouri, a zinc refinery
at Corpus Christi, Texas, a Denver, Colorado, refiner of cadmium and high
purity metals, copper smelters at Hayden, Arizona and El Paso, Texas, and a
copper refinery at Amarillo, Texas. Its U.S. mining properties produce
silver, copper, lead, zinc, gold, asbestos, coal, limestone, and
aggregates. Through subsidiaries Federated Metals Corp., Lone Star Lead
Construction Corp., and Federated Genco Ltd., ASARCO is active in scrap
metals and recyling in both the U.S. and Canada.
ASARCO is engaged in foreign metals enterprises on three continents through
affiliates. Mexico Desarrollo Industrial Minero SA, 34% owned, operates
five Mexican metallurgical plants and eleven mines that produce copper,
lead, zinc, silver, gold, coal, and fluorspar. Southern Peru Copper Corp,
52.3% owned, mines copper, silver, and molybdenum and operates a copper
smelter. And ASARCO's 44% participation in MIM Holdings LTD. gives it an
entree into Australian coal, copper, lead, zinc, silver, iron and nickel
mining and a copper refinery, as well as English lead and silver refining
and secondary lead production, a West German zinc refinery and zinc products
plant.
11 <
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The firm's financial record over the past decade is mediocre, mirroring all of
the difficulties that other metals producers have encountered. Though
operations, like those of all metals firms, were highly profitable in 1973 and
1974, dependance on toll business dampened ASARCO's participation in the
profits of raw materials inflation. Metals firms generally were posting cash
returns on investment in the area of 25%, and net cash returns on equity above
30% were not uncommon; but ASARCO's earning power was roughly ten percentage
points lower.
In theory ASARCO's situation as a primarily custom smelting firm should have
partially insulated it against the price level risk that depressed its
competitors' earnings after 1974. In fact, ASARCO's reliance on custom
smelting for a large portion of its revenues did not protect it from the ill
fortunes of the industry. ASARCO mines did no better than others, while
declining output of lead and copper cut into custom smelting revenues.
Combined net incomes of the four years 1975 through 1978 was distinctly below
that of the single year 1974. In 1977, largely as a consequence of writeoffs
from abandonment of the Granduc Mine, ASARCO experienced its first deficit
since the Great Depression. And while earning power recovered brilliantly in
1979 and 1980, the next three years brought a return to sub-standard profits,
including a second deficit in six years in 1982.
ASARCO's poor operating experience in the last decade can not be ascribed
entirely to the general, ills that have plagued the non-ferrous metals
industries. In part at least, it was the consequence of the implementation of
definite management decisions involving major capital alterations that were
intended to bolster long term profitability. Several low profit mines were
abandoned, and a long range investment program that involved a substantial
increase in indebtedness—from $134 million in 1974 to $490 million in
1983—was undertaken.
The principal element of the investment program was major alteration of copper
production. In 1976 ASARCO entered into a joint venture with Anamax—held in
equal shares by Anaconda and AMAX—to expand Arizona mining operations.
Construction of a grass roots copper refinery at Amarillo, Texas allowed the
consolidation of refinery operations previously divided among three tidewater
sites (Perth Amboy, Baltimore, Tacoma), and the closure of the old plants.
With the completion of the Amarillo plant, ASARCO embarked on a major
alteration of its Hayden, Arizona, smelter. That project—including
installation of an oxygen flash smelting furnace, augmentation of production
capacity by 35,000 tons per year, and installation of state of the art air
pollution controls—was completed in October 1983 and brought on stream the
next month.
In sum, what has been done to the firm in the last ten years has changed it
radically. Domestic mining has been strengthened, Copper smelting and
refining capacity has been reduced and modernized. ASARCO has become smaller,
more efficient, more fully integrated, less involved in foreign mining and
international markets.
12
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Table 7
ASARCO Simplified Financial Situation, 1974 - 1983
Minions of Dollars
1974 1975 1976 1977 1978 1979 1980 1981 1982 1983
Total Assets 1329.7 1474.5 1543.7 1529.6 1622.6 1969.7 2044.8 2092.8 2153.1 2227.1
Current
Liabilities (244.2) (173.8) (163.5) (197.8) (215.5) (403.81 (278.4) (383.0) (432.5) (403.2)
Total
Investment 1085.5 1300.7 1390.2 1331.8 1407.1 1565.9 1766.4 1709.8 1720.6 1823.9
Long Term
Debt (133.6) (358.01 (414.31 (406.71 (352.7) (306.01 (277.61 (388.1) (481.6) (400.1)
Net Worth 951.9 942.7 975.9 925.1 1054.4 1259.9 1488.8 1321.7 1239.0 13333.8
Net Income 130.4 25.4 42.3 (29.5) 49.5 259.1 237.3 50.0 (74.1) 58.3
Interest
Expense 11.4 22.7 33.9 37.0 38.4 29.9 19.99 31.7 46.9 38.4
Non-Cash Expenses
Depreciation 34.9 36.5 50.7 52.6 54.5 56.1 49.4 58.4 60.9 55.0
Write-offs - 20.5 - 39.0 10.0 - 35.4
Deferred Taxes NA 14.9 NA 5.4 22.3 57.7 NA NA (15.1) 16.1
Cash Return 176.7 120.0 126.9 74.5 174.7 402.8 306.6 140.1 54.0 147,8
Rates of Return
Net Income/
Net Worth .137 .027 .043 (.032) .047 .206 .159 .038 (.060) .044
Cash Income/
Investment .163 .092 .091 .056 .124 .257 .174 .082 .031 .081
Net Cash/
Net Worth .174 .103 .095 .041 .129 .296 .193 .082 .006 .082
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The Plant
Built just after the turn of the century as a lead smelter and converted
to copper smelting in 1912, ASARCO's Tacoma facility is the last of the
nation's tidewater smelters.
With a charge capacity of about 400,000 tons a year and a production
capacity of 100,000 tons of blister copper, the Tacoma smelter is
adequately sized to function in contemporary metal markets. But its
distance from raw materials sources put it at a distinct competitive
disadvantage.
The smelter survived by finding a specialized operational niche, one that
gave it for years a certain distance from, and advantage over, other
plants.
From its first days as a copper smelter the Tacoma plant has had an
association with Philippine copper mining. Between the two World Wars it
was probably the principal source of smelting for all Philippine copper.
And though ASARCO did not share in the ten-fold expansion of Philippine
copper mining after World War II—growth was taken up by Japanese
smelters—the Tacoma establishment continued to serve as the only outlet
for the production of the great Lepanto Mine. Lepanto's annual output is
substantial, but its ores contain such high concentrations of sulfur and
arsenic that smelters other than the one at Tacoma have been unwilling to
process them.
To supplement the concentrate supply from the Lepanto Mine the Tacoma
smelter drew on similarly contaminated concentrates from the Northern Peru
Mine. Together the two foreign sources accounted for a third to a half of
Tacoma1s feedstocks for many years. They were the principal reason that
the obsolete facility remained operative, and they formed a uniquely
profitable base for operations. For, though the cost of smelting their
contaminated concentrates was high, their captive status made it possible
for ASARCO to pass through to the mines the full cost of such processing,
regardless of the general state of competition in custom smelting
markets. Further, by recovering and selling arsenic contained in the
concentrates, ASARCO secured for itself a source of incremental revenues.
Though the Lepanto and Northern Peru mines formed the Tacoma smelter's
base, they did not in themselves constitute an adequate raw materials
supply for a plant of its size. The largest single source of concentrates
for some years has been Pennzoil's Duval Mine in Arizona. But Duval's high
quality concentrates give ASARCO no market advantage—indeed,
transportation costs to Tacoma put the smelters at a disadvantage in
bidding for the Duval concentrates. To supplement charges available from
the three principal suppliers, Tacoma had smelted scrap and ores and
concentrates available from minor regional sources, and has reprocessed
some of the wastes of lead smelters in Idaho and Montana and copper
smelters in Montana and Nevada.
14
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Its specialized role did not shield the Tacoma smelter from the recent
vicissitudes of the world copper market. Smelter throughput has not
approached the preferred operation rate since 1974, and has probably been
in the area of 50% of capacity over the last five years. (Plant production
records since 1980 have not been made available.) The consequence has been
steady erosion of earning power of the facility, long term withdrawal of
capital, and the realization of the long deferred decision to close the
plant.
The definition of those conditions as they became evident in financial
statements is attempted in Table 8. The table must be used with caution.
No publically available data are available for years after 1980. ASARCO
(like many firms) is intensely secretive about individual plant data. Thus
the material supplied for public purposes has invariably been selected and
aggregated for the particular purpose, lacks detail, and is undocumented.
These data assembled from ASARCO public submissions may, then, be presumed
to be accurate, but not necessarily correct; in that we have no knowledge
of how the basic material was assembled, or what was left out. Still, they
serve our purpose.
Table 8
Generalized Financial Statement For Tacoma Smelter
1974
Inventories 81,715
Other Current
Assets 4,309
Current Assets 86,024
Net Plant
Other Assets
32,855
181
1975
58,656
7,718
66,374
32,679
24
1976
59,785
7.703
67,488
30,659
126
1977
1978
70,610 32,816
31,783
58
7,127
39,943
32,572
1979
51,031
7.917
32,132
741
Current
Liabilities 33,343
Total
1980
35,541
10
58,948 35,551
25,285
89
Total Assets 119,060 99,077 98,273 107,192 72,515 91,821 60,925
31,588 26,220 28,962 23,116 73,674 30,833
Investment 85,717
L. T. Debt* 20,037
Net Worth 65,680
Net Income 1 ,732
Noncash Charges 2.000E
Interest 3,056
Deferred Taxes 1,457
Cash Return 8,245
Cash/Investment .096
67
12
54
1
2
1
6
,489
,913
,576
,833
,059
617
,782
,291
.093
72
15
56
2
2
1
7
,053
,524
,529
,842
,516
885
,230
,473
.104
78
16
61
1
2
5
,230
,307
,923
,607
,501
912
150
,170
.066
49
6
42
2
2
,399
,961
,438
103
,444
-
55
,602
.053
18
8
9
2
3
,147
,152
,995
432
,424
-
922
,778
.208
30,092
11 ,583
18,509
(5,324)
8,959
22
1,732
5,389
.179
Net Cash 5,189 5,674 6,588 4,258 2,602 3,778 5,389
Net/Net Worth .079 .104 .117 .069 .061 .378 .291
* includes tax deferrals & other long term liabilities
15
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What they reveal is a progressive reduction in cash return from operations
in the late 1970's. (Though tax effects of write-offs and the transfer of
metal inventories with closure of the refinery produced non-recurring cash
benefits 1n 1979 and 1980). Return on invested capital was clearly
substandard through most of the period. Perhaps more meaningful, since the
bulk of the capital was tied up in inventory, cash rate of return on fixed
capital dropped irregularly but persistently. Management, clearly
convinced of the marginal status of the plant even in the period of raw
materials inflation, made no meaningful additions to fixed capital over the
period, total additions to net plant failing to cover cumulative
depreciation, even before the write-off of the refinery.
The circumstances that made the failing profitability of the Tacoma plant
terminate in closure go beyond the general weakness of copper markets.
Fundamental changes in the smelter's operating environment and the
management philosophy of the firm were involved in the decision.
First of the series of assaults on the viability of the Tacoma smelter was
the closure of the Northern Peru Mine in 1975. With the mine played out,
the plant lost about an eighth of its normal supply of feedstock. More
important, that supply was a portion of its captive base, and could only be
replaced by actively bidding against lower cost and more modern smelters
closer to any potential source of supply. In effect, Tacoma had lost
irretrievably access to a significant portion of its raw material needs.
The next year a consortium of Philippine mining firms, the Philippine
Government, and several Japanese trading firms announced plans to construct
a Philippine copper smelter. Delayed by financial considerations and a
weak copper market, the plant was slow to come on line; but it was
completed and began producing in the spring of 1983. The complex includes
an arsenic roaster, so is capable of processing the output of the Lepanto
Mine.
The Philippine smelter unquestionably sealed the doom of the Tacoma Plant.
The importance of the .Lepanto Mine to Tacoma may be gathered from the
distribution of the smelter's feedstocks in production depressed 1979 (c.f.
Table 9), when 267. of its smelter charge originated in the Philippines, 527«
in Arizona. With a quarter of its raw materials eliminated—the quarter,
moreover, for which it had a production cost advantage—and with other
smelters holding a transportation cost advantage in the case of at least
half of its raw materials, the Tacoma smelter had no reason to exist.
ASARCO corporate policy, certainly influenced in part by knowledge of the
prospective loss of Northern Peru and Lepanto concentrates, adopted a basic
shift in the firm's copper activities during the 1970's, one that dictated
abandonment of the Tacoma operation. The changes .are revealed, in stages,
in the series of Chairman's letters to stockholders in the annual reports
of the late 1970's and early 1980's.
16
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Table 9
Origin of Raw Material for the Tacoma
Origin
United States
Material Type
Smelter, 1979
Short Tons
Transportation Method
Alaska
Arizona
Cal ifornia
Colorado
Idaho
Michigan
Nevada
Oregon
Foreign
Chile
Canada
Peru
Phi 1 ippine
Islands ,
Other Smelter
Anaconda
ASARCO Plants
East Helena
Amari 1 lo
Secondary
Concentrates, Ore
Concentrates, Ore
Concentrates, Ore
Concentrates, Ore
Concentrates, Ore,
Pyrites
Concentrates, Ore
Concentrates,
Precipitates
Concentrates, Ore
Concentrates, Ore
Concentrates, Ore
Precipitates
Concentrates, Ore
Blister
Concentrates, Ore
Flue Dust Sludge
Matte, Speiss
Cathodes, Sludge
Scrap
43
120,324
3,981
10,241
9,361
302
995
1,674
146,921
2,908
3,321
5,197
60,802
72,228
1 ,972
3,792
343
7,667
Ship
Rail
Rail
Rail
Rail
Rail
Rail or
Rail or
Ship
Barge,
Truck
Truck
Rail,
or Truck
Ship
Ship
Rail
Rail
Rail
Rail or
Truck
Total All Sources
232,923
Data from: Labbe 1980 reported in variance application to PSAPCA
17
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Investment in domestic mining and domestic exploration activities was
stepped up, foreign mining ventures were deemphasized.
Construction began in the mid 1970's of a huge, state of the art copper
refinery at Amarillo, Texas, one that afforded equal access to smelters in
the Southwestern states and, through Gulf Coast ports, to potential
foreign customers. At its completion, ASARCO closed refineries at
Baltimore and Perth Amboy immediately. Within a year, the Tacoma refinery
was closed, consolidating the firm's copper refining in a single plant.
Significantly for the future of the Tacoma smelter, the capacity of the
single refinery was roughly 50,000 tons per year less than the aggregate
capacity of the plants it superseded and less than ASARCO's total smelting
capacity.
Upon the completion of the refinery the firm entered the second phase of
modernizing its copper manufacturing plant. Between 1979 and 1983 ASARCO
extensively modified its Hayden smelter, installing oxygen flash smelting
and adding 50,000 tons per year to its capacity. The Tacoma smelter was
kept in operation during the reconstruction at Hayden; however after the
Hayden smelter came on-line, the limited availability of Lepanto ore was
the only conceivable reason for continuing operation of the smelter at
Tacoma.
In the spring of 1984 the Hayden improvements were completed. Within six
months the intention to close the Tacoma smelter was announced. ASARCO
has made it clear that its future copper production activities would be
based on tight control of variable costs through reduction of employment
and energy inputs, would be more concentrated geographically and represent
a closer approach to integration, and would stress tighter control of raw
material supplies and market outlets by deemphasis of foreign operations.
18
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Envi ronmental Re.gul ation
The influence of environmental regulation on the resolution of the fate of
the Tacoma smelter has been insignificant. That conclusion may be
difficult to credit in view of the substantial sums that regulatory
agencies—OSHA, EPA, PSAPCA—have demanded that ASARCO invest in its
Tacoma plant in order to comply with their laws. It certainly does not
seem to conform to the fact of ten years of intense, often acrimonious,
negotiation and litigation between ASARCO and those agencies. But in the
light of hindsight, it is plain that ASARCO was never effectively
inconvenienced by the regulations, and that regulatory requirements played
no meaningful part in the closure decision.
EPA has estimated that it would require an investment of about $65 million
of 1980 purchasing power to bring the Tacoma smelter into conformance with
State standards for SOX and EPA and OSHA standards for arsenic
emissions. ASARCO management put the sum $100 million higher. The
estimates may not be in disagreement. EPA's number refers to the cost of
specific engineering constructs required to achieve a limited purpose.
ASARCO advanced its number in the impeccable financial logic that if it
were to make the capital commitment required by the regulators, it would
be necessary to rework, the total smelter production system to produce a
factory efficient enough to justify the investment. (ASARCO's estimate,
in fact, was the amount actually devoted to modernizing the Hayden
smelter—including installation of state of the art pollution controls.)
It was probably clear to ASARCO1 s managers no later than 1976 that there
were considerable uncertainties associated with investments of the
indicated magnitude at Tacoma. ASARCO's long range plan called for
transferring production from Baltimore, Perth Amboy and Tacoma to Amarillo
and Hayden— that is, from the places where raw materials had been
available in the past to the places where they would become available. It
needed Tacoma to sustain production until that capital deployment had been
completed. But after the loss of Lepanto feedstocks, the Tacoma plant was
redundant.
And so the firm played out a decade long process of procedural delay,
raising the real prospect of plant closure repeatedly, but effectively
postponing the necessity to install capital that would have to be written
off at a loss. ASARCO eventually achieved compliance with the
environmental laws—but it did so in Arizona, not in Tacoma.
19
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A Note on Sources
With the exception of limited financial statements (summarized in Table 8)
provided directly by ASARCO, the paper was prepared from secondary sources.
Moody's Industrial Manual for years 1974 through 1983 was the source of
most material about the firm.
U.S. Bureau of Mines Minerals Yearbook for years 1964, 1968 and 1974
through 1983 provided the bulk of background information about the
industry. Various issues of the Survey of Current Business for all years
since 1974 were the source of information on price, production and raw
materials sources.
Dames & Moore, September 1981 "Environmental Impact Statement" on the
question of a waiver from PSAPCA S02 controls; A. D. Little "Economic
Impact of Incremental Pollution Control at ASARCO's Tacoma Smelter", July,
1977, with various unpublished working papers; and the docket for New
Source Performance Standards for Arsenic Producers provided specific
information on the Tacoma plant.
Useful background was provided by A. D. Little, "Economic Impact of
Environmental Regulations on the U.S. Copper Industry", January, 1978;
J.M. Heineke "Demand for Refined Lead", in the Review of Economics and
Statistics (1976?); and Oanson, Maclean and Wright Financial Reporting and
Tax Practices in Non-Ferrous Mining.
The analyst has actively monitored the status of the Tacoma Smelter over
the last twelve years as the Seattle Regional Economist for EPA. He
served on the Administrator's Smelter Task Force to devise the measures to
implement specific economic hardship legislation to assist the non-ferrous
smelting industry. With D. Hale and F. Pisano he developed and
interpreted a set of computerized price, quantity, raw material source
scenarios to test the capacity of the Tacoma smelter to accommodate to
OSHA and EPA regulations.
20
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