A year ago last month, Phelps Dodge, one of the nation's two largest copper producers, had shut down all its copper mines, concentrators and smelters except one.
In Morenci, a company town whose existence depends on the Phelps Dodge copper mine here, virtually the whole town was laid off. "PD," as the company is called here, owns the housing in Morenci and rents to the workers. During the shutdown, it deferred half the rental payments and extended credit at the company store.
John Calonge, an engineer who operates trains that carry ore from the pit to the smelter, went as far as California in a fruitless search for another job before returning to Morenci.
Today the situation is dramatically reversed. With the scheduled reopening of the company's mine and smelter in Tyrone, N.M., May 2, all of the company's copper mines and concentrators and all but one smelter will again be in production.
For Phelps Dodge, as for most copper producers and much of the metals mining industry, a slow recovery has begun. Metals prices are rising, miners are returning to work.
But as it climbs out of the worst slump since the Depression of the 1930s, the metals mining industry is facing a series of problems that threaten to prevent a full recovery.
The greatest worry is that the overall recovery in this country will move too slowly to pull the mining industry all the way back.
"We are experiencing a turnaround of significant proportions," Dean Witter Reynolds's first vice president, J. Clarence Morrison, said recently during a discussion of the industry.
But he added, "All of these gains are being recorded on a recession-reduced base. While these shipments and subsequent sharp earnings growth projections are significant, we deem the full recovery ahead to be insufficient to offset the structural problems of the metals industries."
The copper industry is expected to regain most of the business it lost during the recession, while benefiting from significant gains in efficiency, according to many industry officials and observers.
But two major challenges may doom the highest cost operations in this country.
One is growing competition from developing countries. Subsidized production from those countries during the recession increased the recession's toll on U.S. copper producers, according to industry officials and observers.
The other is growing substitution of new super plastics and other metals and materials for copper: Aluminum and polyvinyl chloride pipes have already made a substantial dent in copper's domain and now, communications companies are beginning to use fiber optic technology to supplant copper wiring.
The recession was devastating to the industry, and some of that devastation may take a long time to repair.
"Maybe some copper mines--low-grade ones--are not going to open in the near future, but I think they will maybe in two years," said Robert Horton, chief of the U.S. Bureau of Mines. "In the mining business, when it is at the bottom there is a tendency to think it will get worse. At the top, the tendency is to think it will keep getting better."
In the case of copper, 1982 was the bottom.
Copper prices dropped from $1.43 a pound in early 1980 to an average of 65 cents a pound during 1982, the lowest price since the Depression, and consumption of refined copper in the United States dropped from 2.3 million tons in 1979 to 1.7 million tons in 1982, the lowest level in seven years.
Phelps Dodge reported a loss of $74.3 million, while Kennecott Minerals Company suffered a loss of $189 million. Anaconda Minerals Co., a division of Atlantic Richfield Co., lost $214 million in 1981 and $332 million in 1982.
On June 30, Anaconda--once the world's largest copper company--will shut down its last remaining copper operation, a gigantic mining pit carved into the side of "the richest hill on earth" in Butte, Mont. The Anaconda mine is one of the high-cost operations that are not expected to reopen until much further into the recovery, if at all.
The absence--even if temporary--of Anaconda from the industry it dominated worldwide until the early 1970s provides a dramatic example of the depression that has racked the metals industry in the last year. Still another measure of its severity: Last year, Chile ousted the United States from its traditional position as the world's largest copper producer.
By the first quarter of this year, however, the losses had begun to abate. Phelps Dodge, for instance, reported a first quarter loss of $3.9 million, dramatically less than the company's first quarter loss of $19.1 million a year before.
Although copper prices are still depressed--approximately 82 cents a pound last week--the company has been able to make a little money in Morenci, "although not much," according to John Bolles, the manager here.
"The copper industry is a very cyclical industry. It always has been and always will be," said Simon Strauss. Strauss, formerly with Asarco, is now an adviser to a mining consultant firm, Behre Dolbear & Co. Inc.
"The demand for copper rises more than the Gross National Product in up years and falls by more than the GNP in bad years," said Strauss. "So if we are in a recovery, copper demand ought to be up later this year," he said. One important sign is the rise in residential construction, he said, since 30 percent of all copper consumption is in construction.
During the bad years, U.S. copper producers complained that what they consider to be unfair competition from developing countries forced them to absorb a disproportionate share of the losses. While U.S. mines were shut down, countries such as Chile, Zaire and Zambia, desperate for the hard currency that minerals sales bring and anxious to keep employment up, continued to produce copper and sell it at subsidized prices, according to U.S. and mining industry officials.
"Part of the problem with the mining industry is it's not Arizona copper competing with Utah copper but Arizona copper competing with the world," said Horton of the U.S. Bureau of Mines. In 1982, with about half of the larger mines closed, at least for several months, and remaining operations curtailed, the U.S. produced 14 percent of world production compared with 18 percent in 1981.
Industry officials have blamed international lending institutions, such as the World Bank and the International Monetary Fund, for some of their woes in terms of competitive relations with developing countries.
"The basic problem is this," asserted Phelps Dodge in a paper prepared earlier this year for circulation among government officials. "The wave of nationalizations of copper production that began in Chile in 1969 has put over 40 percent of free world copper production under the ownership or effective control of less developed countries. The World Bank and other international development banks, funded in major part by the United States, have as their mission fostering the economic development of these countries and accordingly, these banks often lend money to permit them to maintain or expand existing mines or to open new ones."
"These mines compete directly with the private sector mines of the world, including our own domestic industry," the paper said.
Athough industry observers see the subsidized competition from developing countries as a severe short-term problem, the United States is expected to regain its position as the world's number one producer of copper when recovery occurs, industry analysts agree.
"When we have a business recovery and there is an increased demand for copper, the Third World companies--because they have been operating at full capacity--can't meet that increased demand," said Strauss. "The only way it can be met is by increased production in the United States and to a certain extent in Canada." Because of the need for that production, the price of copper will rise sharply when the recovery is clearly under way, Strauss predicts.
Another complaint by industry officials is that the cost of meeting air pollution control standards has added to the competitive disadvantage of metals producers in this country.
Strauss said that the fact that most copper mining is located in remote areas means that sulphuric acid recovered in processing copper must be shipped a long way to market, which means the acid is marketed at a loss.
In Japan and Europe, smelters are located closer to major urban centers, which gives the foreign operations a competitive advantage, he said. For instance, the largest copper smelter in Germany is in Hamburg.
Strauss said that he believes an even more significant competitive disadvanatage for domestic producers, however, is the relative strength of the dollar, which gives foreign producers an additional price advantage against American competitors.
Another major potential long run problem facing the industry, although metals industry officials tend to downplay it, is potential competition metals such as copper and steel face from both lighter-weight metals and new products such as superhard plastics and fiber optics. Communications wire now accounts for about 20 percent of copper consumption in the United States.
"I think the competition among materials for common purposes is going to become far more intense than it has been in the past," said John Morgan, staff director for the U.S. Bureau of Mines. Last year in the United States, according to Morgan, 18 million short tons of plastics were produced, compared with production of about 2 million tons of copper and 5 to 6 million tons of aluminum.
"It's not just the competition of copper and aluminum or aluminum and steel, it's the competition of all metals against plastics," said Morgan.
Even so, Kennecott Minerals Company president G. Frank Joklik told a recent Dean Witter Reynolds Inc. metals and mining forum that Kennecott estimates that by 1985 the loss of domestic copper markets due to substitution, economies of use and technological change will amount to about 3 percent of total consumption. "But the prospects are that much of the loss will be offset by the growth of new applications of copper, such as in solar heating systems and the commercial introduction of electric vehicles," Joklik said.
"Competition among materials has been going on since the second material--whatever it was--was discovered," said Richard Pendleton, senior vice president for Phelps Dodge. "We continue to see long-term growth in copper although smaller growth in percentage terms."
"We think this last recession, as I suppose all recessions do, make it clear that high-cost producers are vulnerable," said Pendleton. He said, though, that Phelps Dodge had come out of the recession "in reasonably good shape."
"We're upbeat, but I think we're realistically upbeat," he said. "Just because we've ended this recession doesn't mean there'll never be another one again. We intend to keep our costs lean."