Over the past two years, U.S. - based oil firms have been picking up copper companies at a dizzying rate. And while these purchases may seem questionable in the short-run-with
copper prices so low-the oil giants can afford to be patient,
waiting for the market turn around which will make their
copper investments golden.
The oil companies face a problem that few of us ever have to
confront: what to do with all their cash on hand. So great are their funds that, according to Senator Edward Kennedy (D-Mass), "Exxon, for example, could tomorrow buy J.C. Penney, DuPont, Goodyear, and Anheuser-Busch using only its accumulated cash artd liquid assets."
For many years now the petroleum companies have defended
their large profits on the basis of their need to pour billions of dollars of risk capital into oil exploration and research. In fact, much of the money is not going into exploration, but into wide-spread diversification ventures.
In the last two years alone, U.S. - based oil companies have purchased, among other things, a British newspaper, the corporation which owns Montgomery Ward department stores, a retail grocery chain and a computer software firm.
THE TURN TOWARD COPPER
In particular, the oil companies have been snapping up mining firms. The oil industry currently owns 40% of minable coal
under private leases and 20.6% of domestic coal production,
44% of the nation's uranium reserves and approximately 40%
of domestic copper holdings. Copper, above all, has received
the full attention of the petro-giants in the last two years. For companies "looking for places to park their money," as one senior executive of a large oil company put it, "copper is one of the best after oil."
The oil-copper merger trend has affected most of the major
U.S. producers. (See chart) In 1977, for example, Atlantic Richfield paid $700 million to acquire Anaconda, the largest U.S. copper producer. Exxon has invested $107 million in the "Disputada" copper mine in Chile and plans to pour more than $1 billion into it over the next few years. (See "Chile: Exxon et. al.," NACLA Report on the Americas, May/June 1978, pgs.
41-42.) Duval Corporation, the fifth largest copper firm, is
owned by Penzoil (which was unsuccessful in its previous
attempts to purchase yet another copper company, ASARCO). (Kennecott Copper, which has not received any offers from oil companies, is currently fighting a takeover bid by Curtis Wright, a nuclear and aerospace company.)
The oil companies' move into copper is based on a number of
factors. Primary is the fact that the copper firms are particularly cheap at the present time. The industry as a whole is mired in one of its worst slumps in years. World stocks of copper currently stand at 2 million metric tons even though, worldwide, mines are only operating at an average 82% of capacity. This excessive supply of copper has pushed prices to around 64-67 cents a pound, down from a high of $1.40 a pound four years ago. As a result, earnings at Kennecott
Copper, for example, were down to $7.3 million in 1977 from a
high of $211 million in 1974. Stock prices for the firms have
also tumbled, making them good targets for the cash-rich oil
companies.
The oil corporations have also turned to copper because they
are familiar with many of the industry's problems. Copper, like oil, requries extensive multinational activities and the experience which can be gained from integrated operations, from mineral extraction to processing to marketing. In most cases, the oil companies already have investments in the countries where the copper firms are located. And finally, the two industries are able to use similar tax dodges, such as depreciation allowances.
PRICES: THE SKY'S THE LIMIT
What is more, the investments seem sound even though copper is in a slump. In fact, many securities analysts have noted a similarity between the current weakness of the copper market
and that of the international oil market before prices shot skyward in 1973. One oil company executive cheerfully remarked, "When you look at some of those [copper] companies and the potential for sound investments, your mouth starts to water." A Wall Street metals analyst added, "in five to eight years you will make a ton of money."
This is one of the principal reasons for Exxon's huge investment in Chilean copper in the midst of a tremendous copper glut. The company's "La Disputada" mine won't come on-stream before 1984, by which time prices should again be on
the rise. Given Exxon's satisfaction with the "politically stable investment climate" provided in Chile by the military dictatorship, the firm fully expects to be around to reap the rewards of its patience.
In the meantime, copper producers are jumping at any opportunity to boost their prices. Those most delighted by the
recent fighting in Zaire's copper-rich Kolwezi province were the copper companies with no investments in Zaire who saw in
the consequent disruption of production a chance to get prices
moving again. Kennecott responded to the crisis imrriediately by raising prices approximately 3 cents a pound. "We're
definitely in an improved situation, and most of the signs are
bullish," beamed an executive vice president of Kennecott after the flooding of Kolwezi's mines.
The copper companies are also putting pressure on copper
producing nations to hold down their output so as to push prices upward. Such a move is much more complex now than in the early 1960's when copper production was dominated by a
handful of private corporations.At the present time over 50% of the world's copper supplies are state owned. And many governments prefer to increase production when copper prices drop rather than cutting output and thereby adding to their
unemployment.
In the U.S. mines, however, producers have opted for unemployment. With production in U.S. copper mines at 72% of
capacity, 20% of miners and refiners (some 12,000 workers) are currently laid off their jobs. Still, copper producers are confident that the U.S.'s closest friends, including Chile and
Zaire, will soon begin to trim their production.
Finally, prices on copper could increase if, as is expected, the General Services Administration (GSA) purchases 225,000 tons of copper for the U.S. strategic stockpile. According to numerous business publications, the Carter Administration agreed to the GSA purchase of copper as one way of getting the
Panama Canal treaty through Congress. The deal was fashioned to win the vote of Senator Dennis DeConcini whose home state of Arizona produces 63% of newly mined copper in the United States and who would like to get copper prices moving up again. DeConcini votes for the teraty; the GSA adds to its already large stock-pile of copper; consumers are treated to higher prices.
In the meantime, for companies such as Exxon, with $5.2 billion in available cash, the new alchemists stand to make more money by turning oil into copper than the old alchemists made by turning lead into gold.
