Vale’s Striking Third Quarter

Vale, the company against which my union has been on strike since July, presented its third-quarter earnings this morning. These figures confirm that Vale does not need the concessions it has been demanding and that the strike is costing it significantly.

The company wants to eliminate defined-benefit pensions for new employees and drastically reduce the bonus plan that pays workers more when nickel prices and/or profits surpass defined thresholds. These concessions were supposedly needed to protect the company against an uncertain economic future.

But the third-quarter report (PDF) is confident and optimistic about the economy in general and metal markets in particular. This dramatically improved outlook seems to remove Vale’s original rationale for concessions.

Global after-tax profits were $1.7 billion in the third quarter (page 2), more than twice as much as in the second quarter. Clearly, the company does not need concessions to avoid red ink.

Vale announced that it will pay dividends of $2.75 billion to shareholders in 2009 (page 1), a sharp contrast to other major corporations that slashed or stopped dividend payments during the economic crisis. Management has discretion over dividends. The choice to continue making generous payments confirms that it is not short on cash.

Notably, dividend payments substantially exceed total personnel costs. Vale’s worldwide workforce gets paid about $0.5 billion per quarter (page 11). So, management is trying to squeeze $2 billion of annual labour costs while continuing nearly $3 billion of annual dividends.

The third-quarter report is also surprisingly candid about the strike’s costs. Vale lost $319 million of revenue from reduced sales of nickel and byproducts “due to the strike in Sudbury and Voisey’s Bay” (page 7). It also notes (on page 10) that “US$209 million of the 3Q09 expenses were due to the idling of Canadian nickel operations.”

This summer – when nickel prices were low and facilities were closed for maintenance anyway – might have struck management as a good time to wring some concessions from its Canadian workers. However, the strategy has not succeeded so far and higher nickel prices have raised the opportunity cost of continuing the strike.

While managers may have become personally invested in beating the union, shareholders should recognize that this ongoing loss of potential profit is not worth a relatively small potential reduction in labour costs. An important subplot of this strike may soon be shareholders telling management to get back to the bargaining table.

Note: All figures are in US dollars.

UPDATE (October 30): Quoted by American Metal Market and The Sudbury Star