Inco Case Study: The End of Monopoly: A New World for Inco (Part 3 of 3)

Canadian Business History – Professor Joe Martin

This case was prepared by Anne-Mette de Place Filippini and Professor Joe Martin as the basis for class discussion rather than to illustrate either effective or ineffective handling of a managerial situation. All charts, photos, questions and exhibits omitted.

A Successful Break from the Past?

By the end of 1974, the Grubb regime had enjoyed three strong years of performance with net sales more than doubling to upwards of $1.7 billion. Meanwhile net earnings had more than tripled to nearly $300 million with the return on shareholder’s equity jumping to over 20%. Rebounding demand and cost cutting efforts had restored financial health at Inco with profitability levels now back above the levels not seen since the 1960s.

In the 1974 annual report, Grubb and President Carter wrote proudly “The year covered by this report was marked by a record level of sales and earnings, by your company’s first diversification into a completely new line of business and by continued expansion in Canada and abroad….the company acquired ESB Incorporated, one of the world’s leading battery companies, with a sound growth record and a reputation for good management….We intend to seek planned and orderly diversification…. Our criteria in making acquisitions are a good earnings potential, the capacity to offset cyclical swings in earnings in the primary metals industry and a broad compatibility with our own skills and assets.”

Grubb and Carter’s message went on to discuss geographical diversification by stating that “Construction is well under way in Indonesia and Guatemala on facilities which will ultimately increase the Company’s capacity by an additional 130 million pounds….we also have programs in various stages of development involving nickel, copper and other resources (including oil and deep sea nodules) in a number of other areas.”

Diversification efforts were well under way, and it might appear that Inco’s efforts to diversify were going swimmingly. Given his success, Grubb obtained board approval for a corporate Gulfstream jet in 1974 and purchased it. He was very upset when the Toronto media wrote a critical article on the topic. However, the difficulties created by the newspaper article may well have been a foreshadowing of more bad news to come.

The next year, 1975, was not kind to Inco. The worldwide economic slowdown, a continuing high level of inflation, and one of the sharpest declines in metals deliveries in the history of the nickel industry, all adversely affected Inco’s earnings in 1975.The three previous years of success and growth under Grubb and Carter were halted when 1975 earnings were reported. A burning question remained: Was 1975 a mere blip on Inco’s upward trajectory, or was it a harbinger of worse news to come?

Appendix 1 – The Thompson-Wingate Era

American Government Stockpiling

From the end of World War II until the mid 1960s (with the notable exception of 1959), the nickel market had enjoyed a prolonged period of above-average growth. A major factor affecting demand was the U.S. government decision to stockpile. The American government’s decision to stockpile strategic and critical materials had its roots in World War II. After the war, the American government began stockpiling for the first time ever in peacetime. The government stockpiling of nickel was great for business at Inco. The stockpiling was very much a part of a strategic decision, which envisaged a hemispheric defense of which Canada was an important part.

The stockpiling gained tremendous impetus with the outbreak of the Korean War, which was followed by the Cold War. Indeed, the American government was so concerned about the possibility of a shortage of strategic metals that the President of the Columbia Broadcasting System (CBS), the legendary William S. Paley, was appointed to investigate the U.S.’ strategic preparedness in terms of its inventory of essential resources.

The consequence for Canada was tremendous demand for strategic materials including nickel. Between 1946 and 1955 Canadian nickel production nearly doubled – to 350,000 pounds. In 1955 non-ferrous metal exports surpassed paper exports for the first time, and paper exports were growing rapidly as well.

Nickel was in short supply, which led to a rationing of customer orders and steady price increases. In the first half of the 20th Century the increases in production consistently were greater than the price increases, since Inco used lower prices to control competitive behaviour.

Throughout this period, nickel prices were what Inco said they were. From 1929 until mid-1948, the price of nickel was steady at about 35 cents per pound. From mid-1948 to May 1962, the price climbed to 79 cents per pound. Then, prices really took off – by the early 1970s, the price had risen to $1.33 per pound. By 1976, Inco’s list price was $2.41 per pound. Inco enjoyed a monopoly and could charge whatever price it liked.

The tight supply situation was not sustainable. Strong demand growth and high prices were bound to encourage new competition and bring more supply into the market. And the U.S. government helped this development along. Viewing nickel as a strategic material, the government decided to encourage production of nickel by subsidizing some of the smaller producers, such as Falconbridge, Freeport and Sherritt-Gordon.

For example, in 1953, the American government, through the Department of Defense’s Materials Procurement Agency, the stockpile supervisor, entered into an agreement with Inco to deliver 1.3 billion pounds of nickel over the next five years. Moreover, the same agency provided Falconbridge with a loan of $6 million and a guaranteed premium price to enable Falconbridge to finance expansion.(14)

Sherritt-Gordon’s arrival on the scene would have been impossible under normal market conditions, but it became possible when largely underwritten by the United States government.(15) In Canada meanwhile, the powerful cabinet minister C.D. Howe — who held two portfolios as Minister of Trade and Commerce and of Defense Production — was also encouraging the development of resource companies.

Challenges and Opportunities in the 1950s

Not all was smooth sailing in the late 1950s, however, even for Inco. For example, with a reduction in stockpiling in 1958 “the demand for nickel … declined so severely in the United States, the principal market, that the Company during the first half of the year was forced to make three successive curtailments in its rate of production in Canada.”(16) This curtailment, plus a major strike in Canada sharply reduced corporate earnings in 1958, bringing them back to the levels of a decade earlier in earnings per share terms. Earning per share amounted to only $2.71 in 1958, versus $2.55 in 1948.

The strike was partially the by-product of a vicious inter-union battle between the incumbent Mine Mill and Smelter Workers, a Communist union, and the United Steelworkers of America, which the Steelworkers won.

The late 1950s brought opportunity as well. On February 27, 1956, a major nickel ore discovery was confirmed as a result of drilling at Thompson, Manitoba. “It was at a meeting in February, 1956, that the Chairman said to the directors: ‘Late yesterday afternoon a call came in from Manitoba to Wingate. Ralph Parker was calling, and saying: ‘It looks like we’ve hit the jackpot’”(17) In December of that same year, International Nickel announced its plans for immediate development of a new nickel-mining centre in the Mystery-Moak Lakes region of northern Manitoba. Over the next three years, Inco invested $100 million to develop the Thompson site.

The Wingate Era

On April 20, 1960, the Board of Directors met in Thompson, Manitoba for the first time. The board was welcomed there by Manitoba Premier Duff Roblin. At that historic meeting, Henry S. Wingate was elected as Chairman and Chief Officer succeeding John Thompson.

James Richardson, Vice President of the Winnipeg-based James Richardson & Sons, and the son of a former Inco director, was elected to the board in recognition of Manitoba’s new importance to Inco. Also at that meeting, J. Roy Gordon became the first Canadian President. Four new Vice Presidents were also appointed. They included: James C. Parlee, who was named General Manager of the Manitoba Division, and Albert P. Gagnebin, appointed as Vice President of the U.S. subsidiary.

Wingate was in his mid-fifties when he became Chairman. A corporate lawyer and graduate of the University of Michigan, Wingate was tall and debonair and looked like he was born to leadership. An early positive development in his term of office was the Thompson mine. Formally dedicated in 1961, the mining and refining enterprise was brought into full operation, making Inco the second largest producer of nickel in the world.

The first few years under Wingate’s leadership were tentative. Sales declined in 1962 as the result of problems in the United States steel industry.(18) Wingate’s 1962 report to the shareholders was one of the rare occasions where he complained of ‘strong competition’. However, both profits and return on investment improved in the early years.

The period 1962 to 1968 saw good growth in sales, from $452 million to close to $800 million, an increase of 73% in six years. However profits were not as consistent; 1966 was a bad year, and the three years 1965, 1967 and 1968 were flat, showing profits in the range from $141.8 million to $143.8 million as ROI declined from a high of 19% in 1964 to a low of 13.1% in 1968. Part of the reason was a significant addition of debt to fund the major capital expenditures that began in 1967.
 
Throughout this period Wingate was making changes in both the company’s strategy and structure. The changes were most pronounced when, in 1966, for the first time in over a decade, Wingate alone, as Chairman and Chief Officer, signed the annual report. In the past, the President had signed as well.

Other changes were also taking place. The completion of the Research Laboratory at Sheridan Park in the Greater Toronto Area emphasized the company’s commitment to mining and process research. Perhaps a more important change was the expansion of mining projects beyond Canada. In terms of mining projects, these ventures extended from Guatemala, to Indonesia, to an agreement with Broken Hill PCL in Australia, to proposals for joint ventures with French interests in New Caledonia, to feasibility studies in Minnesota.

Structurally the Board of Directors and Senior Management changed as Wingate built his team. Both James Parlee and Albert Gagnebin were promoted from Vice President to the new position of Executive Vice President in 1964.The following year both Parlee and Gagnebin joined the Board of Directors.

In 1966, J. Roy Gordon, the Canadian-born President who had reached retirement age, was replaced by Albert Gagnebin, but Gagnebin did not sign the annual report. As a gesture to Parlee, who had been made Executive Vice President at the same time as Gagnebin, Parlee was promoted to Senior Vice President. In 1967, future Chairman Edward Grubb made his first appearance in the annual reports. Grubb, Assistant Vice-President of the Company was promoted from Managing Director to Chairman of Henry Wiggin, the British subsidiary.

In 1968, everyone was saddened by the death of John Fairfield Thompson, Wingate’s predecessor. Thompson was an outstanding metallurgist with a PhD from Columbia. He started the research lab at Inco when he joined the company in 1906. He was a contributor to invention of the stainless steel sink. He had served the company long and well and at the time of his death held the title of Honorary Chairman of the Board of Directors. Now, the company truly belonged to Henry Wingate.

In concluding the 1968 annual report, after paying tribute to Thompson, Wingate wrote “In 1969 we will negotiate a new contract with the United Steelworkers of America….negotiations will commence early, on March 18, almost four months before the …expiration date of the present contract. As we enter the negotiation period, we are prepared to do everything we soundly can to insure that there is not an interruption of employment or production, and can see no reason to expect such an interruption.”

This was the lead-up to the Annus Horribilis of 1969, which resulted in not only the four-month long Steelworkers strike but also to the board’s decision to select Edward Grubb as Chairman over Alfred Gagnebin.

(14) R.D. Cuff and J.L.Granatstein, American Dollars, Canadian Prosperity, (Toronto: Samuel Stevens, 1978), pp. 152,153.

(15) O.W. Main, “International Nickel: The First Fifty Years,” Canadian Business, edited by David S. Macmillan (Toronto: McClelland & Stewart, 1972) pp. 122 and 123.

(16) The International Nickel Company of Canada 1958 Annual Report, p. 7.

(17) John F. Thompson and Norman Beasley, For the Years to Come: A Story of International Nickel of Canada
(New York: Putnam, 1960) p. 275.

(18) On April 11, 1962, U.S. President John F. Kennedy held a news conference during which he told the steel industry that its price increases constituted “a wholly unjustifiable and irresponsible defiance of the public interest.” For print and audio record refer to http://www.jfklibrary.org/jfk_press_conference_620411.html

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