The Arrogance of Inco – by Val Ross (Originally Published in May 1979 – Part 1 of 4)

“The Arrogance of Inco” was originally published as the cover story in the May, 1979 issue of Canadian Business. Reporter Val Ross, who died in 2008, spent two and a half months researching and writing this lengthy expose of the then Inco Limited. It has become a “classic must read” for anyone wishing to understand the often bitter history between Sudbury and the company that defined the Canadian mining industry.

A century of power and profit – and now a sea of troubles

NICKEL, INCO. Clack the consonants of these two words on your tongue, and they sound similar. They used to be synonymous – nickel, Inco – in the public mind undoubtedly, in the company’s mind, indelibly.

The International nickel Co. (it was renamed Inco Ltd. In 1976) was in up to its elbows at the birth of the nickel industry, almost as responsible for nickel’s development as nickel was responsible for making Inco Ltd. the billion-dollar multinational empire it is today. Inco was nickel. And the company men and the metal left their characteristic mark on each other’s fate.

The metal, element 28, is greyish-white. You might describe the company’s subdued, Anglo-Saxon character in the same way. Among the metal’s most important properties are resistance to oxidization and corrosion, and insolubility in water. Alone, nickel us brittle, but it merges promiscuously with iron and other metals into a host of tough alloys. The company is tough too, resistant to change, at times rigid. And the men of Inco have forged some odd business and political alliances to increase their company’s strength and lustre.

Last fall, the metal’s fortunes, always cyclical, continued to flounder. Long after the company’s experts had predicted the market would pick up, nickel was still going for less than $2 per lb. Nickel’s price, below the production cost of many suppliers, was simply the dyspeptic symptom of nickel glut, combined indigestibly with refiners’ rising fuel bills and a recession-caused decrease in steelmaking, construction, military expenditures. There was too much costly nickel in the world and nowhere to sell it.

Inco itself would have lost money in the third quarter of 1978 had it not been for a $10.7- million US currency translation against the low Canadian dollar. Its 1977 earnings were half their 1976 level, and 1977 deliveries of nickel were the lowest in 20 years.

But the metal’s fortunes must inevitably circle up again. For the 20th century is the Age of Nickel, a hard and shiny world built of alloys, armor plate, stainless steel and low-value coin. As capital spending picks up, so will the demand for nickel. This year nickel consumption is expected to increase 4.5%. The news isn’t blowing anyone away, but it’s good enough for Inco’s chairman J. Edwin Carter, to assure his shareholders, “The recovery of nickel is, we believe, certain.”

The reascension of the company is not so certain. A recent Wall Street Journal headline put it: “King No More, with Long Sway Fading, Inco gets Ready for Battle.”

What happened to the King? As Dr. John F. Thompson, a former Inco chairman, stated right off the top in the company history he co-authored in 1960, “The International nickel Co. Ltd. is a combination of two things – important nickel deposits, plus a state of mind.” And the state of mind that is Inco is a key part of its rise and its decline.

Doc Thompson wrote the aforementioned company history, For The Years To Come, in Inco’s fattest years, the 1950s, when nickel consumption was steadily rising by 6.5% a year. In the 1960s, the Vietnam War spurred the company’s growth to 15%. Doc Thompson, a Unitarian from New England, wanted his clients, competitors and readers to believe that Inco’s riches were the righteous fruits of sterling management principles plus that special “state of mind” – by which Thompson meant the creative, aggressive development of new products and new markets.

But by Doc Thompson’s time, the success of the 50-year-old nickel giant was due to a different factor: near monopoly.  And the company was known for a different state of mind: arrogance.

Absent-minded arrogance. Bloody-minded arrogance. Even, let it be admitted, benign, paternal arrogance.

Inco’s security came from having always been the world’s largest producer of a crucial material. Nickel is sold by the pound (in contrast to iron, sold by the ton), and it may only take a little nickel to produce a nickel-strengthened steel. For years Inco could provide all that was needed, and it accounted for 90% of the world’s nickel. As the largest producer  in the world it has usually posted the price, in effect setting a world price which other producers undercut at their peril. As well, it has always been a major copper producer, and in the 1930s was believed to be the world’s largest source of platinum. There’s also considerable gold, silver and cobalt in Inco’s stock of rich ore blends. “So here,” as Fortune put it in 1934, “is a company that was born with a whole collection of valuable spoons in its mouth.”

Born rich, Inco has moved with the quiet, assured might of Canada’s 12th largest company, in a multinational empire worth more than $4 billion in assets and $2 billion in sales, an empire stretching from Wales to West Virginia, from Tokyo to Zaire. Its suitably imperial seats of government are One New York Plaza, where Inco’s financial and marketing headquarters dominate the very tip of Manhattan, and 1 First Canadian Place in Toronto, where the company’s offices for engineering, environment, exploration, purchasing, public affairs, et al., challenge the TD Centre and Commerce Court monoliths. Inco’s corporate image emanates arrogance like the grey, silent shadow of a massive skyscraper.

In the mining industry, Inco was and is known as the king who disdains to speak to his public or for his industry. When the CBC covered Inco’s 1977 layoffs at Sudbury and Port Colborne, the only spokesman it could find to explain the move was Alf Powis, the president of Noranda Mines Ltd. Inco has shown a careless disdain about its relations with governments, too. Though the company accounts for more than 20% of the jobs in Sudbury, it did not consult with the Ontario government about the possibility of layoffs, and the Select Committee subsequently established by the government to evaluate the situation cost Queen’s Park $118, 200.

Equally high-handed was Inco’s way of telling its workers what was happening to their jobs: after weeks of feverish rumours of massive cutbacks, which the company would neither confirm or deny, the rank and file milling around the Steelworkers’ Hall in downtown Sudbury heard the announcement on the October 20, 1977, 1:00 p.m. news – at the same time as their unprepared and surprised union leaders were getting the word from company spokesmen.

The history of the King, as the Wall Street Journal calls it, is a drama of hubris and nemesis, if somewhat lacking in classical tragic resonance. For it’s hard to see the Inco men as Oedipus Rexes, or (contrary to their portrayal at the hand of the union) as murdering Macbeths. At their best, the leaders of the company have been dynamic entrepreneurs in new products and markets.  At their worst, they’ve been crude dealers and poor prophets.

In the dramatic tragedy, the king’s fall from fortune is redeemed by his new-found enlightenment. And so it may be that Inco’s cyclical fortunes will yet turn around the character of the company.

1-King Nickel Ascends The Throne

Hardly anyone wanted nickel until Sam Ritchie came along.

When early European metallurgists found nickel mixed in ore with the copper and iron they wanted, the called the brittle, unfamiliar metal Kupfer-Nickel – Old Nick’s copper (“Nick” as in Satan). Not only were the unsophisticated metal workers unable to do anything with the stuff, but when Kupfer-Nickel got into their smelters, (according to Agricola, a German metallurgist writing in the 16th century) it yielded “foul fumes” and by-products that “eat away at the feet of the workmen…and injure their lungs and eyes.”

By the mid-19th century a way of smelting nickel had been found, and the metal was acquiring some limited application in German, Swiss, Belgium and American coins. But total world demand was only a few million pounds a year. The bulk of this was provided by the Rothschilds’ Societe Le Nickel mines on the island of New Caledonia, a French territory in the South Pacific.

Then, in 1875 or thereabouts, two improbable hustlers crossed paths, and nickel’s rise began.

John Gamgee, an English-born inventor, was in Washington, DC, to lobby for a pet project. A global yellow fever epidemic was in progress, and Gamgee, reasoning that people don’t catch yellow fever in cold countries, wanted to construct a giant floating refrigerator ship which would pick up fever victims in various tropical ports and cure them in cold storage. Gamgee checked into the same hotel as Samuel J. Ritchie, a carriage manufacturer from Akron, Ohio.

Contemporary sources describe Ritchie as “extravagantly optimistic, desperately pugnacious, generous as a prince, and possessed of no degree of caution whatsoever.” He was certainly the most vibrant and colourful man in Inco’s history, which is one reason why his greyer fellow entrepreneurs gave him the boot when the company’s fortunes began to take off.

Born poor, Ritchie was determined to become rich. Whatever hustle brought him to Washington was forgotten in listening to Gamgee’s stories of Floating Refrigerated Fever Treatment Centres. Together Ritchie and Gamgee go the US Senate Committee on Epidemic Diseases to appropriate $250,000 toward the production of the right sort of refrigerator. Getting this money hinged on finding an alloy, stronger than cast iron, to withstand the pressure of a gas-driven refrigeration machine. The two men experimented. An 8% nickel-iron alloy was found that suited their requirements. Alas, the yellow fever epidemic abated, leaving Gamgee’s frigid cure-all sailing nowhere, but leaving Ritchie with a tickling interest in nickel. His belief in the new mineral’s value would carry him into dreams and debt.

On a trip to Canada in 1881 to buy timber for his Akron carriage business, Sam Ritchie found timberland with rich iron and nickel deposits. He snapped it up, 15,000 acres at Coe Hill, near Trenton in southern Ontario. Driven by empire-building notions, he started the Central Ontario railway to carry his ore to Trenton and then west to Toronto and the US. Then he had to search for better sources of ore to carry on his debt-ridden railway.

Visiting Sir William Van Horne’s Canadian Pacific Railway office one day, Ritchie spied a piece of rock sitting on a window sill. It was a sample from the Sudbury area. He pocketed it, had it analyzed, and then staked a claim on 97,000 acres to cash in on the area’s valuable copper and potentially valuable nickel ore – all before Van Horne heard what had happened.

The land held by Ritchie’s Canadian Copper Co. (chartered in Ohio in 1886) was seemingly worthless. For $1,733,000 he’d acquired Canadian Shield – muskeg and bush. Already the best trees had been taken by hungry lumberman, and forest fires and erosion had quickly followed. The slatternly Sudbury landscape, scarred and charred, practically invited further ravaging from her new masters. The metal producers would oblige with a vengeance.

Soon there was a host of them, prospectors and promoters, trampling the ruined woods in search of Sudbury’s fabled riches. Throughout the end of the 19th century companies sprang up – the Drury Nickel Co., the Dominion Mineral Co., H.H. Vivian & Co. The Mond Nickel Co., a British group, went into production later than the others, in 1904. Between them and Sam Ritchie’s Canadian Copper Co., much of the area’s remaining timber was claimed for the construction of mine heads, shaft supports and shelters, or disappeared in smoke on the open-air roasting heaps of raw ore. By the turn of the century there were more than 80 such heaps in the Sudbury district.

On each one of these log piles copper and nickel sulphide ore were “purified” as yellow-white sulphur dioxide smoke poured off. After the roast heap smoke has crept, rich and heavy with poison, through the trees, nothing was left but the odd shuddering brown leaf. People’s eyes and lungs didn’t fare much better.

Sam Ritchie came to Sudbury for the sake of his ambitions and its ore. How other people could be attracted to that blasted frontier is hard to understand, but by the turn of the century Sudbury’s population had swelled to 2,500, and new hustlers arrived every day. Col. Robert Means Thompson (no relation to the later company chairman, Doc Thompson) was one. A US Navy man with good Navy connections, a lawyer, sober, sharp and subtle, Thompson was the very mold for future Inco men. He was to depose his rivals and gain control of nickel with a Marc Antony’s cunning and an actor’s sense of timing.

Thompson was already involved in the metals industry as the company lawyer and general manager of an American copper and iron smelting plant in rural New Jersey. Tales of “mountains of ore” brought Thompson to Sudbury sometime in the 1880s to seek copper. There, fellow American Sam Ritchie gave him the grand tour of the Canadian Copper Company’s mines. Ritchie’s debt-heavy company badly needed Thompson’s Orford Copper Company to buy his ore. Thompson, for his part, was struck by Ritchie’s interest in nickel, and though he was after copper, a position in nickel’s future had its attractions too.

One technical problem that took the shine off nickel was the high cost of separating it from the copper. Because this problem diminished the ore’s utility, the men bickered over the ore’s value and its price. Thompson’s final offer was a miserly 12 cents a pound. His manner was characteristic. “If you don’t like my price,” he said, “take it or leave it.” Richie took it.

Richie signed a contract that agreed to provide Thompson’s company with 1,000 pounds of nickel-copper matte, the semi-purified metal produced by the first stage of the smelting process. Then Richie turned his attention to keeping Canadian politicians happy while he shipped their country’s ore south. Richie rechristened the McAllister Mine, named after its prospector-discoverer, the Lady Macdonald Mine; then he invited the prime minister, Sir John A., and Lady Macdonald to the grand reopening. This and other friendly moves were reciprocated in 1889, when Ottawa lifted its 30% import duty on mining machinery and its 75% duty on smelting coke.

Something else happened in 1889 which gave Richie’s ambitions even more encouragement. In England, a just-published scientific paper, “Alloys of Nickel and Steel,” was alerting the world’s military establishments to the potential of nickel alloys, which, it predicted, had “qualities for armor which will be unsurpassed.” Ritchie speed to Washington with a copy of the report, and showed it to the Secretary of the United States Navy.

Suddenly Richie was not the seeker but the sought-after. A telegram from Krupps followed Ritchie to Washington, offering to buy the entire output of his Canadian Copper Company mines for their German arms factories. When Ritchie sailed to France, Sir Charles Tupper, the Canadian High Commissioner to London, reported that the American was “pressed…in the strongest possible manner to give [the Rothschilds] sole control of the product.” Sir John A. Macdonald ordered Tupper to continue to observe Ritchie and to ask, urge, beg him not to sell.

Colonel Robert Means Thompson, the Canadian Copper Company’s major client, heard of Ritchie’s negotiations with the US Navy. He also got wind of the rumored price: 40 cents a pound. Silent, grey, the shark moved in. Thompson got an interview with the Navy Secretary and produced his contract to buy Ritchie’s ore at 12 cents a pound. “He’s charging you more than he’s charging me,” said Thompson, “so I’ll sell it to you for 24 cents.” And he cut Ritchie out nicely.

Thompson’s long-term strategy was to cut Ritchie out altogether, but in the meantime he had a good instinct for getting maximum value out of the Ohio entrepreneur’s energy. Thompson observed Ritchie as he developed the Sudbury mining operations, organized transportation, and wooed the Canadian government’s support for expanded operations. Thompson also absorbed the example of Ritchie’s ever-alert search for new applications for nickel; Ritchie even made overtures to Thomas Alva Edison. In the end, Thompson didn’t need to lift a finger to cut Ritchie out of the nickel action. Sam Ritchie’s own board at the Canadian Copper Company, alarmed by his grandiose plans for expanded operations, and by his ever-expanding debts, ousted him in 1891. Ritchie’s defeat may have confirmed the efficacy of a low-key, low-profile modus operandi for the future empire’s leaders. In any case, the field was now clear for Thompson – clear except for the Rothschilds.

Between 1892 and 1895 the Rothschilds and the Thompson group waged a price war so vicious that other Sudbury producers were driven out of business. By 1895 Thompson emerged dominate. It was inevitable. He had a contract with the US Navy. He had a solid contract to buy the output of the Canadian Copper Company, which owned the biggest motherlode of nickel in the world. And finally, he had the patent to a new process he’d personally helped develop, the fairly inexpensive Orford process, in which a nitre cake catalyst separated soluble copper from insoluble nickel – thus solving the separation problem that had hitherto inhibited nickel’s development. Possibly it was Thompson’s “copper tops and nickel bottoms” separation process, combined with the unarguable superiority of the Sudbury supply, that persuaded the Rothschilds to back off.

At any rate, according to the official and discreet version of For the Years to Come, “In the rough and tumble struggle, Thompson and Baron Adolphe de Rothschild became friends.” The two divided the world market, agreed that Thompson’s group would establish price, and remained in personal communication. (This friendship continued to echo into the early 1970s, when a price-cutting war between nickel suppliers broke out. But as one senior Inco executive remarked to a New York financial journalist, in an uncharacteristic lapse: “The Baron? He’s a responsible competitor. We’ve always got along well with him.” Only lately has the Inco-Rothschild friendship gone sour.)

As the 1890s drew to a close, R.M. Thompson’s future seemed stronger than the new metal he had cornered. But Sam Ritchie wasn’t out of the picture yet. With the backing of Quebec and Ontario businessmen, the American entrepreneur launched an offensive against his own disloyal board, and against their refinery client Thompson.
Ritchie’s offensive line was – sweet irony – Canadian nationalism. As he told it, Canadians were being bilked out of an Ontario nickel refinery, and therefore out of jobs, technology and Progress. Therefore, he argued, the government ought to impose an export duty on unrefined nickel matte.

Thompson defended his right to extract Canadian ore and refine it in New Jersey. His argument would echo throughout Inco’s script. If onerous government taxes or duties were imposed, said Thompson, he would be compelled to turn to New Caledonia in the South Pacific for his ore.

Thus was first raised the spectre of foreign competition, of Sudbury a ghost town. Take it or leave it. The local business press backed Thompson. An export tax, said the Canadian Mining Review, could “force one of the largest institutions in Canada to close its doors. It can throw a thousand Canadians out of their honest employment. It can silence the noise of the drill and put out the furnace fire….”

Alarmed, Prime Minister Wilfred Laurier hit on a Canadian-style compromise. He silenced Ritchie and the nationalists by passing an export duty act. But the act’s provisions were never put into effect.

The export relationship between the Canadian Copper Company and the Orford Copper Company flourished, and R.M. Thompson consolidated his control over both. But while the bigger fish ate the smaller one, a whale was watching: J. Pierpont Morgan, whose company, US Steel, was Thompson’s biggest client. J.P. Morgan was attracted by the logic of integrating nickel mining, refining and ultimately steelmaking. Thompson’s choice was to cooperate or to lose everything. He cooperated. In 1902 Margan and Thompson together formed the International Nickel Company, incorporated in New Jersey, by purchasing the Canadian Copper Company, the Orford Copper Company and other Sudbury and New Caledonia nickel holdings.

Thompson was made Inco’s first chairman and presided over a board of US Steel appointees, plus a representative of the New York law firm, Sullivan and Cromwell, which had engineered the acquisition. Ore would be mined and smelted in Canada, the matte then shipped to New Jersey for refining, and its fate decided at the company’s New Jersey headquarters.

Ottawa smiled benignly on the new American giant, and Prime Minister Laurier’s personal correspondence reveals the pleasant friendship he’d developed with R.M. Thompson. The letters also mention a cheque to him from Inco for an undisclosed amount, and in one letter Thompson advises that a $5,000 profit has been realized on some Inco stock he’d purchased for the Canadian PM.

And Sam  Ritchie, the entrepreneur? He ended as he’d begun – back in the US, and poor.

For part 2, click here: http://www.republicofmining.com/2010/06/30/the-arrogance-of-inco-%E2%80%93-by-val-ross-originally-published-in-may-1979-%E2%80%93-part-2-of-4/

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