In late 2006, just a few weeks after Vale, the Brazilian mining group, bought Inco, the Canadian nickel miner, for $17.6bn, a meeting between executives of the two companies hinted at a potentially difficult future.
According to a former Inco executive, the session ended abruptly with one of the Brazilians losing his temper. “How come, if you’re so smart, you didn’t take us over?” he snapped.
Worse was to follow. A succession of senior Canadian managers as well as key engineers and operating staff walked out the door. Another former Inco executive says that of 29 colleagues who took part in a senior management strategy session in early 2007, only six remain.
The tensions came to a head last July when more than 3,100 members of the United Steelworkers union went on strike at Inco’s flagship operations in Sudbury, Ontario, and a refinery near Niagara Falls.
They are still off the job. Exploratory talks aimed at a settlement broke down earlier this week with the union rejecting a new Vale offer on the grounds that it fell “far short of the ... membership’s expectations”.
The acquisition of the Canadian company, which the new owner renamed Vale Inco, turned Vale, whose core business is iron ore, into the world’s second-biggest mining group by market capitalisation.
The question now is whether the upheaval at the Canadian operation could be a taste of things to come in other parts of the world as Brazilian companies increasingly flex their muscles overseas. Groups such as Gerdau, a steelmaker, and Marcopolo, a busmaker, were busy buying foreign assets before the global crisis struck and, if the recovery continues, more are expected to follow. Vale’s experience reveals the kind of challenges they may face.
“We’re a culture of ‘why?’” says a former Inco executive, referring to the constant exchange of ideas and decentralised decision-making that was encouraged by the former Canadian management. On the other hand, he says, “the Brazilians were: ‘I told you to do this. Now do it.’” (Former Inco executives who spoke to the Financial Times asked not to be identified.)
At the same time, the Brazilians encountered more resistance than they expected.
Francisco Alves, editor of Brasil Mineral magazine, which covers the mining sector, argues that Canadian companies were more accustomed to taking over Latin American mining operations than the other way round. “Brazil was still seen as an underdeveloped, colonial country, so accepting the takeover didn’t come naturally,” he says.
Even without the north-south divide, however, Vale might have had a hard time putting its stamp on its new acquisition.
Iron ore and nickel have little in common apart from both being widely used metals. The former is a basic commodity, mined in huge quantities in a relatively simple operation and typically sold under fixed-price contracts. Nickel, a key ingredient in stainless steel, is a more complex business, involving underground mining, day-to-day price movements and costly research into new applications.
Hinting at the disdain that the Canadians felt towards their new bosses, one of the former Inco employees says that “to run an iron ore business is almost like a high school diploma. Nickel is a PhD.”
Even so, Inco, founded almost a century ago, had a reputation as a sleepy company operating well below its potential. According to David Robinson, a professor of economics at Laurentian University in Sudbury: “Management did a poor job of getting the most out of the workers.”
The company and the union, he continues, “established a modus operandi in the past where neither side played too rough. That’s the Canadian way.”
By contrast, Roger Agnelli, Vale’s chief executive, describes his group as “a company with attitude”, acknowledging that “it can’t be easy to have me as a boss”.
Mr Agnelli readily admits to being a demanding manager. “If people don’t have passion, dreams, challenges and good health, it’s hard for them to work with me,” he says. “Speed, for me, is everything – in decision-making, in execution, in reacting, it is the most important differential ... I always say, let’s have a decision, because if nobody else will take one, I will.”
Inco was Vale’s first important acquisition outside Brazil and Mr Agnelli says the difficulties “are specifically in Sudbury, with the union”.
“It is all a question of different points of view and principles,” he says. “We understand that some principles have to be respected, such as meritocracy, the primacy of results ... and so on. So there is a debate, a collision of views with the union, and we are confident of our position.”
Vale’s experience is in sharp contrast with the almost simultaneous takeover by Xstrata, the Anglo-Swiss mining group, of another big Canadian nickel miner, Falconbridge.
The Xstrata deal has gone more smoothly. By all accounts, it was planned more carefully, with Falconbridge staff being given a bigger role in decisions on changes. And, in contrast to the dispute at Vale Inco, Xstrata recently signed a new contract with its own workers in Sudbury, represented by the Canadian Auto Workers union (which also has a more pragmatic reputation than the United Steelworkers).
The main issue in the strike at Vale Inco is a bonus linked to the nickel price that the union accepted during the 1980s in return for giving up annual wage increases. But the deal did not envision the spurt in commodity prices that drove nickel from its traditional range of $4,000-$7,000 a tonne to a peak of $54,000 a tonne in 2007. It now trades at about $21,000 a tonne.
“People were coming home with bonuses the size of other people’s salaries,” says Prof Robinson, adding that the union might have won wider support in the stand-off if its members had shared more of their wealth with local charities and other causes.
Vale maintains that the Canadian operations have lost their competitive edge against nickel producers in other parts of the world, mostly in low-wage developing countries. It wants to raise the threshold at which the Sudbury workers become eligible for the nickel bonus and to convert Inco’s pension plan from a defined benefit to a defined contribution model.
According to Mr Agnelli: “Our view is that the price is not related to the results got by our workers. The price of nickel could be lower and their efforts much greater.”
Feelings have run high on both sides. Vale has begun legal action against the union, accusing its members of vandalism, pre-meditated assaults and death threats.
The union is equally bitter. “The community is now realising just what type of company our federal government has allowed to purchase our mineral wealth and resources,” Leo Gerard, the union’s president, wrote in the Sudbury Star, a local newspaper, last month.
Vale has further raised the union’s hackles by employing non-union replacement workers.
According to Mr Alves, the acquisition in Canada also created problems for Vale closer to home. “The union came to meet with the unions in Brazil and caused a lot of problems as the Brazilians suddenly wanted to earn as much as the Canadians,” he says.
This week’s breakdown in talks came as many thought the two sides were close to a deal. Few now are willing to guess how the dispute will end, but Vale appears to have learnt some lessons from its Canadian experience. Murilo Ferreira, the first Brazilian parachuted into Toronto to head Vale Inco, spoke halting English and was known more for technical than leadership skills. He was replaced last year by Tito Martins, a more personable executive with a greater ability to communicate Rio de Janeiro’s concerns to Toronto, and vice versa.
“It is a question of cultures that have to adjust,” Mr Agnelli says. “We will reach a good understanding. Inco is ... innovative, its employees are highly qualified, we respect them and we want them together with us.”