Wabush woes: Labrador mining town reels from a China slowdown
RACHELLE YOUNGLAI - MINING REPORTER
WABUSH, LABRADOR — The Globe and Mail
Published
The
family’s roots run deep here. Mr. Barron’s father was one of Wabush‘s
first settlers, who not only got a job in the mine when it opened in the
1960s but also helped organize a union. Five of Mr. Barron’s brothers
have worked in the same pits along with his son and nephew.
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But
now Mr. Barron’s life has been upended along with the rest of city. The
Wabush mine, once the cornerstone of this community, is shutting down
along with another iron ore mine called Bloom Lake in neighbouring
Quebec. More than 1,000 miners will be out of work, not to mention a
slew of other job losses from businesses that service the industry. It’s
a crippling blow in an area with a population of about 9,000.
“Oh
my god, everybody loses. All the organizations, the schools, everything
loses. Everything will suffer because of it,” said Mr. Barron, who will
be officially out of a job by mid-December. “We have had shutdowns and
layoffs before, but this is different. The mine is closing.”
The
reason for the closings is simple: The price of iron ore, a key
ingredient in steel, has been in freefall, falling 60 per cent in three
years. Where the resource once traded as high as $190 (U.S.) a tonne in
2011, it is now below $70. The deterioration is due to two factors: less
demand from China and an oversupply of iron ore and coking coal, which
is also used to make steel.
As
a result, producers around the world are slashing costs, halting
operations and laying off workers in droves. What’s happening in Wabush
is taking place in many other Canadian communities as well as
resource-rich countries such as Australia.
The
fall out can be seen in places like Sept-Îles, Que., where an iron ore
pellet plant was shut down, and in Tumbler Ridge, B.C., where a number
of nearby coking coal operations have been suspended and two mines
closed. “When the commodity price goes down and mines close, it is
devastating,” said Darwin Wren, Tumbler Ridge’s mayor. In Queensland,
Australia, thousands of mining jobs have been lost as coking coal prices
fall by more than 60 per cent since 2011.
But
it is here in Wabush and Labrador City – known as Labrador West – where
the real impact can be seen. These communities were built around two
giant iron ore mines nestled in the surrounding snowy hills. It’s here
where iron ore is so critical to everyday life that just about anyone
can quote you the price of the mineral on any given day.
“Most
of our residents follow the price. There is an understanding of how
dependent we are,” said Labrador City’s mayor, Karen Oldford.
The rise and fall of iron ore
For
a long time, iron ore wasn’t like most other minerals. It didn’t have
wild price fluctuations because global steel production remained fairly
constant. That changed in the early 2000s when China’s economy surged
and the country gobbled up vast amounts of stainless steel to build
everything from railways and power grids to office towers and
apartments.
The
increased demand sent iron ore prices soaring, up from $30 a tonne to
$190 in seven years. Companies invested billions of dollars to boost
production, existing mines expanded and employment levels took off. And
most took on large amounts of debt to snap up mining assets, convinced
China’s growth was unstoppable.
In
Canada, the big attraction was a 1,600-kilometre-long iron ore-rich
mineral belt called the Labrador Trough that straddles the Quebec and
Labrador border. That deposit, and another in the Far North, made Canada
a player in the global iron ore market. Soon, bidding wars broke out
for Canadian mines. Cleveland-based Cliffs Natural Resources Inc. bought
out its partners in the Wabush mine in 2010 for $88-million and then
spent nearly $5-billion a year later for the Bloom Lake mine. The
world’s largest iron ore producers – Rio Tinto, BHP Billiton, Vale SA
and Fortescue Metals Group – spent billions expanding and building their
mines.
But
China’s double-digit growth didn’t last and when the country’s economy
began to cool, steel demand fell along with the price of iron ore. At
the same time, the iron ore giants kept pumping more iron ore into the
market, eager to cash in on their more than $100-billion-plus
investments. With their costs per tonne below $30, these heavyweights
were, and still are, able to rake in huge profits. But over the past
four years, they have added 300 million tonnes to an already saturated
market, leaving higher-cost producers scrambling.
“Any
recovery in prices will have to come from either a recovery in demand
in China or from an acceleration in the closure rate of high-cost
producers,” Paul Gait, an analyst with Sanford C. Bernstein in London,
said in a recent research note.
The
iron ore market has a surplus of about 70 million to 80 million tonnes
this year, according to CRU Group, a global commodities research firm.
Next year, CRU expects a surplus to narrow somewhat to 50 million to 60
million tonnes, but that’s still more than enough to meet global demand.
Metallurgical coal, also used in the steel-making process, is suffering
the same fate with a surplus of about six million to eight million
tonnes.
Since
the summer, the price of iron ore has slipped even further. A barrage
of weak economic data from China showed a slowdown in its manufacturing
and property market – two sectors that consume huge amounts of stainless
steel. In addition, China’s steel exports nearly doubled since last
year, underscoring the fact that the country simply needs less metal.
“There
is just not a whole lot of demand growth,” said Jessica Fung, commodity
strategist with BMO Nesbitt Burns. “The steel sector is relatively
mature and China has gone through its double-digit growth.”
At
first, companies took precautionary measures to deal with the downturn.
Some like Baffinland Iron Mines Corp. scaled back its Mary River iron
ore project in Nunavut while others made small cuts to production. Now
companies are suspending operations and shutting down mines.
“It
is inevitable that some will have to shut down. Who shuts down is the
real question,” said Serafino Capoferri, a consultant with CRU Group.
Fort McMurray East
People in Wabush know the rise and fall of iron ore all too well.
This
community was carved out of the bush 50 years ago, shortly after
exploration of the area in the 1950s revealed a giant deposit. Soon the
IOC mine was opened, then the Wabush mine opened in 1965.
Like
many one-company towns, there have been highs and lows. But the
emergence of China as an economic powerhouse triggered a wave of
unprecedented expansion. The Bloom Lake mine opened in 2010. The IOC
mine, now controlled by Rio Tinto Group, expanded. Wabush was set to
crank out even more ore and another company, Alderon Iron Ore Corp., had
plans to build a new mine. Exploration of the Trough continued with
hopes of even more mining.
At
one point, Labrador West came to be known as Fort McMurray East, taking
a cue from the Alberta boom town. Local hotels were perpetually booked
and grocery stores could barely keep their shelves stocked.
As
workers and opportunity seekers flooded in, housing got scarce.
Duplexes that cost $25,000 in 2000 were going for more than $500,000.
Home rental rates jumped from $1,500 a month to $6,000. Even one room in
a home cost $1,000 a month to rent and landlords routinely pushed out
long-time tenants to make room for higher-paying contractors.
“When
I moved here, I couldn’t buy a house or rent anything. My company put
me up for six months. Then I bounced around to cabins and basements,”
said John Skilling, who moved to the area from Nova Scotia during the
boom years.
The
community grew so fast, local officials travelled to Alberta to get
tips from people in Fort McMurray on how to cope with rapid growth.
“It was crazy,” said Mr. Barron, who served as Wabush’s mayor during the boom time.
Mine closings
The boom time is over and the closing of the Wabush and Bloom Lake mines is hitting the community hard.
More
than 400 residents lost their jobs when Cliffs suspended operations in
Wabush last February. About 500 workers will go at Bloom Lake. Although
some miners were able to find work at IOC, others had to look outside of
Labrador West and head to the Alberta’s oil sands and the Muskrat Falls
energy project in eastern Labrador. Many are still looking.
A
third of the Wabush city operating budget comes from mine taxes. Those
funds are used for basic city functions, such as shovelling the roads
and hauling away the garbage.
“Things
are very tough. Every day is a struggle. We want to get everyone back
to work. We are looking for new opportunities,” said Wabush’s mayor
Colin Vardy.
The
once frantic housing market has softened with vacancy rates climbing.
Landlords are cutting rent to entice tenants to stay and the average
home price has dropped about 15 per cent since the boom times. A
three-bedroom house that went for $450,000 in the heyday can now be
bought for just under $400,000. But most aren’t selling, meaning prices
are likely to fall farther. Residents talk about how families took on
hefty mortgages to buy half-a-million-dollar homes and they will now be
stuck with a property worth less than what is owed.
Along
one quiet road in Wabush with a view of a lake and mountains, about 15
per cent of the houses had for sale signs on their lawn. They were new
houses built during the boom years and some have been on the market for a
year.
“A
lot of people are holding on to wait and see,” said Lois Milley, a
realtor with Sutton whose “For Sale” signs can be seen all over Labrador
West. Ms. Milley said she hasn’t seen any foreclosures yet.
Residents are not fleeing as they did during the recession in the 1980s. But the future is uncertain.
In
addition to the closing of the Wabush and Bloom Lake mines, Cliffs had
already stopped production at its iron ore pellet plant on Quebec’s
north shore earlier this year. Labrador Iron Mines Holdings Ltd. had to
suspend all operations at its mine and development projects.
The
fallout has spread across the area, with many local businesses, reliant
on miners’ spending, laying off staff. Even the lineups outside a Tim
Hortons drive-through are shorter and there’s no problem getting a table
at the local Pizza Delight.
Mike
Scott, who owns two mine-servicing businesses in Wabush, said the city
has changed over the past six to seven months. “The phones are quieter,
the shop is quieter, the town is quieter,” Mr. Scott said. “The
attitude, I guess, is somewhat subdued, like people died or something.
You know what I mean? The air is heavy.”
Mr.
Scott used to own one store in New Brunswick, which provided repair
services to mines. In 2010, business was so good he set up two
industrial shops in Wabush. One of his workshops has a crane that can
lift 100 tonnes to repair the giant shovels and equipment used to move
the ore.
His
business has changed for better and for worse. Contractors have left,
freeing up some of the work for shops like his. At the same time, there
are fewer mines to work on. “Not only did the mines invest. But a lot of
people like ourselves invested. We put up a building looking at the
future,” said Mr. Scott, who grew up in New Brunswick and commutes
between the two provinces. “Now you have all these players, and we are
one of them, still picking at the same plate. But the plate just got
smaller.”
Cost problems
For
companies that invested heavily in iron ore projects, the reality is
grim. Labrador Iron Mines suspended operations at its small mine in the
Trough when the mineral was trading at around $90 a tonne. Now the
company is racing to secure additional funding to stay afloat.
“It
is very difficult competition for all Canadian iron ore companies,”
said Labrador Iron’s chief executive officer John Kearney. “Companies
need much lower operating costs.”
Labrador
Iron is trying to renegotiate contracts with its suppliers and
restructure its operations to get costs below $70 a tonne.
The
Wabush mine’s cash costs were $137 a tonne earlier in the year. Bloom
Lake’s costs were $94 a tonne. Those mines made money when iron ore
prices were above $150 tonne, but not any more with prices dropping to
around $70.
Initially,
the community pinned its hopes on the Wabush mine being sold and
reopened under new owners. But a proposed deal fell apart in October and
Cliffs is getting the mine ready to close.
Mr.
Barron and others say the government should step in and provide some
assistance. The province’s Minister of Natural Resources, Derrick
Dalley, said his government was “prepared to work with any interested
company to ensure a smooth and expedient transition back to production,
provided that the company has a viable plan for the mine and is
committed to operating within our regulatory framework.”
“We
know this is a difficult time for the workers of the mine and their
families, as well as residents in the Labrador West area,” he added.
Alderon
Iron Ore Corp., which is trying to raise more than $1-billion for its
iron ore project in the Trough, is considering buying the mine. But it
is only interested in the infrastructure and the land and it would not
resume iron ore production.
The
company’s own iron ore deposit is close to the Wabush mine, IOC and
Bloom Lake. If Alderon obtained the necessary funding to start
construction, it would at least help provide some jobs to those who were
laid off from the Wabush mine. Alderon has no operations at this time.
But
with the price of iron ore steadily dropping, Alderon has had a hard
time attracting investors. “It is undoubtedly difficult to raise funding
in this climate,” said Tayfun Eldem, the company’s CEO.
Long-time
residents of Labrador West remember the 1980s when the recession
slashed demand for stainless steel products. IOC and the Wabush mine cut
production and laid off about 2,000 workers. Hundreds of houses were
abandoned.
“This
is not something we haven’t seen before in Labrador West. We understand
we live in a mining community and we are very much subject to the world
markets,” said Labrador City’s mayor Ms. Oldford, whose husband, son
and father-in-law worked at the mine.
“One
of the biggest things we started to talk about, even before the
downturn started to happen, was diversification … So that’s where we are
focused now,” she said.
Labrador
West has not exactly diversified since the 1980s. IOC, Wabush and Bloom
Lake are still the area’s main employers. The other businesses exist
largely to service the mining industry.
The future for Labrador West
Ms.
Oldford still has big dreams and would like to turn the area into a
manufacturing hub. The mayor and city councillors, all volunteers, have
dusted off an old report from the 1970s that explored developing other
industries.
In
an interview, she mused about someone developing a steel plant or
making ball bearings for mines or creating some kind of research centre.
She recently hosted a Taiwanese delegation and pointed out that Taiwan
has no natural resources and has to import everything it needs.
“We
have access to rail, we have access to a port. We have an industrial
power rate that is attractive. We have a highly skilled work force,” she
said.
A
round wooden plaque inscribed with the words “Iron Ore Capital” hangs
in the mayor’s chamber. That slogan seems somewhat faded now with two
mines closing and the industry on the ropes globally.
Many
residents like Bob Garland would like to stay. He loves the land, the
winters and blue skies. He moved to Labrador two years ago to work at H
& H Enterprises Ltd., a local business that does work for the mining
industry, including crushing rocks. He was a human resources manager
and was inundated with résumés when the Wabush mine suspended operations
this year. Now he too is looking for work.
“Will
there be anything else for me in Labrador West? Will I have to go to
another part of Labrador or go back to another part of Canada?” he said.
“There will be some of us that stay to fight another day.”
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