LETTER TO WILLIAM J. CASEY FROM J. ALLEN OVERTON

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP87M00539R002804700091-8
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 17
• Document Creation Date: December 22, 2016
• Document Release Date: September 17, 2009
• Sequence Number: 91
• Publication Date: January 11, 1985
• Content Type: LETTER

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FOUNDED 1897
SUITE 300
1920 N STREET NW
WASHINGTON
DC 20036
2021861 ? 2800
TWX 710?822?0126
The Honorable William J. Casey
hers Director
chair-na?: Central Intelligence Agency
Ralph E. Bailey Washington, D.C. 20505
vice Chairman and Chairman,
Finance Committee:
Harry M. Conger Dear Bill
Vice Chairmen:
January 11, 1985
CharksF.Barber It was great to have the opportunity to
George B. Munroe visit with ou at The Vdhite House on Tuesda I
Pierre Gousseland Y Y
Robert H. Quenon appreciated very much your concern with regard to
Thomas C. Graham the alarmin 1 ra p-
Walter E. 0usterman, Jr. g y pid :deterioration of the U . S , co
Richard A.Lenon per mining and processing sector of the economy and
Samuel K.Scovtl the questions this raises with respect to both
Thomas D. Barrow
President: national security and the nation's economic well-
J. Allen Overton, Jr. being .
Secretory and 7Yeasurer:
Henry l.Dworshak Iri that regard, I enclose some most thought-
~O`~ ful comments by our friend, Chuck Barber, delivered
George B. Munroe, New York
StonieBarker,Jr.,LexingtonKY recently in Arizona, which you wished to see.
P. Malozemoff, New York
Charles F. Barber, New York ?
OtesBennett,Jr.,Cleveland I know that the demands of your reading
Robert W. Hutton, Greenwich SChedUle are monumental, but, frankly, Barber ' s
Richard A. Zenon, Northbrook IL
E.B.Leisenring,Jr.,Phitadelphia comments deserve your reflection and review.
Ralph E. Bailey, Wilmington
Paul W. Douglas, Greenwich
K.E.McElhattan,Pituburgh If there is any further information we might
Samuel K.Scovil,Cleveland provide, or if we can be of assistance to you in
Thomas A. Holmes, Woodcliff Lake NJ
PierreGousseland,Greenwich any way concerning this or any other matter, it
A.M. Wilson, San Francisco would be my pleasure to hear from you .
Robert H. Quenon, St. Louis ,
Ralph F. Cox, Denver
Thomas D. Barrow, Houston Wi. th warmest personal regards , I am
Frank A. McPherson, Oklahoma City
W.A. Griffith, Wallace ID
Robert F. Anderson, Cleveland
Calvin A. Campbell, Jr., Chicago
Harry M. Conger, San Francisco S 127Ce r e 1 y,
R
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M
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ann, Bethlehem
Richard G. Miller, Jr., Chicago
Walter E. Ousterman, Jr., Oakland
R.J. Gary, Dallas
Michael A. Morphy, EI Monte CA
Charles W. Parry, Pittsburgh
Frank V. McMillen, Danbury
R.J. Assheton, Los Angeles
Kenneth J. Barr, Englewood CO
A.W. Calder, Pittsburgh
Gino P. Giusti, Stamford
Ralph L. Hennebach, New York EriC10S ure
William G. Kegel, Indiana PA
John A. Wright, Clayton MO
Thomas C. Graham, Pittsburgh
Robert McInnes, Cleveland
Douglas J. Bourne, Houston
W. J. Conway, Los Angeles
Raymond M. Ingram, Houston
James R. Voisinet, Dallas
Milton H. Ward, New York
Ian MacGrogor, Greenwich t
N.T. Camicia, Greenwich t
. Allen Overton, Jr.
? Immediate Past Chairman
t Honorary
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Remarks of
Charles F. Barber
Former Chairman
Asarco Incorporated
Mining Club of the Southwest*
Tucson, Arizona
December 8, 1984
More About Copper
--Reflections on Fundamentals in the Interdependent
World of the 1980's
Copper has been a big story here in Arizona all year--multimillion
dollar losses on copper operations, layoffs, mine curtailments and
shutdowns, the Phelps Dodge strike and, more generally, labor's response
to austerity and the demand for greater productivity, the advocacy
of Senator DeConcini and Congressmen McNulty and Udall, the President's
denial of relief to the copper industry in the Section 201 case.
And then, less than a month ago, Pennzoil's announcement that it had
decided to withdraw from the industry and that Duval's copper properties
were for sale.
This last has to have special poignancy here in Tucson. Duval's
record as an operator and a successful innovator is outstanding.
Pennzoil thus loins Atlantic Richfield, Louisiana Land, Occidental
Petroleum and Texaco in withdrawing from the industry this year.
These oil companies, which have the financial strength to hang on,
have decided to write off their copper investments and put their
energies to work elsewhere.
*American Mining Hall of Fame awards presentation banquet. The dinner
was sponsored by the Mining Club of the Southwest Foundation, Inc.
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Sir Ronald Prain, perhaps the dean of his generation in the industry,
advised some years ago:
"Change is inevitable, and the fruits of success
will go to those who adapt to it and make an ally
and not an enemy of this almost universal human
characteristic."*
It is fair to say that none of us foresaw the magnitude of the change
to which we would have to adapt in our search first for the route to
survival and then, down the road, "the fruits of success." Nor did
we anticipate the extent to which the domestic copper industry would
become a victim of other priorities of the U.S. Government.
The economics of the domestic copper industry have been thoroughly
analyzed this year and all of you have been exposed to a great deal
of heavyweight advocacy. I have subtitled my talk "Reflections on
the Fundamentals in the Interdependent World of the 80's." My objective
is to present the big picture in order to throw light on the President's
decision in the Section 201 case. Each of you can then form your
own judgment with respect to the future of the mines in Arizona.
I will begin my presentation with a number of oversimplified
statements:
1. Copper is a capital intensive, cyclical industry producing
a basic industrial material. Consumption is functionally
related to the durables component of the gross national
product on a world basis.
*Cited by Wolfgang Somes, "Mineral Policy of the Federal Republic of
Germany and the European Community," 1984 American Mining Congress,
Mining Convention, Phoenix, Arizona, p. 3.
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2. A price representative of the economic value of copper
depends on balanced markets. Historically a small excess
of supply has produced a disproportionate decrease in
price and vice versa. The markets are heavily influenced
by expectations relating to the adequacy of supply and
this is reflected both in the physical and futures markets.
3. Happiness in the copper mining industry depends on growth
in demand over the cycle. It is easier to provide the
required supply in an environment of growth. This brings
good prof its during the buoyant phase of the cycle and
ameliorates mistakes in the timing of additions to supply.
4. Happiness in a copper mining company means having costs
to market which compare favorably to those of its compe-
titors in the free-world and the financial strength to
ride out the low phase of the cycle.
All this is elementary. Now a word about the demand aide of the
market equation.
On Demand
My generation had an exciting time in the copper industry. We
were operating in an environment of growth. In 1950, the free world
consumption of copper totalled about 2,500,000 tons of copper; by
1973 consumption had tripled to about 7,500,000 tons--a compound
growth rate of over four percent per year. The challenge over this
period was to discover, finance and develop properties in order to
meet these steadily growing requirements. Silver Bell, San Manuel,
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Pima and Mission and a number of other copper mines were developed
near Tucson during this period. The return on investment was attractive.
The United States government in the late 1960's considered security
of supply of such urgency that it provided a major share of the financing
for Duval's Sierrita mine under the Defense Production Act.
I should say a word about intensity of use. Growth of demand
for material intensive products levels off as an economy matures.
Broadly, the post World War II rate of growth of demand for copper
was fueled in the 1950's by the rebuilding of Europe, in the 1960's
first by the industrialization of Japan and the material needs of
the Vietnam War and then later by above average growth in the developing
countries. It was the expectation of continuing growth in the developing
countries that fueled our buoyant expectations for the 80's.
At the same time copper was continuously engaged in the battle
of substitutes with new materials and new technology. The energy
cost inflation in the 1970's and the electronics revolution led to
downsizing of products and less use of heavy materials. Your honoree
last year, George Atwood of Duval, focused on the importance of an
industry committment to research, innovation and market development
to win new markets and defend established markets. George Atwood
and I first became acquainted as fellow directors of the Copper Develop-
went Association and the International Copper Research Association.
We both believed in the importance of research and were committed to
maintaining the strength of these industry research and market develop-
went organizations.
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Putting this all together, the Bureau of Mines as recently as
1979 in its year 2000 study forecast a "most probable" rate of growth
of 3.6% per year, leading to an annual requirement of 19.5 million
tons of primary copper in the year 2000.*
At that time, the prospective inadequacy of supply by the mid-
1980's was regarded as most serious. I participated in a conference
in London in May 1980 convened jointly by the AIME and the Institu-
tion of Mining and Metallurgy (UK) to. ad dress the problem. The root
concern was the long-term adequacy of supplies of minerals. This
concern stemmed from the natural consequences of political turbulence
in the developing world and of the unprecedented inflation which had
occurred in the leading industrial countries. Together these in-
fluences had swept away the bases for long-term private investment
in minerals projects. My contribution was to describe the immense
gap between the price required to sustain existing operations and
that required to develop new greenf field projects. I presented a
study that showed that a projected price of at least $2.35 per pound
would have been required to justify construction of the Cuajone mine
in Peru, had construction started in 1980.** I predicted there would
*Sousa, The U.S. Copper Industry (Bureau of Mines, October 1981), p.
78.
**Barber, Mineral Investment in an Anxious World, in National and
International Management of Mineral Resources (The Institution of
Mining and Metallurgy, London, 1981) pp. 133-152.
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not be any more such mega projects for a long time. Michael
West, publisher of the Mining Journal (London) referred to Cuajone
and La Caridad, then nearing completion in northern Mexico, as "the
last of the dinosaurs." The late Sir Mark Turner, then Chairman of
The Rio-Tinto Zinc Corporation, who had just announced the purchase
of Texasgulf's interest in the Cerro Colorado project in Panama,
shared the platform and defended his contrary judgment. It provided
some lively by-play at the meeting.
The recession which began in 1981 and bit severely in 1982 brought
losses and a round of severe cost cutting to the domestic copper
industry. But the industry still anticipated a resumption of the
projected growth in demand. This expectation was then shattered
with stunning force following the financial crisis in Mexico in August 1982.
As the enormity of the LDC debt problem became clear, it also
became clear that Latin America and much of the developing world was
faced with an extended period of austerity and limited growth, and
that all but the most urgent of the materials intensive capital pro-
jects then in various stages of planning would have to be deferred.
More recent forecasts by the Bureau of Mines and the industry
have reduced anticipated average growth of consumption of copper
over the coming decade to from 1X to 1 1/2X per year.
This reduction in the projected average rate of growth of demand
has had a severe impact on the copper industry. On average,
large and growing amounts of copper will still be required each year.
But the price environment is likely to be poor because the appro-
priate response on the supply side of the equation, given existing
equipped capacity, will be vastly more difficult.
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Supply
The adjustment of supply in times of reduced demand has always
been difficult for the copper industry because of the ponderous
momentum of production and the fierce perverse dynamic which tends
to rule the industry during recessions. This latter follows from
the relationship between operating rates and/or grade of ore mined
and unit costs.
The copper pipeline is long. The time required for mining~milling-
smelting-refining-transportation to fabricator-manufacture of wire,
sheet, shapes, alloys, etc. -transportation to manufacturer of pro-
ducts, etc. to market is long. And when prices weaken, the pressure
on the miner is both to increase thruput and to raise the cut-off
grade to get more units of production per period in order to main-
tain revenue. That response increases output and exacerbates the
pressure on price. Historically, the burden of responding construc-
tively to conditions of excess supply has been assumed by the largest
and lowest cost producers because they tend to be the producers with
f inancial resources to accept reduced revenues for a period in the
interest of relieving pressure on price.
In former times, the inexorable cyclicality of the copper industry
has led to bankruptcies and consolidations within the industry during
each significant recession. By the late 1940's and continuing to
the mid-1960'x, eight companies, two British, one Belgian, and five
U.S., controlled three-quarters of the free world's supply of primary
copper.
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These companies were headed by experienced men committed to the.
copper industry. Demand was cyclical, but to quote Ronald Fraser
of the Anglo American group, there was "sufficient community of under-
standing and resolution among producers to minimize the adverse effects
(of reduced demand) by taking appropriate measures."*
The structure of the industry changed dramatically in the late
1960's. By the time of the first oil shock in 1973, more than 40X
of the supply of primary copper had passed into the hands of govern-
ments of developing countries. If we were to add the additional
supply influenced by LDC government policy, the figure would be well
over 50~ of the supply.
The mining companies owned by governments in the developing countries
have not at any time to date, made a significant response to the economic
imperative of reduced demand. They did not do so in the 1975-77
recession nor in the 1981-82 recession. They continued to operate
at maximum available capacity in response to social priorities and
the need for foreign exchange. The result for all of them and for
all others in the industry has been the sacrifice of economic rents
attributable to their natural resources and an immense transfer of
wealth from the lesser developed producing countries to the indus-
trialized consuming countries.
Thus the full burden of ad3ustment to reduced demand was, and
continues to be, thrust on the private North American companies, as
those of us here in Arizona know all too well.
*Ronald Fraser, "The Copper Industry: Then, Now and Tomorrow," presented
at the Mining and Metallurgical Society luncheon, March 8, 1983,
Atlanta, Georgia.
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The irony of this record is that this lack of response has been
financed, to a considerable extent, by support mechanisms the indus-
trialized countries have put in place to aid and assist the developing
countries.
I refer to the International Monetary Fund (IMF), the World Bank
and the Multilateral Development Banks (MDBs). I find it extraordinary
that over the last two years, the IMF alone has made available to
six countries which produce over 50y of the supply of primary copper
$1.2 billion under its Compensatory Financing Facility, primarily
because of the low price of copper and has made available to these
same countries another $2 billion under its general credit facilities
because of shortfalls in the availability of foreign exchange. During
the same period the multilateral development banks loaned additional
tens of millions of dollars at concessional terms to Chile, Zambia
and Zaire for investment in their copper industries.
Three billion dollars is a lot of money. I have urged that the
IMF and the MDB's should contribute to the solution of the problem
of excess supply of copper and not be part of the problem. I have
made a number of suggestions to that end.* Senator DeConcini and
Congressman McNulty have sponsored parallel legislative initiatives.
To date there has been only a limited response by the international
f inancial institutions.
Policy Issue
That is the setting. I come now to the policy issue that con-
fronted the Administration in the Section 201 case.
*See American Banker, "Compensatory Financing Rules Can Be Counter-
productive," September 27, 1983; "Economics of Copper in the Mid-
80's; A Role for the Multilateral Financial Institutions," Materials
and Society, Vol. 8, No. 3 (1984) pp. 481-489.
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1. One of the highest priorities of the United States Govern-
went is to maintain the stability of the international
financial system. This is regarded as "an all win or all
lose situation, there is no in-between."* Hence the extra-
ordinary measures to help Mexico, Brazil and Argentina,
the largest debtors, avoid default. Hence, the pressure
on the U.S. Government, the IMF and the commercial banks
to accommodate the debtors. Servicing and eventual repayment
of the debt will require both austerity and growth over
an extended period. To make this scenario credible, the
leaders of the industralized countries have established
a growth target for the industrialized countries of not
less than 3y per year in real terms. Even this projects
a sustained period of restrained growth in the developing
countries and a deferral of all but the most urgent capital
intensive, infrastructure projects. "Mega-projects are
out," said one informed banker, referring to mining projects
in developing countries.**
2. The Administration's policy strategy is based on economic
growth -- free up the economy, encourage investment, avoid
protectionist measures. The Administration's economic
program has had remarkable success to date in stimulating
growth. The performance of the U.S. economy has been the
envy of the world. The gross national product has grown
*See "The Global Repercussions of U.S. Monetary and Fiscal Policy,"
Economic Policy Council of the UNA-USA (September 1984). The quo-
tation is from Christian F. Baiz III, Vice President, Manufacturers
Hanover Trust Company, "Metals and Mining Industry-A New Agenda,"
presentation to Society of Mining Engineers, Detrver, Colorado
(October 26, 1984)
**See Baiz, cited above.
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by 15Y over the last two years, albeit from a low base.
This is the strongest advance for the U.S. economy in any
two year period since World War II. Notwithstanding the
strong dollar, more jobs have been gained 'in the United
States than have been lost in the relatively few severely
impacted industries.
The copper industry has participated in this advance in
terms of consumption. Data available as of this date
indicates that free world consumption in 1984 may be the
greatest ever; it will surely be second only to 1979.
Stocks on the terminal exchanges in London and New York
have declined almost 50y since their peak in January -
including each of the last three weeks. Although there
may be some offsetting increase in refiners stocks, over-
all the level of inventories has declined substantially.*
Nonetheless, because of prior conditions of excess supply
and resulting overhanging stocks, the price of ,copper in
real terms in dollars has been and remains at the lowest
level in the century, except for slightly lower prices
for a brief period in 1932.*
This is the setting. What I have just said is stated in the
President's order in the Section 201 case.
*See Richard de J. Osborne, President, Asarco Incorporated, Presentation
to Quarterly Meeting of Securities Analysts (November 1,1984).
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The President's order denying relief relies on pure economic
theory. "I have determined," he wrote, "that granting relief is not
consistent with our national economic interests." He listed three
reasons
1. The imposition of import restrictions "would create a
differential between U.S. and world copper prices." This
would "seriously disadvantage the copper fabricating industry"
and "over time, shrink domestic demand for copper and add
to the serious problems faced by U.S. copper producers."
2. "Import relief would also affect the export earnings of
the foreign copper-producing countries, many of which are
heavily indebted and highly dependent on copper exports.
It would, therefore, complicate our efforts to maintain
the stability .of the international financial system and
lessen the ability of foreign countries to import goods
from the United States."
3. Finally, "there are encouraging signs that economic recovery
is beginning to have a favorable effect on world copper
prices...stocks have fallen...a significant price increase
is expected in the near future."
The reasoning is classic. Impose no restraints on supply, encourage
demand, "resist protectionist acts" and the working of the market
system through price over time "will foster...recovery." Note also
the reference to the Administration's "efforts to maintain the stability
of the international payments system."
In a speech in London in October, the Director of the Bureau of
Mines reviewed the cost-cutting and other survival strategies of the
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U.S. copper companies. These developments, he said, "illustrate the
free market at work; they also 3ustify it." "We will probably have
to accept some decrease in our mineral self-sufficiency as a trade-
off," he added, "but the trade-off is acceptable."* In contrast,
Senator DeConcini commented: "From my vantage point, the President
has written off America's copper industry and the tens of thousands
of American fobs that go with it."**
These two comments present the policy issue:
1. Will markets recover in time to prevent the virtual shut-
down of the U.S. copper mining industry?
2. Will the recovery be sufficiently sustained to provide a
basis for continuing investment in the U.S. copper industry?
The President says "yes" to both questions. His Director of the
Bureau of Mines applauds the cost reductions which have been accom-
plished by domestic producers in response to the relentless pressure
of the "free market at work" and anticipates "some" decrease in U.S.
production capacity which he states is "acceptable."
Senator DeConcini is not convinced. He, Congressmen McNulty and
Udall, and the principal industry executives have stated forcefully
their view that certain measures are required now to forestall the
virtual destruction of the domestic industry. They state that the
U.S. mines are competitive and could hold their own in the free market
on a level playing field, but that the producers in the developing
countries, financed both directly and indirectly by the international
f financial institutions, are playing by different rules. That is
unfair and the U.S. Government should seek appropriate remedies.
*Robert C. Horton, Remarks to the American Metal Market London Metal
Forum (October 8, 1984) p. 24.
**Letter to the Arizona Republic, November 7, 1984.
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What do each of you think?
This is an important national issue. There is no way that U.S.
manufacturing industry and the U.S. defense establishment can supply
their needs without the continued availability of a mayor portion of
the 1,000,000 tons of domestic capacity still operating - except
in the very long term.
Q. Mr. Barber, What do you think is the future of the copper mines
in Arizona?
A. Given the President's premises, I understand his decision
in the Section 201 case.
I do not question the committment of the Administration
to a growth strategy. The growth of trade and of the economic
interdependence of nations over the post-war period has been an
essential aspect of the sustained real growth and widely shared
prosperity of the period.
I do not question the priority given by the President to
maintaining the stability of the international financial system.
In its present, extremely extended posture, I believe this presents
a "we all win or we all lose" sort of challenge.
As a result of the strong economic growth in the United
States and more modest growth in the other industrialized countries,
consumption of copper in 1984 has been good and may turn out to
be the highest ever. If the level of consumption is maintained
in 1985, it is reasonable to anticipate, as the President stated
in his order denying relief, "a significant price increase...in
the near future."
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I emphasize "near" future, because, as of this date, the
price of copper remains below the costs of production of all but
a handful of the world's copper mines and the costs of these few
have been aided by devaluation of the local currency. The length
of time that a private company can or will accept losses on operations
is limited. Time runs out. As I noted at the outset, five oil
companies which have a choice have decided this year to withdraw
from copper mining in the United States. The capacity of the
remaining mining companies to finance continuing operations is
limited. That reality must command the attention of our national
leaders. As I have said, there is no way_the continuing needs
of the United States can be supplied during periods of average
and strong demand without the continued availability of the greater
part of that capacity. The billions of dollars and years of
time that would be required to replace that capacity elsewhere
in the world is not and could not be available except in the
very long term. Nor would the virtual loss of our economically
competitive domestic copper industry be acceptable from any point
of view.
The U.S. mines now operating are among the most efficient
in the world and some of them represent the leading edge of copper
mining technology. I hope Mr. T.C. Osborne's recent discussion
of Asarco's cost reduction experience at the Mission mine in
Arizona* will put to rest the notion that the major Arizona mines
are not acceptably placed in the array of costs of the free world`s
copper mines.
*T.C. Osborne, Executive Vice President, Asarco Incorporated, Pre-
sentation to Security Analysts (July 26, 1984). See Engineering and
Mining Journal, September 1984, pp. 21, 25.
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To answer the question, I believe that the Arizona mines
have a sound future. However, under existing conditions, they
are a victim of other national priorities and time is running
out.
We all hope and some of us expect that demand for copper
will continue strong in 1985 and that, as stocks continue to
decline, market forces will bring improved prices. The President's
order states that he has "directed the Secretary of Commerce to
actively monitor the domestic copper industry including inventories
and the levels of copper imports." The situation is being closely
monitored and I know that the concerns I have expressed are widely
shared .
The longer term issues remain. The economics of 'the copper
mining industry in the free world have been so bad for so long
that they are forcing a widespread reassessment in both the
United States and the developing countries of past strategies
and policies.
I plan to continue to work encouraging public under-
standing of the issues and I hope that you will too. If we do,
I have to be confident that there is a sound future, for the
majority of the copper mines of Arizona.
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