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The implications of the Japanese resource procurement strategy for staple resource regions : an examination… Maund, Jacqueline K. 1984

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THE IMPLICATIONS OF THE JAPANESE RESOURCE PROCUREMENT STRATEGY FOR STAPLE RESOURCE REGIONS: An Examination of Coal Mining i n Southeastern B.C. JACQUELINE K. MAUND B.A. Honours, M c G i l l U n i v e r s i t y , 1980 A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF ARTS i n THE FACULTY OF GRADUATE STUDIES (Department of Geography) We accept t h i s t h e s i s as conforming to the re q u i r e d standard THE UNIVERSITY OF BRITISH COLUMBIA A p r i l 1984 ® J a c q u e l i n e K!. Maund, 1984 In p r e s e n t i n g t h i s t h e s i s i n p a r t i a l f u l f i l m e n t o f the requirements f o r an advanced degree a t the U n i v e r s i t y o f B r i t i s h Columbia, I agree t h a t the L i b r a r y s h a l l make i t f r e e l y a v a i l a b l e f o r r e f e r e n c e and study. I f u r t h e r agree t h a t p e r m i s s i o n f o r e x t e n s i v e copying of t h i s t h e s i s f o r s c h o l a r l y purposes may be granted by the head o f my department o r by h i s o r her r e p r e s e n t a t i v e s . I t i s understood t h a t copying or p u b l i c a t i o n of t h i s t h e s i s f o r f i n a n c i a l g a i n s h a l l not be allowed without my w r i t t e n p e r m i s s i o n . Department o f Geography  The U n i v e r s i t y o f B r i t i s h Columbia 1956 Main Mall Vancouver, Canada V6T 1Y3 Date A p r i l 4, 1934 ABSTRACT The study begins by n o t i n g the importance of the P a c i f i c Rim as a t r a d i n g area w i t h i n the world economy and examines growing economic t i e s between Japan and B.C. Japan i s becoming i n c r e a s i n g l y s i g n i f i c a n t as a market f o r B.C.'s raw m a t e r i a l s and a source of investment c a p i t a l f o r resource development. In consequence we need to examine the strategy followed by Japanese i n d u s t r i a l i n t e r e s t s i n procuring raw m a t e r i a l s . I t i s noted that t h i s strategy d i f f e r s i n s i g n i f i c a n t respects from the American str a t e g y of d i r e c t f o r e i g n investment which has been so dominant i n Canadian resource development and thus may have d i f f e r e n t i m p l i c a t i o n s f o r a s t a p l e r e g i o n . The Japanese resource procurement strategy i s described f o c u s i n g on Japanese aversion f o r i n v e s t i n g equity c a p i t a l , long-term c o n t r a c t s , m u l t i p l e - s o u r c i n g of resources, and consortium resource purchasing. A set of hypotheses are developed concerning the i m p l i c a t i o n s of t h i s strategy and are tested i n the context of the c o a l industry i n southeastern B.C. This involved i n t e r v i e w s with spokesmen from the four c o a l companies i n the region and r e l i a n c e upon a number of primary and secondary sources. The study concludes that the Japanese strategy gives r i s e to a set of new problems which increases the costs and r i s k s a s s ociated with s t a p l e development. For example, t h e i r preference f o r not i n v e s t i n g equity s h i f t s the r i s k s of resource development onto the owners of the venture and means that i t i s e a s i e r f o r the Japanese to wind down co n t r a c t s or terminate a t r a d i n g r e l a t i o n s h i p than under the American strategy of d i r e c t f o r e i g n investment. Consortium resource purchasing i n h i b i t s s e l l e r s from r e c e i v i n g adequate returns f o r t h e i r resource. The Japanese I l l attempt to encourage over-supply by l e t t i n g out contracts f o r more resources than they require. This r e s u l t s in resource developers bearing the costs of unused capacity when contract cut backs occur. F i n a l l y , some policy suggestions are offered regarding the problems posed for staple economies by the Japanese resource procurement strategy. i v TABLE OF CONTENTS Page ABSTRACT i i TABLE OF CONTENTS i v LIST OF TABLES v i i LIST OF MAPS i x ACKNOWLEDGEMENTS x I. INTRODUCTION 1 I I . THE IMPORTANCE OF JAPAN AS A MARKET AND INVESTMENT SOURCE FOR B.C.'S RESOURCES 7 I I I . HISTORICAL BACKGROUND TO MINING IN SOUTHEASTERN B.C 15 A. Coal Mining i n the E l k V a l l e y , 1900-1960 15 B. Contemporary Coal Mining Under the Stimulus of Japanese Demand 21 IV. THEORETICAL BACKGROUND 33 A. The American Resource Procurement Strategy 33 B. The Japanese Resource Procurement Strategy 36 (a) H i s t o r i c a l Background 36 (b) D e s c r i p t i o n of the Strategy 37 (c) P o s s i b l e I m p l i c a t i o n s of the Japanese Strategy . . . 39 C. Methodology . . . . . 46 V. PRESENTATION OF FINDINGS 52 A. The I m p l i c a t i o n s of Japanese Preference f o r not I n v e s t i n g Equity 53 (a) The Development of Backward Linkages 53 ( i ) Foreign and Domestic Purchasing Patterns . . . 53 ( i i ) Domestic Development of Inputs to the Coal Industry 55 V Page (b) The Development of Forward Linkages 61 (c) The Development of F i s c a l Linkages . . . 63 B. The I m p l i c a t i o n s of Long-term Contracts w i t h Japanese Buyers 69 (a) Long-term Contracts and Staple Producers 69 ( i ) S t a b i l i t y of Demand . 70 ( i i ) S t a b i l i t y of P r i c e 73 ( i i i ) Concluding Remarks 74 (b) Long-term Contracts and Regional S t a b i l i t y . . . . 80 C. The I m p l i c a t i o n s of Japanese M u l t i p l e - S o u r c i n g 89 (a) Competition on the Supply Side 89 (b) The E f f e c t s f o r Coal Supplying Regions 95 D. The I m p l i c a t i o n s of Japanese Consortium Resource Purchasing 100 VI. ANALYSIS OF FINDINGS 107 A. Summary of Research Findings 107 B. The I m p l i c a t i o n s of the Japanese Strategy f o r a Staple Resource Region I l l V I I . CONCLUSION 121 A. P o l i c y Suggestions 121 B. Concluding Comments 129 BIBLIOGRAPHY 134 APPENDIX A. Coal Mining S t a t i s t i c s f o r E l k V a l l e y Region, 1898-1979 142 APPENDIX B. Main Stages Involved i n the Mining and Pr e p a r a t i o n of Coal 154 APPENDIX C. Main Stages Involved i n the Handling of Coal at Roberts Bank Port 156 APPENDIX D. Interview Questions 157 v i Page APPENDIX E. Forms Completed by B.C. Coal Regarding Sourcing of Inputs and Services 167 APPENDIX F. Forms Completed by Westshore Terminals L t d . Regarding Sourcing of Inputs and Services 175 v i i LIST OF TABLES Page Table 1. Exports of B.C. products to p r i n c i p a l c o u n t r i e s , 1965-1981 9 Table 2. Exports of B.C. products to Japan, 1965-1981 . . . . 10 Table 3. New B.C. mega-projects developed to supply the P a c i f i c Rim 13 Table 4. H i s t o r i c a l E l k V a l l e y population f i g u r e s 20 Table 5. Coal companies operating i n southeastern B.C., 1981 28 Table 6. F i n a n c i a l data f o r Ka i s e r Resources 65 Table 7. D i s t r i b u t i o n of K a i s e r ' s cash flow 67 Table 8. Contracted tonnages versus a c t u a l purchases from B.C. Coal L t d . by Japanese s t e e l m i l l s , 1976-1982 . 71 Table 9. Contracted tonnages versus a c t u a l purchases from Fording Coal L t d . by Japanese s t e e l m i l l s , 1972-1982 72 Table 10. Annual production l e v e l s f o r Kaiser/B.C. Coal L t d . , 1968-1982 77 Table 11. Annual production l e v e l s f o r Fording Coal L t d . , 1972-1982 . . . . . 78 Table 12. Annual s i z e of Kaiser/B.C. Coal L t d . labour f o r c e , 1970-1983 79 Table 13. Annual s i z e of Fording Coal L t d . labour f o r c e , 1972-1982 79 Table 14. Unemployment f i g u r e s by occupation f o r E l k V a l l e y r e g i o n , 1981-1983 82 Table 15. Average income of tax f i l e r s f o r E l k V a l l e y communities and the province of B.C., 1970-1980 . . 83 Table 16. Contemporary E l k V a l l e y p o p u l a t i o n f i g u r e s 84 Table 17. Apartment vacancy r a t e s f o r E l k V a l l e y communities, 1979-1982 85 Table 18. T o t a l value of a l l b u i l d i n g permits awarded f o r E l k V a l l e y communities, 1970-1982 86 v i i i Page Table 19. Foreign suppliers of Japanese coking coal needs, 1970-1981 90 Table 20. Comparison of forecasted Japanese me t a l l u r g i c a l coal requirements from A u s t r a l i a and western Canada with contracted amounts 94 Table 21. Japanese coking coal requirements i n r e l a t i o n to steel production, 1970-1983 98 i x LIST OF MAPS Page Map 1. L o c a t i o n of E l k V a l l e y Region i n B r i t i s h Columbia . . . 4 Map 2. H i s t o r i c a l Coal Mining i n the E l k V a l l e y 16 Map 3. L o c a t i o n of Roberts Bank Coal Handling Port 23 Map 4. Contemporary Coal Mining i n the E l k V a l l e y 24 X ACKNOWLEDGEMENTS I would l i k e to thank my s u p e r v i s o r s , Terry McGee and Pat Marchak. Pat Marchak's help i n i n i t i a t i n g the t h e s i s and guiding me through the p a i n f u l process of "research design" i s p a r t i c u l a r l y appreciated. I would a l s o l i k e to thank Tom Gunton f o r h i s comments on my research f i n d i n g s and d i s c u s s i o n s which were extremely h e l p f u l i n t h i n k i n g about the i m p l i c a t i o n s of the Japanese resource procurement s t r a t e g y . Ray Payne's comments and sharing of ideas are a l s o much appreciated. Funding f o r my f i e l d w o r k was made p o s s i b l e by Clyde Weaver through a grant from the Max B e l l Foundation. Patsy Quay i s g r a t e f u l l y acknowledged f o r her e x c e l l e n t work i n typing the t h e s i s . F i n a l l y I would l i k e to thank the many i n d i v i d u a l s who generously shared t h e i r time and knowledge during my i n t e r v i e w s . Without t h e i r p a r t i c i p a t i o n t h i s t h e s i s would not have been p o s s i b l e . x i I n d i v i d u a l s Contacted During Fieldwork Interviews B.C. Coal L t d . Robert Stanlake, Executive Vice President of Marketing Guy Heywood, Marketing Analyst Greg McCormick, Purchasing Agent - Jack Buchanan, Supervisor, Personnel A d m i n i s t r a t i o n Byron Creek C o l l i e r i e s L t d . - Kent O'Connor, P u b l i c R e l a t i o n s Advisor Canada Employment and Immigration Rod Smelser, Economist Canada Mortgage and Housing Corporation - George Fessenden, Cranbrook Branch Manager - A.M. MacMillan, Chief Appraiser - Helmut P a s t r i c k Crows Nest Resources L t d . Charles Vermeeren, Manager, P u b l i c and Government A f f a i r s - Roger Goodman, Marketing Coleman C o l l i e r i e s L t d . - W i l f r i d Loucks, President Fording Coal L t d . - Ken Carnes, General Manager Marketing - Wayne St. Amour, Ad m i n i s t r a t o r of P u b l i c R e l a t i o n s Pat K o s k i , A d m i n i s t r a t o r , Purchasing M i n i s t r y of Industry and Small Business Development, B.C. Government - Ken Roueche, Research O f f i c e r - John Roucks Revenue Canada - Doug Smith Westshore Terminals L t d . Greg S c o t t , Manager of Operations 1 I . INTRODUCTION According to the s t a p l e s theory of economic growth, a s t a p l e s economy i s one where r e s o u r c e - i n t e n s i v e exports are the l e a d i n g sector which sets the pace f o r economic growth. Scarce f a c t o r s of production have to be imported and continued economic growth r e q u i r e s the emergence of a new s t a p l e sector i f e x t e r n a l demand d e c l i n e s or the resource base i s exhausted. Economic development i n such a region w i l l be based on linkages stemming from the s t a p l e s e c t o r . For example, backward linkages or the domestic manufacture of inputs to the s t a p l e sector may develop, and forward linkages may emerge where i n d u s t r i e s using the s t a p l e product as an input develop. The s t a p l e sector can a l s o generate f i n a l demand linkages as r e f l e c t e d i n the growth of a consumer goods i n d u s t r y , and f i s c a l linkages which r e f e r to the normal and above normal returns to c a p i t a l earned i n the l e a d i n g s e c t o r . An o p t i m i s t i c v e r s i o n of the s t a p l e s theory p r e d i c t s that these linkages w i l l develop and encourage f u r t h e r growth and d i v e r s i f i c a t i o n to the extent that the r e g i o n a l economy i s no longer dependent on the s t a p l e s e c t o r . However, the more common experience i s one where the economy be-comes caught i n a " s t a p l e s t r a p " w i t h an over-concentration of resources i n the s t a p l e sector and a c y c l i c a l p a t t e r n of economic growth f e a t u r i n g "booms" and "busts" r e s u l t i n g from changes i n e x t e r n a l demand f o r the r e g i o n a l s t a p l e . * * * * * B r i t i s h Columbia has always been a s t a p l e s economy where economic growth has been i n i t i a t e d by e x t e r n a l demand f o r p a r t i c u l a r resources. At present, f o r e s t and mineral products are B.C.'s two s t a p l e exports making 2 up 89 percent of a l l p r o v i n c i a l exports. These c o n s t i t u t e the leading 2 sector which sets the pace f o r economic growth i n the province. We w i t -nessed the danger of such over-concentration during the recent d e c l i n e i n U.S. demand f o r B.C. lumber and the r e s u l t i n g downturn i n the p r o v i n c i a l economy. H i s t o r i c a l l y , Great B r i t a i n and the United States have repre-sented the metropolitan economies whose i n d u s t r i a l development has been aided by imports from r e s o u r c e - r i c h B.C. More r e c e n t l y the P a c i f i c Rim, and Japan i n p a r t i c u l a r , has emerged as an important market f o r B.C. s t a p l e s . The U.S. now buys 44 percent of B.C.'s exports and Japan i s the 3 second major export market consuming 23 percent of t o t a l exports. Of the province's s t a p l e exports, f o r e s t r y and mineral products, the U.S. took 4 41 percent and Japan took 24 percent i n 1980. L i k e the United States and B r i t a i n , Japan i s i n t e r e s t e d p r i m a r i l y i n o b t a i n i n g raw m a t e r i a l s from B.C. to feed i n d u s t r i a l a c t i v i t y at home. The province's three main s t a p l e exports to Japan are f o r e s t products, c o a l , and copper; together they earn more than three-quarters of t o t a l B.C. earnings from exports to Japan.~* Since the 1960's Japanese companies have begun d i r e c t l y i n v e s t i n g i n B r i t i s h Columbia, p a r t i c u l a r l y i n resource mega-projects. Although not p r e s e n t l y major i n v e s t o r s i n the province, the s i g n i f i c a n c e of investment from Japan and other P a c i f i c Rim c o u n t r i e s such as South Korea i s expected to increase due to f a s t paced i n d u s t r i a l growth and the subsequent demand f o r raw m a t e r i a l s . Much of the s t a p l e export a c t i v i t y i n B.C. has been c a r r i e d out by American m u l t i n a t i o n a l corporations aiming to secure a supply of raw m a t e r i a l s to feed manufacturing a c t i v i t y i n the U.S. The i m p l i c a t i o n s of heavy l e v e l s of American investment i n the s t a p l e resource and manufacturing sectors of the Canadian economy have been d e a l t w i t h by w r i t e r s such as A i t k e n (1961), Watkins (1968), L e v i t t (1971), and Gray (1972). Thus we have 3 some understanding of the workings and e f f e c t s of the strategy of d i r e c t f o r e i g n investment followed by the Americans to procure raw m a t e r i a l s from abroad. However, the str a t e g y followed by Japanese i n d u s t r i a l i s t s to o b t a i n overseas resources i s q u i t e d i f f e r e n t from the American strategy w i t h which we have become f a m i l i a r . In view of the growing Japanese involvement i n B.C. s t a p l e i n d u s t r i e s and our u n f a m i l i a r i t y w i t h the nature of t h i s involvement i t i s important to understand the Japanese resource procurement strategy and i t s i m p l i c a t i o n s f o r resource regions. A l s o , the n e w l y - i n d u s t r i a l i z i n g c o u n t r i e s (N.I.C.'s), Taiwan, Singapore, Hong Kong, and South Korea, appear to be f o l l o w i n g the Japanese model of overseas investment. South Korea i n p a r t i c u l a r has j u s t completed i t s f i r s t major investment i n Canada and based on the r a p i d growth r a t e of i t s economy we can p r e d i c t that country to become the next b i g i n v e s t o r i n B.C. Such observations add f u r t h e r weight to the argument that we must study and understand the investment s t r a t e g i e s of these c o u n t r i e s . This study examines the i m p l i c a t i o n s of the Japanese resource procure-ment strategy by focusing on a case study of a st a p l e s region supplying Japan, the c o a l mining region of the E l k V a l l e y i n southeastern B.C. (see Map 1). Coal represents the most important B.C. export to Japan i n terms of value, and u n t i l the northeast c o a l p r o j e c t begins shipping i n 1984, the southeastern region i s the only p r o v i n c i a l c o a l producer. I t i s an o l d c o a l mining region which s u f f e r e d an economic downturn during the 1940's and 1950's, but experienced a resurgence i n growth i n the l a t e 1960's as defunct mines were re-opened to supply the Japanese s t e e l i n d u s t r y w i t h m e t a l l u r g i c a l c o a l . I conducted i n t e r v i e w s w i t h the four c o a l companies p r e s e n t l y operating i n the region and consulted a number of primary and secondary sources i n an e f f o r t to a s c e r t a i n the i m p l i c a t i o n s of the 4 SOURCE: Base map from A.L. F a r l e y , A t l a s of B r i t i s h Columbia. Vancouver: U n i v e r s i t y of B r i t i s h Columbia Press, 1979, p. 11. 5 Japanese resource procurement strategy f o r t h i s s t a p l e s r e g i o n . The study begins w i t h a general overview of the increased importance of the P a c i f i c Rim as a t r a d i n g area and focuses on Japanese involvement i n B.C. resources stemming from the 1960's. I then examine the c o a l region of the E l k V a l l e y beginning w i t h a b r i e f h i s t o r i c a l d e s c r i p t i o n of the r e g i o n a l economy during the 1900-1960 p e r i o d . Then the contemporary c o a l mining economy i s described i n c l u d i n g information on the c o a l companies, markets, c o n t r a c t s , and the changes which have taken place i n response to Japanese demand f o r the s t a p l e export. Chapter IV examines the Japanese resource procurement s t r a t e g y . To h i g h l i g h t how d i f f e r e n t i t i s from the American strategy I begin w i t h a b r i e f d e s c r i p t i o n of the l a t t e r and i t s r a m i f i c a t i o n s . The four main c h a r a c t e r i s t i c s of the Japanese strategy are then presented and a set of hypotheses developed concerning the i m p l i c a t i o n s of each f o r a s t a p l e s r e g i o n . These hypotheses were t e s t e d i n the context of c o a l mining i n the E l k V a l l e y region and Chapter V presents the research f i n d i n g s . The study concludes w i t h an a n a l y s i s of the i m p l i c a t i o n s of the Japanese resource procurement strategy and presents some p o l i c y suggestions concerning the problems f o r B.C. which i t engenders. 6 FOOTNOTES 1. M.H. Watkins, "A Staple Theory of Economic Growth," i n Approaches to  Canadian Economic History, ed. W.T. Easterbrook and M.H. Watkins (Toronto: Macmillan Company of Canada Ltd., 1978), p. 141-58. The following description of staples theory i s based on th i s a r t i c l e . 2. B.C., Ministry of Finance, B.C. F i n a n c i a l and Economic Review, p. 97, 3. 3. B.C., Ministry of Finance, B.C. F i n a n c i a l and Economic Review, p. 1. 4. B.C., Minis t r y of Finance, B.C. F i n a n c i a l and Economic Review p. 96, 5. Keith A.J. Hay and S.R. H i l l , Canada-Japan Trade and Investment (Ottawa: Economix International, 1979), p. 68. 7 I I . THE IMPORTANCE OF JAPAN AS A MARKET AND INVESTMENT SOURCE FOR B.C.'S RESOURCES Recent decades have seen a gradual d e c l i n e i n the hegemonic p o s i t i o n occupied by the North A t l a n t i c region i n the world economy. The very impressive performance of the Japanese economy i n the post-war p e r i o d and the f a s t r a t e of economic growth i n the newly i n d u s t r i a l i z i n g c o u n t r i e s of Hong Kong, Taiwan, Singapore, and South Korea have aided a s h i f t i n economic power westward toward the P a c i f i c Rim. Trade between North America and Europe as a percentage of t o t a l world trade i s d e c l i n i n g , w h i le trade w i t h i n the P a c i f i c Rim i s growing at a r a t e f a s t e r than the world average.^ The B r i t i s h Columbia economy has been drawn i n t o t h i s p a t t e r n of increased t r a d i n g and economic i n t e g r a t i o n w i t h i n the P a c i f i c Rim. The province's exports to P a c i f i c Rim economies have grown from a value of $400 m i l l i o n i n 1969 to 3.1 b i l l i o n i n 1980. 2 In 1970, 24 percent of a l l B.C. exports were destined f o r P a c i f i c Rim co u n t r i e s whereas i n 1980, t h i s 3 f i g u r e had r i s e n to 32 percent. These exports are overwhelmingly composed of unprocessed and semi-processed goods; only about 2 percent of B.C.'s exports to P a c i f i c Rim c o u n t r i e s are f u l l y manufactured goods and end 4 products. Within the P a c i f i c Rim, Japan has c o n s i s t e n t l y been the most important market f o r B.C. products. B r i t i s h Columbia, meanwhile, i s the major source of Canadian imports f o r Japan since 50 percent of Canada's exports to Japan are from B.C.^ However, trade between the Japanese and B r i t i s h Columbian economies only began to achieve r e a l s i g n i f i c a n c e during the l a t e 1950's and e a r l y 1960's. A number of events marked the commencement of t h i s r e l a t i o n s h i p . In 1954, f o r example, a trade mission representing the 8 Vancouver Board of Trade v i s i t e d f i v e major Japanese c i t i e s to discuss trade prospects between B.C. and Japan. In 1957, a major contract w i t h Japan f o r the s a l e of B.C. copper concentrate helped stimulate the lagging mining i n d u s t r y i n the province.^ Western Canadian c o a l producers v i s i t e d Japan i n 1958 thus beginning the c o a l export trade between B.C. and A l b e r t a and 8 the Japanese s t e e l i n d u s t r y . In 1961 Japan became the major new market 9 f o r the B.C. lumber i n d u s t r y w i t h sales of hemlock, f i r , and cedar. The decade of the 1960's witnessed a new era of r a p i d expansion i n trade between Canada and Japan and t h i s was p a r t i c u l a r l y evident i n B r i t i s h Columbia. Table 1 shows the value and percentage of B.C. exports going to the three major markets (the U.S., Japan, and the United Kingdom) f o r s e l e c t e d years from 1965 to 1981. One can c l e a r l y see the i n c r e a s i n g importance of the Japanese market. In 1965, 10.4 percent of B.C.'s exports went to Japan and by 1975, t h i s amount had increased to 22.3 per-cent. In 1981, 23.1 percent of t o t a l p r o v i n c i a l exports were destined f o r Japan. Examination of Table 2 shows the composition of these exports. I t may be seen that Japanese importers are p r i m a r i l y i n t e r e s t e d i n the raw m a t e r i a l s of B.C. In the 1960's and e a r l y 1970's, copper, woodpulp, and lumber were B.C.'s strongest exports to the country but t h i s changed between 1973 and 1975 w i t h a dramatic increase i n the export of c o a l to Japan. From 1965 to 1981, c o a l exports increased from a value of $4.2 m i l l i o n (or 3.3 percent of the t o t a l value of B.C. exports to Japan) to $491.1 m i l l i o n , 23 percent of the t o t a l value and the major B.C. export to Japan. In 1981 the province's major exports to Japan were c o a l , lumber, woodpulp, copper concentrates, and aluminum i n g o t s . TABLE 1. Exports of B.C. products to principal countries, 1965-1981. (in millions of dollars) 1965 1967 1968 1970 Value % Value % Value % Value % U.S.A. 697.8 57.3 852.4 54.1 1,046.4 56.8 1,041.4 51.2 Japan 126.6 10.4 266.2 16.9 297.7 16.2 387.5 19.1 U.K. 190.9 15.7 200.7 12.7 189.4 10.3 207.5 10.2 Others 203.6 16.6 259.3 16.3 307.2 16.7 395.7 19.5 Total 1,218.9 100% 1,578.6 100% 1,840.7 100% 2,032.1 100% 1972 1973 1975 1976 Value % Value % Value % Value U.S.A. 1,615.2 58.5 2,009.4 52.6 1,886.3 48.7 2,670.2 Japan 465.8 16.9 924.5 24.2 863.0 22.3 1,040.4 U.K. 201.3 7.3 325.8 8.5 264.3 6.8 351.4 Others 476.2 17.3 561.2 14.7 858.7 22.2 1,207.6 Total 2,758.5 100% 3,820.9 100% 3,872.3 100% 5,269.6 1977 1978 1979 1980 U.S.A. Japan U.K. Others Total Value 3,423.4 1,225.4 359.8 1,298.8 6,307.7 % 54.3 19.4 5.7 20.6 100% Value % Value % Value % 4.202.1 55.6 1.559.2 20.6 352.0 4.7 1,444.7 19.1 7,558.0 100% 4,914.0 51.6 2,043.7 21.4 499.9 5.4 2,055.3 21.6 9,512.9 100% 4,152.6 43.0 2,181.9 22.6 625.9 6.5 2,693.4 27.9 9,653.8 100% % 50.7 19.7 6.7 22.9 100% 1981 Value % 4.054.6 44.3 2,112.3 23.1 554.0 6.0 2,431.8 26.6 9.152.7 100% SOURCE: Adapted from B.C., Ministry of Finance, B.C. Financial and Economic Review, 1977-1982 editions. TABLE 2. Exports of B.C. products to Japan, 1965-1981 (In m i l l i o n s of d o l l a r s ) Lumber Shingles and shakes Woodpulp Newsprint paper Other paper + paperboards Aluminum ingots Zinc ingots Lead ingots Copper concentrates Iron ore concentrates Molybdenum concentrates Coal Fish products Others T o t a l 1965 1967 1968 1970 14.6 35.4 45.2 65.2 26.3 39.0 49.1 69.8 - 1.0 3.9 3.3 - 0.1 0.3 -11.9 47.9 43.9 35.8 - 2.1 0.8 1.7 1.1 0.7 0.8 0.1 28.5 70.9 84.1 118.9 19.7 17.3 19.0 15.3 2.0 7.7 6.8 10.8 4.2 4.7 4.3 11.5 1.0 2.6 4.3 4.0 17.3 36.8 35.2 51.1 126.6 266.2 297.7 387.5 1971 1972 1973 1975 36.2 44.3 116.6 88.3 - 0.1 0.1 -53.5 56.9 95.9 126.1 2.6' 4.7 3.3 0.2 0.4 1.6 8.9 7.9 41.4 31.0 40.6 26.0 0.4 - - -- - 0.2 -120.8 170.7 424.5 173.4 16.8 10.7 12.2 11.0 8.6 8.0 .11.7 14.7 26.5 71.1 99.9 325.8 7.1 23.8 56.1 36.9 45,5 42.9 54.5 52.7 359.8 465.8 924.5 863.0 1976 1977 1978 145.4 180.1 203.4 0.1 0.1 152.8 130.0 184.1 1.9 1,0 3.3 15.0 19.4 30.8 8.0 42.5 133.0 0.4 0.2 0.8 - .3 253.7 214.2 207.3 10.6 5.8 4.8 30.6 41.7 53.4 266.8 350.4 363.1 73.5 122.7 205.3 81.3 117.1 143.1 1,040.4 1,225.4 1,559.2 1979 1980 1981 458.8 501.6 364.1 0.1 0.1 0,1 302.3 " 384.8 323.2 2.2 2.7 3.5 20.9 32.6 24.8 99.8 171.6 208.8 0.2 -1.5 1.7 1.2 268.3 283.5 257.7 6.0 8.0 10.3 71.8 94.9 57.7 419.1 393.2 491.1 223.8 72.1 131.8 169.1 234.9 238.0 ,043.7 2,181.9 2,112.3 SOURCE: Adapted from B.C., Mini s t r y of Finance, B.C. F i n a n c i a l and Economic Review, 1977-1982 e d i t i o n s . Turning now to Japan's r o l e as a source of investment c a p i t a l , the Japanese began d i r e c t l y i n v e s t i n g i n B.C. and i n a number of resource ventures around the world i n the e a r l y 1960's. My attempts to discover the exact amount of such investment and the p r o p o r t i o n i t represents of t o t a l f o r e i g n investment i n the B.C. economy proved u n s u c c e s s f u l . Informa t i o n sources are l i m i t e d and i t appears that such data does not e x i s t i n an accurate and up-to-date form (although Hay and H i l l (1979), give a use-f u l l i s t i n g of B.C. p r o j e c t s f e a t u r i n g Japanese d i r e c t investment as of 1976). One can say, however, that most of the Japanese d i r e c t investment i n Canada i s concentrated i n the B.C. economy.^ In t o t a l i t would not represent a large sum i n comparison to other f o r e i g n i n v e s t o r s f o r the Japanese do not o f t e n p r a c t i s e equity f i n a n c i n g and i n the cases where they do, they become only m i n o r i t y equity partners i n a venture. I t i s p o s s i b l e to give some idea of the sectors of the B.C. economy penetrated by Japanese d i r e c t investment. The f i r s t instance occurred i n 1961 when Sumitomo and Granges A.B. e s t a b l i s h e d the Bethlehem Copper Corporation to explore f o r and develop copper i n B.C.^ Further Japanese investment i n companies such as Lornex and V a l l e y i n 1964 and Brenda Mines 12 L t d . i n 1968 helped s t i m u l a t e an un-precedented boom i n B.C. mining. These moves were accompanied by investment i n the f o r e s t r y i n d u s t r y and companies such as Crestbrook (1967), F i n l a y (1969), C.I.P.A. (1970), Mayo and Q.C. Timber L t d . (1972), and C i n d e r e l l a D a i e i (1973) were e s t a b l i s h e d . Other sectors penetrated by some degree of Japanese d i r e c t investment include the f o l l o w i n g : t r a d i n g , automobile d i s t r i b u t i o n , t r a n s p o r t a t i o n f a c i l i t i e s , marine products, s t e e l wire and ferrous products, f i s h process 14 i n g , c o a l and molybdenum mining, and mineral e x p l o r a t i o n . 12 Table 3 l i s t s some of the new B.C. mega-projects which have been developed to supply resources to Japan and which i n some cases fea t u r e Japanese equity investment. Such p r o j e c t s r e i n f o r c e the conclusion that B.C. i s becoming f i r m l y i n t e g r a t e d i n t o the P a c i f i c Rim economy and i s p l a y i n g the s p e c i f i c r o l e of raw m a t e r i a l s u p p l i e r w i t h r e l a t i o n to Japan. I t i s thus important that we examine the terms of t h i s i n t e g r a t i o n and how they are a f f e c t i n g resource i n d u s t r i e s and resource regions i n B.C. dependent on the export of st a p l e s to the Japanese market. 13 TABLE 3. New B.C. mega-projects developed to supply Che P a c i f i c Rim. Project Participants Description Northeast Coal Quintette Coal (owned 50% by Denison, 12.5% by Mitsui, 10.5% by Tokyo Boeki, 5% by Sumitomo Shojl, 10% by Japanese stee l m i l l s , 12% by Charbonnages de France) Operates metallurgical coal mine near Chetwynd producing about 6.3 m i l l , tonnes/year when i n f u l l production for sale to Japan Teck Bullmoose (owned 51% by Teck, 39% by Lornex, 10% by Nissho Iwai) Operates thermal and metallurgical coal mine near Chetwynd producing about 1.7 m i l l , tonnes/year when in f u l l production for sale to Japan Methanol Plant Ocelot Industries Operates near Kitimat; s e l l s about 1/3 of product to Japan L.N.G. Plant Dome, TransCanada Pipelines, Nova, Nissho Iwai Planned for 1987 near Prince Rupert; w i l l s e l l natural gas to 5 Japanese u t i l i t y companies Petrochemical Complex Dome, Westcoast Transmission, Canadian Occidental Petroleum, Mitsubishi Planned plants at Prince George and Prince Rupert F e r r o s i l i c o n Plant Cominco, Mitsui Planned plant at Kimberly; decision depends on economy Monkman Coal Project PetroCanada, Canadian Superior O i l , Mclntyre Mines, Sumitomo Metallurgical and thermal coal mine planned near Chetwynd; aiming for Japanese market Willow Creek Coal Project 3 David Minerals, Ssangyong of South Korea Planned thermal coal mine near Chetwynd; aiming for South Korean market Cinnabar Cinnabar Peak Mines Planned metallurgical coal mine near Chetwynd; aiming for P a c i f i c Rim and European markets Sage Creek Sage Creek Coal (owned by Rio Algom and Pan Ocean O i l ) Planned thermal coal mine near Fernie; aiming for P a c i f i c Rim market Elk River Elco Mining (owned by Stelco, Home O i l , and consortium of European Steel m i l l s ) Planned metallurgical coal mine near Elkford; aiming for P a c i f i c Rim markets but postponed at present. Phase 1 = Preliminary project proposal. Phase 2 = Preliminary project design. Phase 3 = Project design. Phase 4 = Fi n a l engineering and construction. Phase 5 = Operational. Compiled from B.C., Ministry of Industry and Small Business Development, "North East Coal Develop-ment" folder (1983); B.C., Ministry of Industry and Small Business Development, Office of Procure-ment and Ind u s t r i a l Benefits, "Major Project Inventory", Aug. 1983; Coal Association of Canada, "Coal Focus", Oct. 1983; Don Whiteley, "Methanol plant opens to a rough future", Vancouver Sun, Sept. 16, 1982, p. DI. 14 FOOTNOTES 1. B.C., M i n i s t r y of Industry and Small Business Development, Economic A n a l y s i s and Research Bureau, P a c i f i c Rim Export Markets - A B.C. P e r s p e c t i v e , prepared by Dennis Grimmer, 1981, p . l . 2. I b i d . 3. I b i d . 4. I b i d . , p.11. 5. K e i t h A.J. Hay and S.R. H i l l , Canada-Japan Trade and Investment (Ottawa: Economix I n t e r n a t i o n a l , 1979), p.68. 6. 100 Years of Trade and Commerce Between Canada and Japan (Toronto: Japan Trade Centre, 1977), p.12. 7. I b i d . , p.13. 8. I b i d . , p.14. 9. I b i d . , p.17. 10. Hay and H i l l , p.94. 11. I b i d . 12. I b i d . ; 100 Years of Trade and Commerce Between Canada and Japan, p.21. 13. Hay and H i l l , p.94. 14. I b i d . ; B.C., M i n i s t r y of Industry and Small Business Development, " B r i t i s h Columbia Companies w i t h Japanese Involvement", n.d., pp.1-6. 15 I I I . HISTORICAL BACKGROUND TO COAL MINING IN SOUTHEASTERN B.C. One such region whose economy i s dependent on the export of a s t a p l e product to Japan i s the E l k V a l l e y i n southeastern B.C. This s e c t i o n gives a b r i e f h i s t o r i c a l background to the region and then focuses on the changes which have occurred i n the area f o l l o w i n g the stimulus of Japanese demand f o r m e t a l l u r g i c a l c o a l from B.C. A. Coal Mining i n the E l k V a l l e y , 1900-1960 Coal deposits i n the area had been noted by e a r l y e x p l o r e r s i n the 1870's but i t was not u n t i l the c o n s t r u c t i o n of a r a i l r o a d through the Crows Nest Pass that they could be exploited.''' In 1898 the Canadian P a c i f i c R a i l r o a d (C.P.R.) b u i l t the Crows Nest Pass R a i l r o a d to connect w i t h the B.C. Southern route thus p r o v i d i n g a market (since c o a l f u e l l e d the t r a i n s ) and access to a major market area, the burgeoning smelters of the West Kootenays (see Map 2). In 1897 the Crows Nest Pass Coal Company began mining at Coal Creek near the present day s i t e of F e r n i e and i n the 2 f o l l o w i n g year they began producing coke at F e r n i e . Coal mining f u r t h e r up the v a l l e y at the s i t e of Michel began i n 1899 and coke production began 3 there i n 1902. The Crows Nest Pass Coal Company was the major c o a l company i n the region and the only one whose operations would survive throughout t h i s f i r s t p e r i o d of mining from 1900 to 1960. The company's head o f f i c e was i n Toronto (although i t was l a t e r moved to Fernie) and a l l the o r i g i n a l o f f i c e r s were from eastern Canada thus i t i s presumed that i t was eastern 4 Canadian c a p i t a l which developed the mines. Since the turn of the century c o a l mining has been the dominant economic a c t i v i t y of the E l k V a l l e y r e g i o n . F o l l o w i n g the c o n s t r u c t i o n of Map 2. H i s t o r i c a l Coal Mining i n the E l k V a l l e y . KEY: 1 - Coal Creek Mine (1897-1944) and coke ovens (1898-1932) 2 - Michel Mine (1899-1968) and coke ovens (1902-1981) 3 - Morrisey Mine (1905-1909) 4 - Hosraer Mine (1906-1914) 5 - Corbin Mine (1908-1935) 6 - Smelters f u e l l e d by Elk V a l l e y coal — Railway routes as of 1900 SCALE: 1:2,000,000 SOURCE: Base map: Canada, Energy, Mines and Resources, Surveys and Mapping Branch, "B.C." Rai l r o a d routes adapted from R.H. Meyer, " E v o l u t i o n of Railways i n the Kootenays," unpublished M.A. Thesis, Dept. of Geography, U.B.C., 1970, p. 19. 17 the r a i l w a y there occurred a mushrooming of small mines, towns, hamlets, and v i l l a g e s . " ' The main communities were Fer n i e and M i c h e l - N a t a l ; F e r n i e was the h i s t o r i c a l c o a l centre of the region and M i c h e l was b u i l t as a company town by the Crows Nest Pass Coal Company to house the workers of i t s M ichel mines. By 1928, Michel's p o p u l a t i o n had expanded up the narrow v a l l e y so that the adjacent small community of Na t a l was incorporated i n t o the town l i m i t s . ^ Other c o a l communities i n t h i s e a r l y p e r i o d included M o r r i s e y , Corbin, and Hosmer (see Map 2). The Crows Nest Pass Coal Company mined near Morrisey and the operation was run i n t e r m i t t e n t l y between 1905 8 and 1909. The second major c o a l company of the r e g i o n , Corbin Coal and Coke Company, began mining i n 1908 at Corbin. This American company w i t h head o f f i c e s at Spokane, Washington supplied c o a l f o r the r a i l w a y system 9 owned by Dani e l Corbin, the great American r a i l w a y magnate. Hosmer developed due to the mining a c t i v i t i e s of Hosmer Mines L t d . which l a s t e d from 1906 to 1914. This company was a s u b s i d i a r y of the C.P.R. and a l l production was consumed do m e s t i c a l l y by the Canadian r a i l w a y . ^ In a d d i -t i o n to c o a l mining, f o r e s t r y was an important economic a c t i v i t y i n the region l e a d i n g to the growth of small communities such as E l k o , Galloway, J a f f r a y , and Waldo. As to markets f o r the r e g i o n a l s t a p l e , the domestic market f o r E l k V a l l e y coke production was strong i n the pre-W.W.l. pe r i o d f o r much of the coke was used to f u e l the smelters of the West Kootenays, p a r t i c u l a r l y the Consolidated Mining and Smelting Company smelter at Trail.''"''" The impor-tance of domestic as opposed to American markets f l u c t u a t e d during t h i s p e riod but the volume of E l k V a l l e y c o a l exported to the U.S. outweighed domestic sales u n t i l the mid-1920's. A f t e r that p o i n t , Canadian markets were more important f o r both c o a l and coke (see Appendix A). Coal 18 production l e v e l s and the general economic p r o s p e r i t y of the region a l s o began to change i n the 1920's; t h i s was the f i r s t p e r i o d f o r which a l a c k of demand f o r c o a l and coke i s mentioned i n the annual r e p o r t s of the B.C. M i n i s t e r of Mines. Examination of Appendix A shows that 1913 was the year of peak production when 1,331,725 gross tonnes of c o a l were mined. A f t e r that the gradual annual increases i n production of the e a r l y years were not evident - the f i r s t "boom" pe r i o d of the E l k V a l l e y c o a l economy had ended, although c o a l production continued and the r e g i o n a l p o p u l a t i o n remained f a i r l y s t a b l e . The region was severely h i t by the depression of the 1930's and c o a l production and employment l e v e l s were adversely a f f e c t e d (see Appendix A). In 1932 the coke ovens at F e r n i e operated by the Crows Nest Pass Coal 12 Company were closed and i n 1935, the Corbin mines were c l o s e d . From 1936 to 1944 the Crows Nest Pass Coal Company was the only company operating i n the area w i t h mines' at Coal Creek and M i c h e l , and coke ovens at M i c h e l . In 1939 the company s t a r t e d a coke oven by-products p l a n t at Michel to recover 13 t a r and gas from the c o a l treatment. During the 1940's the r e g i o n a l economy experienced a temporary r e s u r -gence i n growth due to the stimulus of W.W.2 and consequent increase i n the 14 demand f o r c o a l and coke. Examination of Appendix A shows the increased production l e v e l s between 1941 and 1951. In 1944 the Crows Nest Pass Coal Company opened a new mine c a l l e d E l k R i v e r C o l l i e r i e s near F e r n i e , but the company's mining operations at Coal Creek were closed permanently meaning that F e r n i e was no longer the centre of r e g i o n a l c o a l o p e r a t i o n s . ^ In the same year the o l d Corbin mine was re-opened and operated i n t e r m i t t e n t l y between 1944 and 1968 by a number of d i f f e r e n t companies ( t h i s p a r t i a l l y e x p l a i n s the annual f l u c t u a t i o n s i n production l e v e l s during t h i s p e r i o d ) . 19 Technological changes had made p o s s i b l e a new type of c o a l mining and i n 1948 surface mining i n a d d i t i o n to underground mining began i n the operations of the Crows Nest Pass Coal Company (see Appendix B f o r a 16 d e s c r i p t i o n of the processes involved i n surface and underground mining). Canadian markets were s t i l l the predominant consumers of the region's s t a p l e ; i n 1950, 91 percent of the c o a l and 53 percent of the coke was consumed d o m e s t i c a l l y w i t h the remainder exported to the U.S.A.^ The p e r i o d of the 1950's to the l a t e 1960's was one of economic stagnation f o r the E l k V a l l e y r e g i o n . Because of the depressed s t a t e of c o a l markets the mines were not operated at f u l l c a p a c i t y and the miners 18 p r a c t i s e d "work-sharing" where they would not always work a f u l l week. In 1959, f o r example, the Michel C o l l i e r y operated f o r only 165 days out 19 . . . . of a p o s s i b l e 236. Changes i n f u e l markets and the i n t r o d u c t i o n of d i e s e l locomotives on the Canadian r a i l w a y system had r e s u l t e d i n a d e c l i n e i n the demand f o r c o a l and coke. In 1958 the E l k R i v e r C o l l i e r y of the Crows Nest Pass Coal Company closed l e a v i n g only the company's mining and coke oven . 20 operations at M i c h e l , and the i n t e r m i t t e n t c o a l production at Corbin. The year 1959 witnessed the f i r s t shipment of E l k V a l l e y c o a l to Japan and by 1960, although t o t a l production was only 743,979 gross tons, 38 percent of t h i s amount was consumed d o m e s t i c a l l y , 4 percent consumed i n the U.S.A., 21 and 58 percent exported to Japan. The economic downturn experienced by the s t a p l e i n d u s t r y during the 1950's had repercussions throughout the r e g i o n . Table 4 shows population f i g u r e s f o r the region and i t s major communities and one may note the general d e c l i n e s witnessed from 1951 to 1961. For example, t a k i n g F e r n i e as the major p o p u l a t i o n , s e r v i c e , and r e t a i l centre of the E l k V a l l e y , the town's pop u l a t i o n increased by only 4 percent and r e t a i l s ales dropped by TABLE 4. Historical Elk Valley population figures. (i) Elk Valley Regional Population, 1921-1976 1921 1931 1941 1951 1956 1961 1971 1976 8,941* 7,624* 6,820 7,332 7,284 6,739 10,725 14,150 (ii) Fernie Population, 1911-1981 1911 1921 1931 1941 1951 1956 1961 1966 1971 1976 1981 3,146 2,802 2,732 2,545 2,551 2,808 2,661 2,715 4,422 4,608 5,444 ( i i i ) Michel-Natal Population, 1906-1976 1906 1941 1951 1956 1961 1971 1976 1,200* 2,183 1,895 1,430 1,246 158* 25* NOTES: *Approximate figures. SOURCE: Compiled from B.C., East Kootenay Regional Statistics, 1954. Fernie and District: An  Economic Survey, 1963. Regional Index of East and West Kootenays, 1963; Regional Index  of B.C., 1966; B.C. Regional Index, 1978. Fernie Historical Association, Backtracking  with the Fernie Historical Association, 1967; Canada, 1976 Census of Canada, Cat. 92-830 and Cat. 92-805; 1981 Census of Canada, Cat. 93-910. 21 10.6 percent between 1951 and 1961. This may be compared to f i g u r e s f o r B.C. as a whole where population increased by 16.5 percent and r e t a i l s a l e s 22 rose by 45.5 percent i n the same p e r i o d . A report done f o r the F e r n i e Chamber of Commerce i n 1958 stated that Fernie was experiencing a r e d u c t i o n i n economic a c t i v i t y , a d e c l i n e i n community p r o s p e r i t y , s u b s t a n t i a l increases i n the numbers of unemployed l o c a l people, and a general f a l l i n g -23 o f f of l o c a l business. L a y - o f f s at the mines l e d to out-migration and the r e g i o n a l population d e c l i n e d by 9 percent between 1951 and 1961; such f i g u r e s i n d i c a t e the d e c l i n e i n r e g i o n a l economic growth stemming from i n -a c t i v i t y i n the lead s e c t o r . B. Contemporary Coal Mining Under the Stimulus of Japanese Demand Conditions i n the region began to change i n the l a t e 1960's. I n t e r e s t i n c o a l e x p l o r a t i o n i n the region had been experienced throughout the decade . 2 4 but increased sharply i n 1967. Then i n 1968 an event took place which heralded the beginnings of a new era of i n t e n s i v e c o a l mining i n the E l k V a l l e y . K a i s e r S t e e l Corporation of C a l i f o r n i a purchased Crows Nest I n d u s t r i e s (as the Crows Nest Pass Coal Company had become known) and a l l but i t s L i n e Creek c o a l resources to set up K a i s e r Coal L t d . C a p i t a l sources f o r the venture included Canadian banks which provided $35 m i l l i o n , an equity stock Issue on. the Canadian stock exchange f o r $30 m i l l i o n , and 25 the parent company which provided $20 m i l l i o n . An a d d i t i o n a l $45 m i l l i o n was supplied by Japanese and Canadian banks when e r r o r s i n i n i t i a l p l a n t 26 design and other s t a r t - u p problems n e c e s s i t a t e d f u r t h e r investment. K a i s e r announced the s i g n i n g of a f i f t e e n - y e a r contract w i t h M i t s u b i s h i of Japan f o r the d e l i v e r y of a t o t a l of 45 m i l l i o n tonnes of m e t a l l u r g i c a l 27 c o a l beginning i n 1970. M i t s u b i s h i would then r e s e l l the c o a l to the 22 nine Japanese s t e e l m i l l s . This was followed by a major expansion of the e x i s t i n g mining operations and t r a n s p o r t a t i o n i n f r a s t r u c t u r e (see Appendix A and note production increases between 1969 and 1970). The N a t i o n a l Harbours Board constructed an i s l a n d and causeway j u s t south of Vancouver and K a i s e r h i r e d the Vancouver-based c o n s u l t i n g f i r m of Swan Wooster to 28 design and b u i l d the huge coal-handling port known as Roberts Bank. This was opened i n 1970 as the f i r s t shipment of K a i s e r c o a l l e f t the port f o r Japan (see Map 3 ) . In 1969 Fording Coal L t d . , a s u b s i d i a r y of Canadian P a c i f i c L t d . , signed c o n t r a c t s w i t h M i t s u i ( a c t i n g as the t r a d i n g company f o r the nine Japanese s t e e l m i l l s ) and became the second major company to begin operations during t h i s second "boom" phase i n E l k V a l l e y c o a l mining. These c o n t r a c t s c a l l e d f o r the d e l i v e r y of 45 m i l l i o n tonnes of m e t a l l u r g i -29 c a l c o a l over a f i f t e e n year p e r i o d beginning i n 1972. In 1971 Fording began mining operations at t h e i r s i t e near the Fording River and i n the f o l l o w i n g year t h e i r f i r s t shipment l e f t Roberts Bank (see Map 4 ) . In 1973 a major r e - f i n a n c i n g scheme took place at K a i s e r Coal L t d . which helped s t a b i l i z e the company's f i n a n c i a l p o s i t i o n . Japanese i n t e r e s t s converted t h e i r debt holdings to equity g i v i n g M i t s u b i s h i and the nine 30 Japanese s t e e l m i l l s 33 percent c o n t r o l over K a i s e r operations. I t should be noted that i t i s unusual f o r Japanese i n t e r e s t s to hold such a high degree of equity i n a f o r e i g n venture. The reason behind the convert sion was that K a i s e r was experiencing serious f i n a n c i a l problems at that time and needed c a p i t a l . Meanwhile, the Japanese s t e e l i n d u s t r y needed a secure supply of m e t a l l u r g i c a l c o a l and K a i s e r was the only B.C. c o a l pro-ducer at the time. The Japanese decided to i n v e s t equity i n order to keep 31 the venture o p e r a t i n g . Map 3. L o c a t i o n of Roberts Bank Coal Handling P o r t . Map 4. Contemporary Coal Mining i n the E l k V a l l e y . SCALE: 1 inch = 28 k i l o m e t r e s SOURCE: Adapted from D i s t r i c t O f f i c e , E l k f o r d , " D i s t r i c t of E l k f o r d " , (1981). 25 The t h i r d company to commence mining during t h i s p e r i o d was Byron 32 Creek C o l l i e r i e s which purchased the o l d Corbin mine i n 1972. Byron Creek C o l l i e r i e s i s d i f f e r e n t from the other two companies' mining operations i n that i t mines only thermal c o a l and s u p p l i e s p r i m a r i l y a domestic, eastern Canadian market.* For example, Ontario Hydro was i n i t i a l l y the major market f o r the company's product when i t began 33 shipping m 1974. Thus the f i r s t few years of the 1970's witnessed major developments i n the s t a p l e i n d u s t r y of the region and huge increases i n c o a l produc-t i o n . Coal output i n 1971 was 5,602,000 gross tonnes and almost doubled to 9,053,357 gross tonnes i n 1972 (see Appendix A f o r more d e t a i l s of production changes). By that year both K a i s e r and Fording were i n operation and a small mine at Tent Mountain s t r a d d l i n g the B.C.-Alberta 34 border was being run by the Alberta-based Coleman C o l l i e r i e s (see Map 4). Production i n the B.C. side of t h i s mine was minimal and thus Coleman's operations are not discussed i n d e t a i l i n t h i s study; t h e i r B.C. operations 35 ceased i n 1980. Between 1969 and 1974 c o a l production m the region increased t e n f o l d w i t h the greatest p o r t i o n of t h i s output being exported 3 6 as m e t a l l u r g i c a l c o a l to feed the Japanese s t e e l i n d u s t r y . In 1978 S h e l l Canada L t d . purchased the remaining Line Creek c o a l resources h e l d by Crows Nest I n d u s t r i e s and e s t a b l i s h e d the company, Crows 37 Nest Resources L t d . to operate the Line Creek mine. This i s the f o u r t h * I t should be noted that there are two types of c o a l mined i n the r e g i o n ; m e t a l l u r g i c a l (or coking coal) used to produce coke and u l t i m a t e l y s t e e l i s the major type mined, but thermal (or steaming) c o a l which i s a lower grade c o a l used i n thermal power generation i s a l s o mined. 26 and newest company to begin mining i n the region (see Map 4). The mine produces thermal and m e t a l l u r g i c a l c o a l on long-term contract f o r Korean and Japanese markets; c o n s t r u c t i o n began i n 1980 and the f i r s t c o a l s h i p -ment was made i n 1982. The years from 1979 to 1981 have seen a second peak i n the boom per i o d of r e g i o n a l economic growth l a s t i n g from 1970 to 1982. S h e l l ' s purchase i n 1978 was followed i n 1979 by an announcement that Fording would be i n c r e a s i n g the capacity of i t s mines from an output of 3 m i l l i o n 38 tonnes annually to 5 m i l l i o n tonnes a year. In 1980 the B r i t i s h Columbia Resources Investment Corporation (B.C.R.I.C.), a B.C.-based p u b l i c company owned by approximately 2 m i l l i o n Canadian shareholders, acquired 67 percent ownership of K a i s e r Coal L t d . at a cost of $665 m i l l i o n . The remaining 33 percent equity was r e t a i n e d by the Japanese 39 s t e e l i n t e r e s t s . In 1981, the name of "Kaiser Coal L t d . " was replaced by "B.C. Coal L t d . " and the c o n s t r u c t i o n of a new mine known as " G r e e n h i l l s " was announced.* Located near E l k f o r d , t h i s mine i s a j o i n t -venture between the Pohang Iron and S t e e l Co. L t d . (P.O.S.C.O.) of South Korea which owns 20 percent, and B.C. Coal which owns 80 percent (see Map 4 ) . I t represents the f i r s t major Korean investment i n Canada and w i l l be producing m e t a l l u r g i c a l and thermal c o a l f o r P a c i f i c Rim markets 40 when operating i n mid-1983. An a d d i t i o n a l event of note r e l a t i n g to B.C. Coal's operations occurred i n 1981 when the company's coke-making operations (the l a s t i n western Canada) closed due to the termi n a t i o n of 41 t h e i r l a s t customer, a smelter i n Idaho. Further ownership and mine *In 1983 the name "B.C. Coal L t d . " was changed to "Westar Mining L t d . " (but w i t h no change i n the ownership of the company). For the sake of s i m p l i c i t y , the o l d name of "B.C. Coal L t d . " w i l l be used throughout t h i s study. 27 c a p a c i t y changes took place i n 1981 when Byron Creek C o l l i e r i e s was pur-chased by Esso Resources Canada L t d . and plans to increase the mine's c a p a c i t y from 1.1 m i l l i o n tonnes to 2.0 m i l l i o n tonnes a year were 42 . . . . announced. Table 5 summarizes p e r t i n e n t information f o r each of the four c o a l companies c u r r e n t l y operating i n the r e g i o n . Thus the p e r i o d from 1970 to 1982 c o n s t i t u t e s the second "boom" phase i n the h i s t o r y of E l k V a l l e y c o a l mining, but the s i z e , technology, and markets of the c o a l ventures are much changed. Examination of Appendix A shows the steady increases i n production f o r t h i s p e r i o d (except f o r years when s t r i k e s i n t e r r u p t e d output) and a l s o the i n c r e a s i n g s i z e of the c o a l i n d u s t r y ' s labour f o r c e . Between 1971 and 1975, f o r example, there was a 45 percent increase i n the number employed i n the r e g i o n a l i n d u s t r y . The t a b l e a l s o shows the i n c r e a s i n g importance of the Japanese market up u n t i l 1977 when c o a l shipments to other f o r e i g n d e s t i n a -43 t i o n s began to become s i g n i f i c a n t . In 1959, 17 percent of r e g i o n a l c o a l sales went to Japan, i n 1965, 58 percent, i n 1970, 76 percent, i n 1973, 99 percent, and f o r 1977, 83 percent. These major expansions i n the main economic a c t i v i t y of the region were accompanied by changes i n the settlement p a t t e r n and population of the E l k V a l l e y . In 1964 the M i n i s t r y of M u n i c i p a l A f f a i r s of B.C. proposed the abandonment of the o l d c o a l towns of M i c h e l - N a t a l and the r e - l o c a t i o n of the p o p u l a t i o n to an " i n s t a n t town" to be b u i l t f u r t h e r up 44 the v a l l e y (see Map 4 ) . This was a slow and very c o n t r o v e r s i a l process of urban renewal whereby the houses at M i c h e l - N a t a l were g r a d u a l l y t o r n 45 down as r e s i d e n t s moved to Sparwood or l e f t the region a l t o g e t h e r . The year 1970 marked the opening of the new Sparwood townsite to house the 28 TABLE 5. Coal companies o p e r a t i n g i n southeastern B.C., 1981*. Company name  Ownership of company Major mines and l o c a t i o n s Type of c o a l mined T o t a l 1981  pr o d u c t i o n B.C. Coal L t d . 672 by B - C R . I . C 332 by M i t s u b i s h i & 9 Japanese s t e e l m i l l s Balmer Mine at Sparwood - 902 met. + 102 thermal - 902 s u r f a c e + 102 underground 7.1 m i l l , tonnes c l e a n met. 0.4 m i l l , tonnes thermal G r e e n h i l l s Mine near E l k f o r d -owned BOX by B.C. Coal + 201 by P.O.S.C.O. of Korea - 70* met. + 302 thermal (1933) - a l l s u rface mining Planned '83 product-' t i o n : 1.8 m i l l , tonnes c l e a n met. 0.7 5 m i l l , tonnes thermal F o r d i n g Coal L t d . 1002 Canadian P a c i f i c L t d . ( C P . ) For d i n g Mine near E l k f o r d - 992 met. + IX thermal - a l l s u rface mining 3.7 m i l l , tonnes c l e a n c o a l Byron Creek C o l l i e r i e s 1002 by Esso ( i . e . I m p e r i a l O i l ) Coal Mt. Mine at Corbin 1002 thermal a l l s u r f a c e mining 0.96 m i l l tonnes Resources L t d . 1002 by S h e l l L i n e Creek Mine between Sparwood and E l k f o r d - 52% thermal, 482 met. (1983) - a l l s u r f a c e mining 1983 c a p a c i t y of 2.7 m i l l . tonnes Expansion plans 1982 c a p a c i t y increased to 5.0 m i l l . tonneB Planned 1983 c a p a c i t y of 2.0 m i l l , tonnes Major c o n t r a c t s Japan (632), Korea (212), B r a z i l (6%) Mexico ( 3 1 ) , Taiwan (12 ) , C h i l e ( 2 2 ) , P a k i s t a n ( 2 2 ) , Other (22) - M i t s u b i s h i of Japan 45.0 m i l l . tonnes t o t a l over 15 y r s . 1970-1985 - P0SC0 of S- Korea 1.2 m i l l , tonnes met. a n n u a l l y from 1976-1985 Japan (402 of met.) Korea (282 of met.) Taiwan (172 of met.) Denmark & Hong Kong (thermal) - POSCO of S. Korea 0.5 m i l l , tonnes met. a n n u a l l y from 1983-2003 ' China S t e e l of Taiwan 2.8 m i l l , tonnes met. t o t a l over 10 y r s -1982-1992 • M i t s u b i s h i of Japan 1.93 m i l l , tonnes met. t o t a l over 3 yrs 1983-1986 Japan (822), Taiwan (82), Korea ( 8 2 ) , C h i l e , Europe (22) • M i t s u i of Japan 45.0 m i l l , tonnes met. t o t a l over 15 y r s . 1972-1987 China S t e e l of Taiwan 3.5 m i l l , tonnes met. t o t a l over 10 yrs-1961-1991 POSCO of S. Korea 1.0 m i l l , tonnes met. t o t a l 1982-85, 0.5 m i l l . met. ann u a l l y 1985-1992 Canada (752) Japan (252) O n t a r i o Hydro 0.5 m i l l . tonnes thermal a n n u a l l y from 1978-1993 Sumitomo + JCDC + EPDC of Japan ( u t i l i t y c o n s o r t i a ) f o r 0.25 m i l l , tonnes thermal a n n u a l l y from 1981-? Korea (772 of t h e r m a l ) , Japan (772 of met.) Korea E l e c t r i c Power Corp. 0.75 m i l l , tonnes thermal annual-l y f o r 15-20 y r s . s t a r t i n g 1982 • Ssangyong Corp. of S. Korea 0.35 m i l l , tonnes thermal annual-l y from 1982-1992 Kowloon E l e c t r i c i t y of Hong Kong 1.57 m i l l , tonnes thermal t o t a l over 6 y r s 1982-1988 E l k r a f t Power of Denmark 3.8 m i l l , tonnes thermal t o t a l over 10 y r s -1982-1992 POSCO f o r 0.1 m i l l , tonnes met. 19B2, 0.2 m i l l , tonnes met. a n n u a l l y 1983-1992 Korea E l e c t r i c Co. 0.15 m i l l . tonnes thermal 1982, 0.2 m i l l , tonnes thermal a n n u a l l y 1983-1987 China Cement of Hong - M i t s u i of Japan 1.0 Kong 0.5 m i l l . m i l l , tonnes met. tonnes thermal t o t a l a n n u a l l y from over 6 y r s . 1982-1988 1983-1998 NOTES: * T h i s i n f o r m a t i o n i s based on 1981 d a t a . P r o d u c t i o n l e v e l s and percentage c o n t r i b u t i o n s to d i f f e r e n t markets have changed si n c e then due to c o n t r a c t cut backs. SOURCE: Compiled from 1981 company r e p o r t s from B.C.R.I.C., Byron Creek C o l l i e r i e s , Crows Nest Resources, and F o r d i n g Coal L t d . ; Maclean Hunter L t d . , The F i n a n c i a l Post Survey of Mines and Energy Resources, (Toronto: Maclean Hunter L t d . , 1981); Alexandra Worobec (ed;.), Canadian  Mines Handbook, 1982-83 (Toronto: Northern Miner Press L t d . , 1982); and i n t e r v i e w s w i t h company spokesmen. 29 K a i s e r workers and by 1982, a l l that remained of Mi c h e l - N a t a l was the o l d Michel Hotel and some abandoned coke ovens and b u i l d i n g s of Crows Nest 46 I n d u s t r i e s . In 1971 a second " i n s t a n t town", E l k f o r d , was b u i l t about t h i r t y k i l o m e t r e s north of Sparwood and incorporated as a v i l l a g e . The 47 settlement was b u i l t by Fording Coal L t d . to house i t s employees. * ft * & ft This h i s t o r i c a l background to c o n d i t i o n s i n the E l k V a l l e y i l l u s -t r a t e s the booms and busts i n economic fortune which the r e g i o n a l economy has undergone as a r e s u l t of changes i n demand f o r i t s s t a p l e , c o a l . I t may a l s o be seen that markets f o r the r e g i o n a l s t a p l e have changed during the d i f f e r e n t phases of E l k V a l l e y c o a l mining. During the f i r s t p e r i o d domestic markets were very important; the E l k V a l l e y c o a l i n d u s t r y was an i n t e g r a l part of the e n t i r e Kootenay mining economy as co a l from the East Kootenays f u e l l e d the smelters of the West Kootenays. In c o n t r a s t , the contemporary c o a l i n d u s t r y of the E l k V a l l e y f u n c t i o n s more as an enclave economy dependent on the fortunes of the Japanese s t e e l i n d u s t r y . I t i s c l e a r that the contemporary "boom" was the r e s u l t of strong Japanese demand f o r the region's m e t a l l u r g i c a l c o a l . This demand was accompanied by a p a r t i c u l a r strategy which the Japanese have developed to procure raw ma t e r i a l s from overseas. The f o l l o w i n g s e c t i o n describes t h i s strategy and begins to suggest some of i t s i m p l i c a t i o n s f o r a s t a p l e s region such as the E l k V a l l e y . 30 FOOTNOTES 1. Backtracking w i t h the F e r n i e H i s t o r i c a l A s s o c i a t i o n ( F e r n i e , B.C.: F e r n i e H i s t o r i c a l A s s o c i a t i o n , 1967), p. 17. 2. B.C., Department of Mines, Annual Report of the M i n i s t e r of Mines, 1897, p. 1165. 3. B.C., Department of Mines, Annual Report of the M i n i s t e r of Mines 1902, p. H276. 4. B.C., Department of Mines, Annual Report of the M i n i s t e r of Mines 1899, p. 820. 5. J . J . Crabb, "Crowsnest Pass Travelog", Crows Nest Resources, 1982, p. 4. 6. B.C., M i n i s t r y of Economic Development, B.C. Regional Index, 1978, p. 12; J . J . Crabb, "Crowsnest Pass Travelog", Crows Nest Resources L t d . , 1982, p. 12. 7. Backtracking w i t h the F e r n i e H i s t o r i c a l A s s o c i a t i o n ( F e r n i e , B.C.: Fernie H i s t o r i c a l A s s o c i a t i o n , 1967), p. 53. 8. B.C., Department of Mines, Annual Report of the M i n i s t e r of Mines, 1919, p. N344. 9. B.C., Department of Mines, Annual Report of the M i n i s t e r of Mines 1909, p. K260. 10. B.C., Department of Mines, Annual Report of the M i n i s t e r of Mines 1908, p. J18. 11. Harold A. I n n i s , Settlement and the Mining F r o n t i e r (Toronto: Macmillan Co. of Canada, 1936), p. 282. 12. B.C., Department of Mines, Annual Report of the M i n i s t e r of Mines, 1932, p. A274; B. C. , Dept. • of Mines, Annual Report of the M i n i s t e r of Mines, 1936, p > . i G43. 13. B.C., Department of Mines, Annual Report of the M i n i s t e r of Mines, 1939, p. A143. 14. B.C., Department of Mines, Annual Report of the M i n i s t e r of Mines, 1941, p. A122. 15. B.C., Department of Mines, Annual Report of the M i n i s t e r of Mines, 1944, p. A130. 16. B.C., Department of Mines, M i n i s t e r of Mines Annual Report, 1948, p. A205. 31 17. B.C., Department of Mines, M i n i s t e r of Mines Annual Report, 1950, p. A244. 18. Ezner DeAnna 1982: personal communication. 19. B.C., Department of Mines, M i n i s t e r of Mines Annual Report, 1959, p. 267. 20. I b i d . 21. B.C., Department of Mines and Petroleum Resources, M i n i s t e r of Mines and Petroleum Resources Annual Report, 1960, p. 218. 22. B.C., Department of I n d u s t r i a l Development, Trade and Commerce, Bureau of Economics and S t a t i s t i c s , Regional Index of B.C., 1966, p. 17. 23. D. L l o y d , I . MacQueen, and J . Wilson, U n i v e r s i t y of B r i t i s h Columbia  Report to the Fe r n i e Chamber of Commerce (Vancouver: U n i v e r s i t y of B r i t i s h Columbia, 1958), p. 1. 24. B.C., Department of Mines and Petroleum Resources, M i n i s t e r of Mines and Petroleum Resources Annual Report, 1967, p. 455. 25. An Economic Development Strategy f o r B r i t i s h Columbia, A Background Report Prepared f o r B.C. New Democratic Party, 1981, p. A20. 26. I b i d . 27. B.C., Department of Mines and Petroleum Resources, M i n i s t e r of Mines and Petroleum Resources Annual Report, 1968, p. 459. 28. Rod Nutt, "Coal harbour view g i r d l e s the globe," i n Vancouver Sun, 13 February 1982, p. CI. 29. Fording Coal L t d . 1982: personal communication. 30. C r a i g Weir, "Regional Coal Prospects Spark L o c a l Economy," i n Trade and Commerce Magazine, May 1981. 31. B.C. Coal L t d . 1982: personal communication. 32. Janeen Bowes, "Byron Creek C o l l i e r i e s " (Calgary: Byron Creek C o l l i e r i e s , 1982), p. 3. 33. I b i d . 34. B.C., Department of Mines and Petroleum Resources, M i n i s t e r of Mines and Petroleum Resources Annual Report, 1972, p. A l l . 35. Alexandra Worobec, ed., Canadian Mines Handbook, 1982-83 (Toronto: Northern Miner Press, 1982), p. 84. 32 36. B.C., Department of Mines and Petroleum Resources, M i n i s t e r of Mines and Petroleum Resources Annual Report, 1974, p. A23. 37. Crows Nest Resources L t d . 1982: personal communication. 38. Fording Coal L t d . 1982: personal communication. 39. C r a i g Weir, "Regional Coal Prospects Spark L o c a l Economy," i n Trade and Commerce Magazine, May 1981. 40. The Energy L i n e , B.C. Coal, August-September, 1982, p. 1. 41. The Energy L i n e , B.C. Coal, A p r i l 1982, p. 2. 42. Janeen Bowes, "Byron Creek C o l l i e r i e s " (Calgary: Byron Creek C o l l i e r i e s , 1982); Byron Creek C o l l i e r i e s , "Byron Creek C o l l i e r i e s Expansion Summary", 1981. 43. B.C., Department of Mines and Petroleum Resources, M i n i s t e r of Mines and Petroleum Resources Annual Report, 1977, p. 23. 44. Arlene B. Gaal, Memoirs of M i c h e l - N a t a l , 1899-1971, n.p., 1971, p. 169. 45. I b i d . 46. Personal observation, 1982. 47. C r a i g Weir, "Boom Proj e c t e d f o r Resource Centre," i n Trade and Commerce Magazine, May 1981. 33 IV. THEORETICAL BACKGROUND Having described the growing Japanese involvement i n B.C. s t a p l e s and presented some background m a t e r i a l concerning the c o a l mining region which w i l l be examined as a case study, I w i l l now describe i n some d e t a i l the strategy followed by Japanese i n d u s t r i a l i s t s to procure raw m a t e r i a l s from overseas. In order to h i g h l i g h t the unique aspects of t h i s strategy I begin w i t h a d e s c r i p t i o n of the American resource procurement strategy and i t s i m p l i c a t i o n s f o r a s t a p l e s r e g i o n . I then describe the h i s t o r i c a l context which produced the Japanese s t r a t e g y , the strategy i t s e l f , and a set of hypotheses regarding i t s p o s s i b l e i m p l i c a t i o n s . The chapter con-cludes w i t h a s e c t i o n concerning the methodology followed i n order to t e s t these hypotheses. A. The American Resource Procurement Strategy To acquire raw m a t e r i a l s from abroad American corporations p r a c t i s e a strategy of d i r e c t f o r e i g n investment whereby a wholly-owned and con-t r o l l e d s u b s i d i a r y of the parent company w i l l be e s t a b l i s h e d i n the f o r e i g n resource region.''" The parent company provides equity c a p i t a l and in c u r s the r i s k of the investment but earns t o t a l ownership and c o n t r o l of the venture. In many cases the corporate head o f f i c e w i l l a l s o supply top-l e v e l management, production technology, and b u i l d the appropriate t r a n s -p o r t a t i o n i n f r a s t r u c t u r e . As A i t k e n w r i t e s , the American strategy r e p r e -sents ... a geographical extension of the operations of e s t a b l i s h e d o r g a n i z a t i o n s . Entrepreneurship, s k i l l e d labour, o r g a n i z a t i o n a l methods, advanced technology - a l l have been t r a n s f e r r e d . 2 34 Such d i r e c t f o r e i g n investment i n h i b i t s the domestic development of linkages from the resource s e c t o r . A recent study by S t a t i s t i c s Canada concluded that e x t e r n a l l y - c o n t r o l l e d firms have a f i v e times higher propen-s i t y to procure inputs from f o r e i g n s u p p l i e r s than that of d o m e s t i c a l l y -3 . . . c o n t r o l l e d f i r m s . American s u b s i d i a r i e s tend to purchase inputs and s e r v i c e s from w i t h i n the v e r t i c a l l y - l i n k e d operations of the m u l t i - n a t i o n a l c o r p o r a t i o n thereby s t i f l i n g p o s s i b i l i t i e s f o r backward linkages to develop 4 . . . . w i t h i n the r e g i o n . Further l o c a l processing i s u n l i k e l y since the s u b s i -d i a r y has been e s t a b l i s h e d to e x t r a c t resources to supply manufacturing a c t i v i t i e s elsewhere w i t h i n the parent company's operations. The under-development of backward and forward linkages means the l o s s of the v a l u e -added component of production, employment o p p o r t u n i t i e s , and the m u l t i p l i e r e f f e c t engendered by such l i n k a g e s . In a d d i t i o n , under f o r e i g n c o n t r o l the f i s c a l linkage or income created through resource e x t r a c t i o n flows out of the region and accrues to f o r e i g n shareholders.^ Thus the resource region loses that c a p i t a l which could be invested i n f u r t h e r r e g i o n a l development and d i v e r s i f i c a t i o n . Since the resource venture has been e s t a b l i s h e d to feed parent company manufacturing a c t i v i t y any f l u c t u a t i o n i n demand f o r the f i n a l product would a f f e c t demand f o r the s u b s i d i a r y ' s resource and lead to economic i n s t a b i l i t y i n the resource r e g i o n . A c e r t a i n degree of market s e c u r i t y stems from the f a c t that the venture has been s p e c i f i c a l l y developed to supply the parent company and may w e l l be the only or main s u p p l i e r of the raw m a t e r i a l . How-ever, i f that raw m a t e r i a l becomes a v a i l a b l e on a more competitive b a s i s elsewhere i n the g l o b a l economy, the American parent company may wind down 6 operations and r e - l o c a t e . One f a c t o r i n h i b i t i n g t h i s would be the i n i t i a l heavy investment i n the f i r s t resource region and the cost of abandoning or 3 5 d i s m a n t l i n g i n f r a s t r u c t u r e . A f i n a l f eature of the American resource procurement strategy to be noted r e l a t e s to the purchasing and p r i c i n g of the resource. Since the resource venture i s wholly-owned by the parent company and that company u s u a l l y represents the major market f o r the operation's output, the buyer of the resource i s the same e n t i t y as the s e l l e r . This allows the parent company to set the p r i c e at which the resource w i l l be s o l d and p r a c t i s e t r a n s f e r p r i c i n g . 7 * These i m p l i c a t i o n s of the American resource procurement strategy may be b r i e f l y i l l u s t r a t e d w i t h an e m p i r i c a l example of the S c h e f f e r v i l l e region i n northern Quebec, an i r o n mining area operated by the Iron Ore Company of Canada (I.O.C.). This company i s a wholly-owned s u b s i d i a r y of s i x American s t e e l companies, one American and one Canadian mining company. The S c h e f f e r v i l l e region has a narrow economic base dependent on i r o n ore e x t r a c t i o n which provides a minimal number of jobs l o c a l l y . Processing and r e l a t e d s e r v i c e s are c a r r i e d out by s u b s i d i a r i e s w i t h i n the v e r t i c a l l y -9 i n t e g r a t e d operation m southern Ontario and the USA. Parent company decision-making i s not always i n the best i n t e r e s t s of the r e g i o n ; the i n t e r n a t i o n a l management c l a s s c o n t r o l l i n g I.O.C. place the i n t e r e s t s of Quebec i n a subordinate p o s i t i o n to those of the c o r p o r a t i o n . ^ Since the American s t e e l companies own the resource venture and represent the major market, the owners are e s s e n t i a l l y purchasing i r o n ore from themselves and are thus i n a p o s i t i o n to p r a c t i s e t r a n s f e r p r i c i n g . F i n a l l y t h i s s t a p l e s Transfer p r i c i n g has been described as the d i s c r e t i o n a r y corporate t r a n s f e r s of goods and s e r v i c e s at a higher or than f o r value received.8 p r i c i n g of i n t e r -lower amount 36 region has been vulnerable to f l u c t u a t i o n s i n parent company demand f o r i t s i r o n ore. For example, p r i o r to 1962 the region experienced a great deal of i n s t a b i l i t y due to p r i c e and demand changes as I.O.C. and i t s parent companies debated the f u t u r e of the town.^ In November of 1982 I.O.C. announced that i t would be winding down i t s S c h e f f e r v i l l e operations f o r they were no longer competitive; since t h i s time the s t a p l e economy of the region has b a s i c a l l y c o l l a p s e d . B. The Japanese Resource Procurement Strategy (a) H i s t o r i c a l Background The Japanese economy i n the post-war p e r i o d has shown remarkable success. Japan has become the f a s t e s t growing i n d u s t r i a l country i n the world during the l a s t decade or so and has achieved a l e v e l of i n d u s t r i a l 12 production second only to the USA. This was accomplished through a high degree of government economic planning which included the encouragement of key heavy i n d u s t r i e s such as i r o n and s t e e l , metal r e f i n i n g , petrochemicals, 13 and o i l r e f i n i n g . The post-war period a l s o saw the re-emergence of the o l d " z a i b a t s u " such as M i t s u i , M i t s u b i s h i , Sumitomo, and Yasuda, but r e -organized i n t o i n d u s t r i a l groupings centred on a bank and t r a d i n g company 14 and i n c l u d i n g a host of v e r t i c a l l y and h o r i z o n t a l l y - l i n k e d c o r p o r a t i o n s . Such a heavy i n d u s t r i a l base i s both r e s o u r c e - i n t e n s i v e and energy consuming. Yet Japan i s e s s e n t i a l l y without n a t u r a l resources; i t i s almost 100 percent dependent on overseas s u p p l i e s of b a u x i t e , n i c k e l ore and uranium, 90 percent dependent on overseas i r o n ore, 83 percent dependent on overseas copper, 73 percent dependent on overseas n a t u r a l gas, and 74 percent dependent on f o r e i g n c o a l s u p p l i e s . ^ Thus economic growth and development i n Japan has been and continues to be dependent upon imports of 37 raw m a t e r i a l s and energy sources. This encouraged a p o l i c y of export promotion to pay f o r the importation of raw m a t e r i a l s . As Duus w r i t e s : Japan simply lacked domestic sources of o i l , i r o n ore, c o t t o n , soybeans, and other b a s i c resources e s s e n t i a l to economic expansion. The r e s u l t was an "export or d i e " psychology that l e d Japan to expand t h e i r exports at double the world r a t e . l ? Such dependence has meant that Japanese i n d u s t r i e s are very s e n s i t i v e 18 to any changes i n the supply and p r i c e of the needed raw m a t e r i a l s . This i n t urn has l e d to the development of a resource procurement strategy which ensures a s t a b l e and secure i n f l o w of resources. The stra t e g y took on a new c h a r a c t e r i s t i c i n the l a t e 1960's when an increased demand f o r raw ma t e r i a l s and an improved balance of payments p o s i t i o n l e d to the beginning 19 of d i r e c t investment by the Japanese i n overseas resource p r o j e c t s . P r i o r to t h i s , Japanese i n d u s t r i a l i s t s had simply imported raw m a t e r i a l s by pur-20 chasing them on the open market or v i a long-term c o n t r a c t u a l arrangements. Since the " o i l shock" of 1973 there has been increased Japanese i n t e r e s t i n 21 overseas investment to secure n a t u r a l resource s u p p l i e s , (b) D e s c r i p t i o n of the Strategy There are four main c h a r a c t e r i s t i c s of the Japanese resource procure-ment st r a t e g y . F i r s t , despite the comments made above i t should be noted that the Japanese do not g e n e r a l l y p r a c t i s e d i r e c t f o r e i g n investment. Japanese i n d u s t r i a l i n t e r e s t s p r e f e r to import raw m a t e r i a l s v i a long-term c o n t r a c t s , or provide a i d to overseas resource su p p l i e s through debt f i n a n c i n g . As Galway notes i n h i s study of Japanese involvement i n the B.C. copper i n d u s t r y , they are p r i m a r i l y i n t e r e s t e d i n securing s t a b l e 22 sources of supply r a t h e r than a c q u i r i n g equity ownership. Wright c o r -roborates t h i s comment s t a t i n g that the Japanese are not i n t e r e s t e d i n 38 earning p r o f i t s through d i r e c t ownership and c o n t r o l f o r long-term . . 23 resource s u p p l i e s are more important than the generation of dividends. However, the Japanese w i l l take an equity p o s i t i o n i n overseas resource ventures i f t h e i r equity f i n a n c i n g i s c r u c i a l to the operation's success. Evidence of t h i s i s provided by the E l k V a l l e y example where only one of the four c o a l companies features Japanese equity p a r t i c i p a t i o n . This occurred under e x c e p t i o n a l circumstances where t h e i r c a p i t a l was r e q u i r e d i n order f o r K a i s e r to continue operating. B.C.'s northeast c o a l p r o j e c t provides another example where the Japanese s t e e l i n d u s t r y was persuaded to take an equity p o s i t i o n and to c o n t r i b u t e debt f i n a n c i n g 24 thereby a l l o w i n g the venture to proceed. I t should a l s o be noted that i n these instances of d i r e c t investment the Japanese w i l l h old only a . . 25 m i n o r i t y equity p o s i t i o n . Thus there are major d i f f e r e n c e s between the American and the Japanese s t r a t e g i e s of resource procurement. The Japanese a l l o w other i n v e s t o r s to provide the equity c a p i t a l and incur the associated r i s k . They do not have f u l l ownership and c o n t r o l of the resource venture and do not reap a l l the p r o f i t s , but then n e i t h e r do the Japanese experience the l o s s i f the p r o j e c t becomes u n f e a s i b l e or i f demand d e c l i n e s . F i n a l l y , when the Japanese do take a m i n o r i t y equity p o s i t i o n they i n v e s t as a group composed of a l l the major companies involved i n the i n d u s t r y which uses 26 that resource as an input. This may be seen i n southeastern B.C. where a consortium composed of M i t s u b i s h i and the nine Japanese s t e e l m i l l s own 33 percent of B.C. Coal. The second major c h a r a c t e r i s t i c of the Japanese strategy f u r t h e r r e f l e c t s t h e i r i n t e r e s t i n o b t a i n i n g secure s u p p l i e s of raw m a t e r i a l s on good terms r a t h e r than i n generating high p r o f i t s from resource e x t r a c t i o n . 39 The Japanese purchase resources on the b a s i s of long-term con t r a c t s w i t h resource s e l l e r s , supplemented by spot market purchases. These con t r a c t s i n d i c a t e the qu a n t i t y of the resource to be purchased and the p r i c e at which i t w i l l be bought. Such long-term c o n t r a c t u a l arrangements are presumably designed to cope with Japan's v u l n e r a b i l i t y to any changes i n the c o n d i t i o n s of supply and p r i c e of resources. Examination of Table 5 shows that a l l of the four c o a l companies i n southeastern B.C. hold major long-term con t r a c t s w i t h e i t h e r the Japanese s t e e l i n d u s t r y or a Japanese u t i l i t y consortium ranging i n du r a t i o n from three to twenty years. T h i r d , the Japanese attempt to ensure s e c u r i t y of resource supply through a strategy known as " m u l t i p l e - s o u r c i n g " . Instead of r e l y i n g upon one main resource s u p p l i e r , Japanese i n d u s t r i a l i s t s spread t h e i r dependence 27 over three or four main supplying regions around the world. In the case of the Japanese s t e e l i n d u s t r y , f o r example, 44 percent of the imported m e t a l l u r g i c a l c o a l was supplied by A u s t r a l i a n mines, 33 percent by American 28 mines, and 15 percent by Canadian mines i n 1981. Thus no resource region f u n c t i o n s as the only or main s u p p l i e r and each must remain competi-t i v e to r e t a i n i t s market share. A f i n a l f eature to be noted about the Japanese strategy i s that the resource i s purchased by a consortium representing a l l the companies using that resource as a major input. For example, the c o o r d i n a t i o n and n e g o t i a -t i o n of a l l m e t a l l u r g i c a l c o a l purchases from the four companies i n south-eastern B.C. i s conducted by Nippon Kokan and Kobe (N.K.K.), two of the nine Japanese s t e e l m i l l s . (c) P o s s i b l e I m p l i c a t i o n s of the Japanese Strategy Thus the Japanese strategy of overseas resource procurement d i f f e r s i n s i g n i f i c a n t respects from the American s t r a t e g y . I t may be suggested 40 that i n consequence the Japanese strategy has a d i f f e r e n t impact on s t a p l e regions. The f o l l o w i n g d i s c u s s i o n examines each c h a r a c t e r i s t i c of the Japanese strategy and suggests i t s i m p l i c a t i o n s f o r a resource r e g i o n . The Japanese preference f o r not i n v e s t i n g equity i n a resource venture provides an opportunity f o r domestic or f o r e i g n entrepreneurs to respond to Japanese market demand and i n v e s t i n resource development. According to much of the economic n a t i o n a l i s t w r i t i n g of the 1960's and 1970's domestic ownership and c o n t r o l has a p o s i t i v e e f f e c t i n generating linkages from the s t a p l e s e c t o r . Therefore, one may argue that to the extent that domestic entrepreneurs respond to Japanese market o p p o r t u n i t i e s there w i l l be a greater l i k e l i h o o d that backward linkages from the s t a p l e sector w i l l develop. Domestic e n t e r p r i s e s would not be part of a v e r t i -c a l l y - i n t e g r a t e d f o r e i g n m u l t i n a t i o n a l which may even p r o h i b i t l o c a l s u p p l i e r s from b i d d i n g f o r c o n t r a c t s since inputs and s e r v i c e s are supplied from i n t e r n a l operations located outside the country. In a d d i t i o n to the greater o p p o r t u n i t i e s f o r domestic manufacturers to o f f e r t h e i r s e r v i c e s i t may be argued that domestic entrepreneurs would be more l i k e l y to buy from such manufacturers than would f o r e i g n c o n t r o l l e r s of a resource venture. Domestic entrepreneurs, due to reasons such as p r o x i m i t y , p r i o r experience, and personal knowledge, would be more f a m i l i a r w i t h Canadian manufacturers of inputs and s u p p l i e r s of s e r v i c e s . Holder argues that domestic e n t r e -preneurs, committed to long-term residence i n the country of operations, show a "community of i n t e r e s t s and can be motivated to demonstrate a 29 greater sense of commitment than a f o r e i g n operator who i s foreign-based". This sense of commitment may i n c l u d e purchasing from domestic over f o r e i g n s u p p l i e r s due to n a t i o n a l i s t sentiment and l o y a l t y to the domestic manu-f a c t u r i n g i n d u s t r y . The existence of t h i s market may i n turn lead to 41 increased a c t i v i t y by domestic manufacturers and encourage such e n t e r p r i s e s to l o c a t e c l o s e to the s t a p l e i n d u s t r y whenever such a l o c a t i o n i s v i a b l e w i t h regard to other, non-market l o c a t i o n a l c r i t e r i a . Using the same reasoning one can argue that forward linkages from the s t a p l e sector w i l l be b e t t e r developed i f that sector i s d o m e s t i c a l l y con-t r o l l e d as i s p o s s i b l e under the Japanese resource procurement s t r a t e g y . Domestic entrepreneurs w i t h t h e i r greater commitment to the resource region would be concerned about capturing a l l of the economic o p p o r t u n i t i e s o f f e r e d by the resource. Domestic e n t e r p r i s e s would not be simply branch pl a n t s of f o r e i g n m u l t i n a t i o n a l s w i t h a s t r i c t mandate to c a r r y out only resource e x t r a c t i o n and feed manufacturing a c t i v i t y elsewhere w i t h i n the corporate o r g a n i z a t i o n . They may engage i n f u r t h e r processing of the s t a p l e themselves, or s e l l the s t a p l e w i t h i n the domestic economy f o r processing. Domestic as opposed to f o r e i g n ownership of the s t a p l e sector would not a f f e c t f i n a l demand li n k a g e s (investment i n the domestic consumer goods in d u s t r y to supply the demand f u e l l e d by income from the s t a p l e sector accruing to l a b o u r ) . I t i s assumed that the m u l t i p l i e r e f f e c t generated by the expenditure of payments to labour i n the s t a p l e i n d u s t r y would be the same whether that i n d u s t r y i s d o m e s t i c a l l y or f o r e i g n c o n t r o l l e d . However, t h i s would not be the case f o r the f o u r t h type of l i n k a g e which might develop from the s t a p l e s e c t o r . The f i s c a l l i n k a g e r e l a t e s to income from the s t a p l e sector accruing to c a p i t a l i n the form of normal returns to c a p i t a l , and resource r e n t . The concept of "resource r e n t " as a component of the f i s c a l l i n k a g e should be c l a r i f i e d . Resource rents are s p e c i f i c to s t a p l e i n d u s t r i e s and stem from the unique and f i n i t e nature 30 of the resource i t s e l f . Resource rent may be defined as that p o r t i o n of 42 the income generated by the s t a p l e i n d u s t r y which i s above a normal r e t u r n on c a p i t a l i n v e s t e d . * I f the resource venture i s c o n t r o l l e d by f o r e i g n i n t e r e s t s as under the American s t r a t e g y the f i s c a l l i n k a g e leaks out of the country and may be used to pursue corporate o b j e c t i v e s elsewhere i n the g l o b a l economy. However, i f domestic entrepreneurs respond to Japanese demand and e s t a b l i s h the resource venture, normal p r o f i t s and resource rents w i l l be r e t a i n e d by those entrepreneurs and could be invested i n the region to develop backward and forward linkag e s and promote economic d i v e r s i f i c a t i o n . Turning now to the second c h a r a c t e r i s t i c of the Japanese s t r a t e g y , i t i s suggested that the existence of long-term c o n t r a c t s between buyer and s e l l e r should a l l e v i a t e some of the "booms" and "busts" i n growth a s s o c i a t e d w i t h s t a p l e economies. U n l i k e the American str a t e g y where there i s the p o s s i b i l i t y of f l u c t u a t i n g demand, long-term c o n t r a c t s i n d i c a t e the presence of an e s t a b l i s h e d market f o r the r e g i o n a l s t a p l e f o r the d u r a t i o n of the c o n t r a c t . This i n turn should engender s t a b l e production l e v e l s of the s t a p l e and steady employment i n the s t a p l e s e c t o r . The i m p l i c a t i o n s of s t a b i l i t y i n the s t a p l e sector f o r the resource r e g i o n as a whole i n c l u d e : s t a b l e r e g i o n a l employment l e v e l s w i t h no sudden increase i n unemployment due to f l u c t u a t i o n s i n the s t a p l e s e c t o r , s t a b l e r e g i o n a l incomes, a s t a b l e r e g i o n a l population w i t h no sudden out-migration due to l a y - o f f s i n the s t a p l e i n d u s t r y , and s t a b i l i t y i n the r e g i o n a l housing market. However, the s t a b i l i t y engendered by long-term c o n t r a c t s may w e l l be threatened by some of the i m p l i c a t i o n s of the Japanese m u l t i p l e - s o u r c i n g A "normal r e t u r n " may be defined i n a number of ways. Gunton defin e s "normal p r o f i t allowances" as a 15 percent r e t u r n on shareholders equity a f t e r corporate income tax.31 43 s t r a t e g y . Under the American str a t e g y the f o r e i g n resource region i s u s u a l l y the only or main s u p p l i e r of the resource to the parent company whereas under the Japanese s t r a t e g y , the f o r e i g n resource region i s one of three or four main s u p p l i e r s . Thus each resource s u p p l i e r would be com-peting f o r a l a r g e r share of the Japanese market thereby enabling the Japanese buyers to p i t one s u p p l i e r against another. Secondly, under the American s t r a t e g y a resource region would only be d i r e c t l y a f f e c t e d by a change i n demand from the parent company buyer. Under the Japanese m u l t i p l e - s o u r c i n g s t r a t e g y i t i s suggested that a resource region's operations could be a f f e c t e d not only by a change i n demand from the buyer, but a l s o by a change i n the competitive p o s i t i o n of the other s u p p l i e r s which might render t h e i r operations more or l e s s a t t r a c t i v e i n comparison. A l s o , any change i n the g l o b a l supply p i c t u r e of that p a r t i c u l a r resource might a f f e c t the comparative p o s i t i o n of an e x i s t i n g supply r e g i o n . F i n a l l y , there would be l e s s l i k e l i h o o d of t r a n s f e r p r i c i n g o c c u r r i n g under the Japanese s t r a t e g y f o r the instances of Japanese equity p a r t i c i p a -t i o n are few and always l i m i t e d to m i n o r i t y equity p o s i t i o n s . However, the Japanese consortium purchasing resources represents a l l the major companies i n the i n d u s t r y using that resource and would thus be n e g o t i a t i n g from a strong u n i t e d p o s i t i o n w i t h a number of fragmented resource s e l l e r s around the world. I t i s suggested that t h i s n e g o t i a t i n g p o s i t i o n would a l l o w the consortium a great deal of power i n o b t a i n i n g the p r i c e and qu a n t i t y condi-t i o n s d e s i r e d from each s e l l e r . This i n turn may r e s u l t i n l e s s than eq u i t a b l e r e t u r n s f o r each region's resource. This d i s c u s s i o n may be summarized i n the f o l l o w i n g four hypotheses: 44 (1) The Japanese resource procurement s t r a t e g y o f f e r s greater o p p o r t u n i t i e s f o r domestic ownership and c o n t r o l of resource i n d u s t r i e s than does the American s t r a t e g y . To the extent that domestic entrepreneurs respond to these o p p o r t u n i t i e s i t i s hypothesized that (a) the purchase of inputs from domestic manufacturers and s u p p l i e r s w i l l be greater i n a resource i n d u s t r y operating under the Japanese than under the American s t r a t e g y , (b) the development of backward and f o r -ward l i n k a g e s from a resource i n d u s t r y w i l l be greater i f i t i s operating under the Japanese s t r a t e g y r a t h e r than the American, and (c) f i s c a l l i n k a g e s from resource e x t r a c t i o n are more l i k e l y to be r e t a i n e d and invested i n r e g i o n a l economic development under the Japanese s t r a t e g y than under the American. (2) Resource i n d u s t r i e s and s t a p l e regions involved i n long-term c o n t r a c t s w i t h Japanese buyers w i l l experience greater s t a b i l i t y than those operating under the American resource procurement s t r a t e g y . (3) A resource region supplying the Japanese market as part of the m u l t i p l e - s o u r c i n g s t r a t e g y w i l l be more s e n s i t i v e to changing c o n d i t i o n s of i t s competitors than a region func-t i o n i n g under the American s t r a t e g y . (4) Japanese consortium resource purchasing r e s u l t s i n l e s s than e q u i t a b l e returns f o r the r e g i o n a l resource as i s the case under the American s t r a t e g y 0 p e r m i t t i n g t r a n s f e r p r i c i n g . 45 Before d e s c r i b i n g the methodology used to t e s t these hypotheses some of the concepts presented need to be d e f i n e d . 'Domestic manufacturers and s u p p l i e r s of i n p u t s ' i n the case of c o a l mining i n c l u d e a l l Canadian pro-ducers and s u p p l i e r s of the items l i s t e d i n Appendix D, pp. 159-166. In looking at 'the development of backward l i n k a g e s ' r e l a t i n g to c o a l mining I am i n t e r e s t e d i n the extent to which manufacturers and s u p p l i e r s of these inputs have developed i n the l o c a l E l k V a l l e y economy, the p r o v i n c i a l economy, and the broader n a t i o n a l economy. Forward linkag e s from m e t a l l -u r g i c a l c o a l mining i n c l u d e the manufacture of coke ( u l t i m a t e l y used to produce s t e e l ) and from thermal c o a l mining, thermal power generation. Again the study seeks to document whether these a c t i v i t i e s have developed i n the l o c a l , p r o v i n c i a l , and n a t i o n a l economies. F i s c a l l i n k a g e s r e f e r to the p r o f i t s generated from c o a l mining. I am i n t e r e s t e d i n whether or not they have been used to promote r e g i o n a l economic development; that i s , have they been r e - i n v e s t e d i n the resource region to promote d i v e r s i f i c a -t i o n of the economic base. The concept of ' s t a b i l i t y ' f o r the s t a p l e i n d u s t r y w i l l be defined as constant annual output w i t h no sudden upswings or downturns. This would engender s t a b i l i t y i n the region as witnessed i n constant employment l e v e l s , constant r e g i o n a l incomes, a constant r e g i o n a l population, and a constant vacancy r a t e . ' S e n s i t i v i t y to changing c o n d i -t i o n s of competitors' r e f e r s to a resource i n d u s t r y i n one l o c a t i o n being d i r e c t l y a f f e c t e d by changes i n the competitive p o s i t i o n of another s u p p l i e r ; i t i s assumed that the number of instances of a Japanese resource s u p p l i e r being d i r e c t l y a f f e c t e d by changing c o n d i t i o n s of competitors w i l l be f a r greater than f o r a region operating under the American resource procurement s t r a t e g y . The concept of ' l e s s than e q u i t a b l e r e t u r n s ' i s d i f f i c u l t to d e f i n e p r e c i s e l y . One can assume that an e q u i t a b l e resource 46 p r i c e i s most l i k e l y to be achieved in. a competitive s i t u a t i o n where there are a number of resource buyers and s e l l e r s . Any a b e r r a t i o n of that s i t u a t i o n may w e l l r e s u l t i n an u n f a i r resource p r i c e . C. Methodology Within the time and monetary l i m i t a t i o n s of an M.A. t h e s i s i t was not p o s s i b l e to obt a i n comparative data concerning resource regions operating under the American s t r a t e g y . Thus the hypotheses were modified to focus on the i m p l i c a t i o n s of the Japanese resource procurement s t r a t e g y and were tested i n the f o l l o w i n g ways: ( l ) ( a ) The i n d u s t r y chosen as a case study includes both domesti-c a l l y - c o n t r o l l e d companies and the f o r e i g n - c o n t r o l l e d com-panies t y p i c a l of the American s t r a t e g y so t h i s hypothesis could be test e d by comparing the purchasing patterns of each. A que s t i o n n a i r e was administered to each c o a l company requesting that i t i n d i c a t e from where i t purchased inputs and s e r v i c e s (see Appendix D, questions # 1 and 2 ) . General d i s c u s s i o n s were held w i t h company purchasing agents based on the f o l l o w i n g s o r t s of questions: - What are the c r i t e r i a on which you base your d e c i s i o n as to who to buy from? - Do you make a p a r t i c u l a r e f f o r t to purchase from Canadian over f o r e i g n manufacturers? In a d d i t i o n , other more comprehensive st u d i e s comparing the purchasing patterns of f o r e i g n and d o m e s t i c a l l y - c o n t r o l l e d companies were consulted. 47 (b) An attempt was made to document the backward and forward li n k a g e s which have developed from the E l k V a l l e y c o a l i n d u s t r y . The completed forms regarding input sources and the d i s c u s s i o n s w i t h purchasing agents served to i n d i c a t e which inputs were a v a i l a b l e from the l o c a l , p r o v i n c i a l , or n a t i o n a l economy. Secondary sources l i s t i n g l o c a t i o n s of some of the manufacturers and s u p p l i e r s to the c o a l i n d u s t r y were consulted. These f i n d i n g s were then compared w i t h l a r g e r s t u d i e s which have examined the domestic development of backward linkage s to the Canadian mining i n d u s t r y as a whole. The d i s c u s s i o n of forward linkag e s was based on i n t e r v i e w s w i t h company r e p r e s e n t a t i v e s (see Appendix D, question #3) supplemented by the f i n d i n g s of a secondary source examining forward l i n k a g e s from the B.C. c o a l i n d u s t r y . (c) Due to data c o n s t r a i n t s i t was not p o s s i b l e to c a l c u l a t e the f i s c a l l i n k a g e and examine how and where i t i s being invested f o r each c o a l company. However, two surrogate examples are presented. The r e s u l t s of a study documenting use of the f i s c a l l i n k a g e by a f o r e i g n - c o n t r o l l e d company are compared w i t h the way i n which the d o m e s t i c a l l y - c o n t r o l l e d parent of one of the E l k V a l l e y c o a l companies i s using p r o f i t s generated from s t a p l e e x t r a c t i o n . (2) The question of how s t a b l e the E l k V a l l e y c o a l i n d u s t r y has been s i n c e producing f o r the Japanese on long-term c o n t r a c t s was examined by f i r s t l o o k i n g at the nature of these con-t r a c t s and whether they r e a l l y do o f f e r a constant demand and p r i c e f o r the r e g i o n a l s t a p l e . This was done through 48 i n t e r v i e w s w i t h company r e p r e s e n t a t i v e s (see Appendix D, question #4). Second, inform a t i o n on changing l e v e l s of out-put and employment i n the s t a p l e i n d u s t r y was c o l l e c t e d from in t e r v i e w s and company reports (see Appendix D, questions # 5 and 6). These f i n d i n g s were supplemented w i t h data from the f o l l o w i n g sources: newspaper a r t i c l e s , secondary sources d e a l i n g w i t h long-term c o n t r a c t s and the experiences of Japanese resource s u p p l i e r s elsewhere, and d i s c u s s i o n s w i t h the president of the United Mineworkers of America ( l a r g e s t union i n the region) about the i m p l i c a t i o n s of long-term c o n t r a c t s f o r labour.. F i n a l l y , i nformation on r e g i o n a l employment, income, p o p u l a t i o n , and vacancy r a t e l e v e l s was c o l l e c t e d from a v a r i e t y of sources to examine s t a b i l i t y i n the r e g i o n a l economy. These sources i n c l u d e d : reports on the region published by government agencies, Canada Employ-ment and Immigration r e p o r t s , Revenue Canada income informa-t i o n , census data, Canada Mortgage and Housing Corporation data, and f i l e s from the planning o f f i c e s of the three main communities i n the r e g i o n . (3) This hypothesis was examined by l o o k i n g at the extent of competition among c o a l s u p p l i e r s to Japan as i n d i c a t e d i n i n t e r v i e w s w i t h company r e p r e s e n t a t i v e s (see Appendix D, question #7) and secondary sources. This i n f o r m a t i o n was backed up w i t h e m p i r i c a l examples from newspapers and secondary sources where the operations of Japanese resource s u p p l i e r s have been d i r e c t l y a f f e c t e d by changes i n the competitive p o s i t i o n of a l t e r n a t e s u p p l i e r s . 49 (4) The implications of consortium purchasing for resource p r i c e were examined through interviews with company repre-sentatives (see Appendix D, question #8). Further evidence was provided by newspaper a r t i c l e s and secondary sources dealing with the experiences of other, resource regions supplying Japan. 50 FOOTNOTES 1. Hugh A i t k e n , American C a p i t a l and Canadian Resources (Massachusetts: Harvard U n i v e r s i t y Press, 1961), p. 140. 2. I b i d . , p. 104. 3. Canada, S t a t i s t i c s Canada, Canadian Imports by Domestic and B.C.  E n t e r p r i s e s , Cat. #67-509, 1978, p. x v i . 4. A.E. S a f a r i a n , Foreign Ownership of Canadian Industry (Toronto: McGraw-Hill Company of Canada L t d . , 1966), p. 19. 5. M.H. Watkins, "A Staple Theory of C a p i t a l i s t Growth" (Paper presented at Three Nations Conference - Dimensions of Dependency, New Zealand, November 1980), p. 6. 6. Roy A. Matthews, "The M u l t i n a t i o n a l Firm and the World of Tomorrow," i n The M u l t i n a t i o n a l Firm and the Nation State, ed. G i l l e s Paquet (Toronto: C o l l i e r Macmillan Canada L t d . , 1972), p. 151. 7. Greg Crough, Foreign Ownership and Con t r o l of the A u s t r a l i a n M i n e r a l  Industry (Sydney, A u s t r a l i a : T ransnational Corporations Research P r o j e c t , U n i v e r s i t y of Sydney, 1978), p. 3. 8. W. Chambers, Transfer P r i c i n g , the M u l t i n a t i o n a l E n t e r p r i s e and  Economic Development (Ottawa: Energy, Mines and Resources, 1976), p. 3. 9. John Bradbury, "Towards An A l t e r n a t e Theory of Resource-Based Town Development i n Canada," i n Economic Geography 55, no. 2 ( A p r i l , 1979): 159-161. 10. I b i d . 11. I b i d . , p. 159. 12. Lawrence B. Krause and Sueo Sekiguchi, eds., Economic I n t e g r a t i o n i n  the P a c i f i c Basin (Washington D.C: Brookings I n s t i t u t e , 1980), p. 16. 13. K e i t h A.J. Hay, The Japanese Economy i n the Post-war Period (Ottawa: Canada-Japan Trade C o u n c i l , 1982), p. 4. 14. I b i d . , p. 9. 15. Terutomo Ozawa, M u l t i n a t i o n a l i s m , Japanese S t y l e (New Jersey: P r i n c e t o n U n i v e r s i t y Press, 1979), p. 162; Japan Economic Yearbook, 1981/82 (Tokyo, Japan: The O r i e n t a l Economist, 1981), p. 81. 16. I r a Magaziner and T. Hout, J a p a n e s e - I n d u s t r i a l P o l i c y (London: P o l i c y Studies I n s t i t u t e , 1980), p. 4. 51 17. Peter Duus, The Rise of Modern Japan (Boston: Houghton M i f f l i n Co., 1976) p. 257. 18. Ozawa, p. 162. 19. M.Y. Yoshino, "Japanese Foreign D i r e c t Investment," i n The Japanese  Economy i n I n t e r n a t i o n a l P e r s p e c t i v e , ed. I s a i a h Frank (Baltimore: Johns Hopkins U n i v e r s i t y Press, 1975), p. 255. 20. I b i d . , p. 252. 21. J . Nishikawa, "Resource C o n s t r a i n t s : A Problem of the Japanese Economy," i n Growth and Resource Problems Related to Japan, v.5, ed. Shigeto Tsuru (London: Macmillan Press L t d . , 1980), p. 297. 22. M.A. Galway, Japanese Involvement i n B r i t i s h Columbia Copper (Ottawa: Information Canada, 1975), p. 5. 23. Richard Wright, "Foreign Investment Between Neighbours: Canada and Japan," i n Canadian Pe r s p e c t i v e s on Economic R e l a t i o n s w i t h Japan, ed. K e i t h A.J. Hay (Montreal: I n s t i t u t e f o r Research on P u b l i c P o l i c y , 1980), p. 192. 24. Rod Nutt, "Japanese concept saves northeast B.C. c o a l d e a l , " i n Vancouver Sun, 3 J u l y 1982, p. A l . 25. Ozawa, p. 163. 26. I b i d . , p. 186. 27. I b i d . , p. 163. 28. K e i t h A.J. Hay, S.R. H i l l , and S.S. Rahman, Canadian Coal f o r Japan (Ottawa: Econolynx I n t e r n a t i o n a l L t d . , 1982), p. 39. 29. Jean Holder, Caribbean Tourism P o l i c y and Impacts (Barbados: Caribbean Tourism Research and Development Centre, 1979), p. 10. 30. Thomas I . Gunton, Resources, Regional Development and P r o v i n c i a l  P o l i c y : A Case Study of B r i t i s h Columbia (Ottawa: Canadian Centre f o r P o l i c y A l t e r n a t i v e s , 1982), p. 4. 31. I b i d . , p. 20. V. PRESENTATION OF FINDINGS This chapter i s d i v i d e d i n t o four s e c t i o n s each d e a l i n g w i t h one of the hypotheses regarding the i m p l i c a t i o n s of the Japanese resource procure-ment st r a t e g y and the research f i n d i n g s f o r the s t a p l e s economy of the E l k V a l l e y . The d i s c u s s i o n begins w i t h an examination of the Japanese preference f o r not i n v e s t i n g equity i n a resource venture and the i m p l i c a -t i o n s of domestic ownership f o r the development of backward, forward, and f i s c a l l i n k a g e s . The second s e c t i o n presents the research f i n d i n g s w i t h regard to long-term c o n t r a c t s and r e g i o n a l s t a b i l i t y . Then Japanese m u l t i p l e sourcing and i t s r a m i f i c a t i o n s f o r the c o a l i n d u s t r y of south-eastern B.C. are discussed, and f o u r t h , the f i n d i n g s w i t h regard to the e f f e c t s of consortium resource purchasing are presented. 53 A. The I m p l i c a t i o n s of Japanese Preference f o r not I n v e s t i n g Equity (a) The Development of Backward Linkages ( i ) Foreign and Domestic Purchasing Patterns The hypothesis being tested here i s that d o m e s t i c a l l y - c o n t r o l l e d resource companies (which can develop under the Japanese strategy) are more l i k e l y to purchase inputs from domestic s u p p l i e r s than are the f o r e i g n - c o n t r o l l e d companies found under the American s t r a t e g y of resource procurement. Planned comparison of the purchasing patterns of the domes-t i c and f o r e i g n c o n t r o l l e d c o a l companies i n the E l k V a l l e y was impeded because only one company, B.C. Coal L t d . , a c t u a l l y completed the d e t a i l e d questionnaire regarding sourcing of inputs and s e r v i c e s (see Appendix E). However, the completion of t h i s q u estionnaire and general d i s c u s s i o n s w i t h the purchasing agents from B.C. Coal, Fording Coal, and Byron Creek C o l l i e r i e s helped i l l u m i n a t e the decision-making process w i t h regard to the purchase of inputs (the purchasing agent from Crows Nest Resources was not w i l l i n g to d i s c u s s the t o p i c ) . On the b a s i s of t h i s i n f o r m a t i o n one detects no d i f f e r e n c e between the purchasing patterns of the d o m e s t i c a l l y and f o r e i g n c o n t r o l l e d com-panies. Discussions w i t h the purchasing agent of the Canadian c o n t r o l l e d company, B.C. Coal, revealed that when de c i d i n g from whom to buy inputs and s e r v i c e s , a t t e n t i o n i s not paid to the " n a t i o n a l i t y " of the s u p p l i e r and f a c t o r s such as n a t i o n a l i s t sentiment and l o y a l t y to Canadian manu-f a c t u r i n g do not come i n t o p l a y . The company would not decide to buy from c e r t a i n s u p p l i e r s simply because they are Canadian. In f a c t when i t had the opportunity of buying a l l of i t s requirements of a p a r t i c u l a r input from Canadian manufacturers, B.C. Coal d i d not n e c e s s a r i l y do so. As an 54 example, about 60 percent of B.C. Coal's purchase of toothed and blade buckets (that i s , wear parts f o r shovels, b u l l d o z e r s , and f r o n t end loaders) came from American manufacturers and 40 percent from Canadian.^" Furthe r -more, B.C. Coal w i l l not buy from Canadian s u p p l i e r s i f they are not com-p e t i t i v e i n terms of p r i c e and q u a l i t y . For example, inputs such as b i n s , hoppers, and chutes ( a n c i l l a r y equipment used i n the preparation p l a n t ) are a v a i l a b l e through l o c a l E l k V a l l e y s u p p l i e r s but B.C. Coal does not buy 2 from them due to problems w i t h workmanship. In f a c t each of the company r e p r e s e n t a t i v e s interviewed stated that inputs and s e r v i c e s are chosen according to c r i t e r i a of p r i c e , q u a l i t y , and d e l i v e r y date. Even i f the companies decided to make a s p e c i a l e f f o r t to p a t r o n i z e Canadian over f o r e i g n manufacturers t h e i r attempts would be con-s t r a i n e d by the f a c t that few of the inputs to c o a l mining are manufactured d o m e s t i c a l l y . They are i n t e r e s t e d i n seeing greater Canadian manufacturing of inputs and say they would pr e f e r to purchase a l l of t h e i r requirements from the l o c a l region s i n c e t h i s would be more p r a c t i c a l i n terms of r e p a i r work and access to replacement p a r t s . However, the purchasing agents str e s s e d that as businesses they could not a f f o r d to p a t r o n i z e domestic over f o r e i g n manufacturers i f the domestic f i r m s were not competitive i n p r i c e , q u a l i t y , and d e l i v e r y schedule. There are f u r t h e r ways to examine the r e l a t i o n s h i p between domestic c o n t r o l of the resource i n d u s t r y and p a t r o n i z a t i o n of domestic manufac-t u r e r s . For example, i f one could show that there are greater o p p o r t u n i t i e s f o r Canadian s u p p l i e r s to b i d f o r c o n t r a c t s w i t h the Canadian c o a l companies than w i t h the f o r e i g n ones t h i s would i n d i c a t e that Canadian c o n t r o l of a resource i n d u s t r y does s t i m u l a t e the development of backward l i n k a g e s . Furthermore, the a s s e r t i o n that s u p p l i e r s are chosen purely on the b a s i s 5 5 of t h e i r competitive p o s i t i o n assumes that the purchasing agent has per-f e c t knowledge of a l l p o s s i b l e domestic and f o r e i g n s u p p l i e r s . I d i d not examine whether the Canadian c o a l companies are more f a m i l i a r w i t h domes-t i c s u p p l i e r s than the f o r e i g n c o n t r o l l e d companies, both of which are s u b s i d i a r i e s of l a r g e , w e l l - i n t e g r a t e d m u l t i n a t i o n a l c o r p o r a t i o n s . This f u r t h e r research was not undertaken si n c e i t would be q u i t e complicated and time-consuming and I had i n i t i a l l y a n t i c i p a t e d that comparison of a l l the completed questionnaires would be s u f f i c i e n t i n d i c a t i o n of the i m p l i -c a t i o n s of domestic c o n t r o l of the resource i n d u s t r y f o r p a t r o n i z a t i o n of domestic inputs and s e r v i c e s . ( i i ) Domestic Development of Inputs to the Coal Industry In t h i s s e c t i o n I am t e s t i n g the hypothesis that backward li n k a g e s w i l l be b e t t e r developed from a s t a p l e sector under domestic c o n t r o l as i s p o s s i b l e w i t h the Japanese stra t e g y of resource procurement. Before documenting the backward li n k a g e s which have developed from the c o a l i n d u s t r y we must d i f f e r e n t i a t e between l i n k a g e s representing inputs to s t a p l e production, and those which have been developed to c o l l e c t and 3 transport the s t a p l e . Within these two types of l i n k a g e s we can i d e n t i f y four c a t e g o r i e s : 1. The design or research and development of inputs to the s t a p l e i n d u s t r y , 2. A c t u a l manufacture of inputs i n c l u d i n g , ( i ) the manufacture of l o w - l e v e l technology parts and components and ( i i ) the manufac-ture of more s o p h i s t i c a t e d , s p e c i a l i z e d , and high technology i n p u t s , 3. Supplying of inputs v i a r e t a i l o u t l e t s , 56 4. P r o v i s i o n of s e r v i c e s to the s t a p l e i n d u s t r y . Backward Linkages f o r Staple Production The development of backward l i n k a g e s i n the l o c a l E l k V a l l e y r e gion i s extremely l i m i t e d . There i s one establishment i n Sparwood and one i n F e r n i e which manufacture a n c i l l a r y equipment and wear p a r t s ; that i s , low l e v e l technology parts and components.~* However, r e t a i l o u t l e t s supplying inputs manufactured elsewhere are numerous, and commercial and r e t a i l s e r v i c e s r e l a t e d to c o a l mining are h i g h l y developed i n the l o c a l economy (see Appendix E pp. 167'to 74) which shows that B.C. Coal i s able to pur-chase about 100 percent of i t s open p i t , road, and wear part equipment requirements from l o c a l s u p p l i e r s as w e l l as a l l needed s e r v i c e s ) . In the l a r g e r B.C. economy there are a number of companies manufac-t u r i n g a n c i l l a r y equipment and wear p a r t s , but there i s no manufacturing of the more s p e c i a l i z e d high technology inputs such as open p i t , under-ground, or p r e p a r a t i o n plant equipment.^ Higher l e v e l p r o f e s s i o n a l and t e c h n i c a l s e r v i c e s r e l a t i n g to c o a l mining are present i n Vancouver where . a number of c o n s u l t i n g f i r m s are l o c a t e d . ^ With respect to backward l i n k a g e s developed at the next geographical s c a l e , the Canadian economy, there i s some domestic manufacturing of a n c i l l a r y equipment and wear p a r t s f o r the c o a l i n d u s t r y . Examination of Appendix E (pp.170-71)'shows that about h a l f of B.C. Coal's purchases of a n c i l l a r y equipment and about 25 percent of t h e i r wear parts are from Canadian manufacturers. A l l of t h e i r needs f o r these inputs can be supplied through domestic r e t a i l o u t l e t s . These f i n d i n g s are supported by the conclusions of a major Energy, Mines, and Resources (E.M.R.) study on the Canadian mining i n d u s t r y as a whole which s t a t e s that about 52 percent of 57 "Class C" items (custom-made l o w - l e v e l technology components or part s ) used g by the i n d u s t r y are manufactured i n Canada. The more s o p h i s t i c a t e d , s p e c i a l i z e d and high technology inputs f o r c o a l mining would i n c l u d e open p i t and road equipment, underground mining equipment, and preparation plant equipment. There i s some domestic produc-t i o n of open p i t equipment (which c o n s i s t s p r i m a r i l y of l a r g e v e h i c l e s ) . For example, about 50 percent of B.C. Coal's needs have been assembled i n Canada ( u s u a l l y i n southern Ontario) but many of the parts and components 9 are from the U.S. Other sources support t h i s general statement. A study e n t i t l e d , Economic Impacts and Linkages of the Canadian Mining Industry, found that i n 1974 about 83 percent of the Canadian mining i n d u s t r y ' s purchase of front-end loaders (a major piece of open p i t equipment) were imported v e h i c l e s , overwhelmingly from the US.^ The E.M.R. study concludes that Canadian i n d u s t r y provides l e s s than 30 percent of the equipment required by open p i t m i n i n g . ^ A s i m i l a r p a t t e r n emerges f o r the equipment used to construct and maintain roads around the m i n e s i t e : about 50 percent of B.C. Coal's purchase of road equipment are v e h i c l e s which have been assembled i n Canada and the remainder i s imported. A l l of the company's needs f o r open p i t and road equipment can be supplied by Canadian o u t l e t s (see Appendix E pp. 167, 172). I t appears that very l i t t l e underground c o a l mining equipment i s 1 2 a c t u a l l y manufactured i n Canada. The United Kingdom, where much of the e a r l y underground c o a l mining occurred and much of the equipment was developed, appears to have r e t a i n e d i t s i n i t i a l hold and remains the major l o c a t i o n f o r most manufacturing of underground c o a l mining needs. Some low technology parts and components are manufactured i n Canada but the major pieces of equipment used by B.C. Coal are purchased from B r i t i s h and 58 Japanese manufacturers (see Appendix E,.p. 168). With respect to c o a l p reparation plant equipment, examination of Appendix E;i,(p.169) • i n d i c a t e s that the U.S. i s the major l o c a t i o n where B.C. Coal's needs are manufactured. This i n t u r n might suggest that domestic c a p a c i t y i s q u i t e weak. However, the E.M.R. study found that Canadian 13 content of b e n e f i c a t i o n p l a n t equipment i s about 65 percent. Perhaps the treatment process f o r c o a l i s d i f f e r e n t from the treatment f o r the mining i n d u s t r y as a whole and Canadian c a p a b i l i t y i s lower i n t h i s case. A l t e r n a t i v e l y , i t i s p o s s i b l e that Canadian manufacturing of c o a l prepara-t i o n p l a n t equipment i s as high as the E.M.R. study suggests but B.C. Coal i s simply not buying from those Canadian manufacturers. Backward Linkages f o r Staple C o l l e c t i o n " The two major backward l i n k a g e s developed to tra n s p o r t and c o l l e c t the c o a l i n c l u d e the Canadian P a c i f i c Railway route and the c o a l handling port at Roberts Bank. The l a t t e r i s operated by Westshore Terminals (a wholly-owned s u b s i d i a r y of B.C. Coal) and represents a major backward l i n k a g e i n the contemporary phase of r e g i o n a l c o a l mining. With respect to research and development r e l a t e d to the s t a p l e i n d u s t r y i t should be noted that Roberts Bank was designed and b u i l t by a Vancouver-based engineering f i r m , Swan Wooster. K a i s e r Coal L t d . h i r e d the f i r m i n the l a t e 1960's and the opportunity proved i n v a l u a b l e . The experience and e x p e r t i s e gained has l e d Swan Wooster to become "the world's premier designer of c o a l ports and a major f o r c e i n harbour and marine-See Appendix C f o r a d e s c r i p t i o n of the process i n v o l v e d i n c o a l handling and l o a d i n g onto s h i p s , and the major pieces of equipment used at the d i f f e r e n t stages of that process. 59 r e l a t e d engineering". Thus an important backward l i n k a g e was developed through the d e c i s i o n of the f o r e i g n company c o n t r o l l i n g s t a p l e production to p a t r o n i z e a l o c a l engineering f i r m . Examination of Appendix F shows that there i s some l o c a l manufacturing of the a n c i l l a r y equipment and wear parts used as inputs to the operation of the p o r t . A l l of these needs are a v a i l a b l e through l o c a l s u p p l i e r s as are the vast m a j o r i t y of commercial and r e t a i l s e r v i c e s used by the p o r t . However, the manufacture of the more .sophisticated and s p e c i a l i z e d pieces of equipment does not occur i n Canada. Two of the s t a c k e r - r e c l a i m e r s were assembled i n southern Ontario by the Canadian s u b s i d i a r y of an American company and the t h i r d i s being manufactured by M i t s u b i s h i i n Japan. Both of the present shiploaders were designed by Swan Wooster and manufactured i n Canada but w i t h many of the parts coming from the United S t a t e s . ^ Thus the p a t t e r n i s s i m i l a r to that found f o r the manufacture of the more s p e c i a l i z e d equipment used i n c o a l mining; that i s , the backward l i n k a g e i s underdeveloped w i t h Canadian branch p l a n t s c a r r y i n g out only the assembly of parts manufactured outside the country. Summary The evidence presented above supports the comments of the purchasing agents regarding the d i f f i c u l t i e s i n purchasing Canadian inputs f o r back-ward l i n k a g e s from c o a l mining do not appear to be s t r o n g l y developed. To summarize .those that have been developed d o m e s t i c a l l y , each category i s examined i n t u r n : l o - The design, or research and development, of inputs. This sector i s underdeveloped but some important c a p a b i l i t y does e x i s t w i t h regard to the design of i n f r a s t r u c t u r e to c o l l e c t and 60 handle the s t a p l e at trans-shipment p o i n t s . 2(i) - The manufacture of l o w - l e v e l technology parts and components. This i s the most s t r o n g l y developed sector but yet not a l l a n c i l l a r y equipment and wear parts f o r the c o a l i n d u s t r y are manufactured i n Canada. As one c o a l company r e p r e s e n t a t i v e summarized the s i t u a t i o n , Canadian i n d u s t r y i s f i t t i n g i n t o the niche of supplying a c c e s s o r i e s and components to Canadian c o a l mining."^ The E.M.R. study reaches s i m i l a r conclusions s t a t i n g "... the Canadian branch plant i n d u s t r y e x p e r t i s e i s biased toward the production of l o w - l e v e l technology equipment and components, a s p e c i a l i z a t i o n that leaves i t v u l n e r a b l e to p r i c e c o m p e t i t i o n " . ^ I t should a l s o be noted that t h i s category of backward l i n k a g e although very l i m i t e d i n the immediate l o c a l economy, has developed at the s c a l e of the p r o v i n c i a l economy. 2 ( i i ) - The manufacture of more s o p h i s t i c a t e d , s p e c i a l i z e d , and high technology inputs. The development of t h i s sector i s very weak. I t i s only at the n a t i o n a l l e v e l that one sees some a c t i v i t y r e l a t e d to the production of heavy equipment f o r c o a l mining, but t h i s i s l a r g e l y d i r e c t e d toward branch plant assembly of pieces manufactured i n the U.S. by the American parent company. This comment i s again corroborated by the E.M.R. study: The Canadian machinery i n d u s t r y does b e t t e r p r o v i d i n g parts and attachments than supplying new c a p i t a l equipment; .... the Canadian branch pl a n t i n d u s t r y has evolved toward an assembly type of o p e r a t i o n . . . . ^ 61 3 - The supply of inputs v i a r e t a i l o u t l e t s . The m a j o r i t y of inputs to c o a l mining whether they have been manu-factu r e d w i t h i n or outside Canada can be purchased from domestic supply o u t l e t s . These have been developed i n the l o c a l economy as w e l l as at the p r o v i n c i a l and n a t i o n a l l e v e l . 4 - The p r o v i s i o n of s e r v i c e s . These li n k a g e s have been developed d o m e s t i c a l l y and are g e n e r a l l y found c l o s e to the resource i n d u s t r y . The lower l e v e l commercial and r e t a i l s e r v i c e s r e l a t e d to c o a l mining are developed w i t h i n the l o c a l economy and the higher l e v e l p r o f e s s i o n a l and t e c h n i c a l s e r v i c e s are g e n e r a l l y a v a i l a b l e w i t h i n the p r o v i n c i a l economy. (b) The Development of Forward Linkages This s e c t i o n presents the research f i n d i n g s i n t e s t i n g the hypothesis that forward l i n k a g e s w i l l be b e t t e r developed from a resource i n d u s t r y which i s d o m e s t i c a l l y c o n t r o l l e d as i s p o s s i b l e under the Japanese resource procurement s t r a t e g y . The i n t e r v i e w s revealed that each of the four c o a l companies i n the E l k V a l l e y ship t h e i r product out of the region as c l e a n 19 raw c o a l . Three of the companies export to f o r e i g n markets ( p r i m a r i l y Japan and other P a c i f i c Rim countries) where f u r t h e r processing of the s t a p l e occurs, and one company ships to eastern Canadian markets where the c o a l i s used as an input to thermal power generation. The three companies which export the raw c o a l are producing p r i m a r i l y m e t a l l u r g i c a l c o a l . These are B.C. Coal and Fording (the two Canadian companies) and Crows Nest Resources (a f o r e i g n - c o n t r o l l e d company). The company which s e l l s i t s c o a l as an input to f u r t h e r production w i t h i n the domestic economy i s the f o r e i g n -62 owned Byron Creek C o l l i e r i e s which produces thermal c o a l . Thus forward li n k a g e s from m e t a l l u r g i c a l c o a l mining are underdeveloped but there i s some f o r w a r d l y - l i n k e d a c t i v i t y which uses thermal c o a l . These f i n d i n g s suggest that i n t h i s case i t i s market f a c t o r s and not the nature of domestic or f o r e i g n ownership which a f f e c t the degree to which the s t a p l e undergoes f u r t h e r processing w i t h i n the n a t i o n a l economy. There i s a Canadian market which uses thermal c o a l as an input, but there i s no r e a l domestic demand f o r m e t a l l u r g i c a l c o a l . The s t e e l i n d u s t r y i n eastern Canada imports c o a l from the U.S. f o r d i s t a n c e from the m e t a l l u r g i c a l c o a l mines of western Canada means that t r a n s p o r t costs 20 are high and Canadian c o a l i s not competitive. Foreign demand f o r m e t a l l u r g i c a l c o a l i n f u r t h e r processed form i s a l s o extremely l i m i t e d . When questioned as to why they d i d not p r a c t i s e f u r t h e r processing of t h e i r c o a l , the company spokesmen explained that t h e i r Japanese customers would only buy raw c o a l , not coke. According to one spokesman, the Japanese s t e e l i n d u s t r y buys about one hundred d i f f e r e n t types of c o a l from around the world and blends t h i r t y to make coke i n t h e i r 21 own ovens and produce t h e i r own p a r t i c u l a r type of s t e e l . Thus even i f the domestic owners of the c o a l companies wanted to process t h e i r product f u r t h e r , t h e i r attempts would be constrained by the nature of market demand. A study by Halvorson i n 1976 examined the p o t e n t i a l f o r m e t a l l u r g i c a l coke production i n B.C. and reached s i m i l a r conclusions concerning market 22 c o n s t r a i n t s . Halvorson contacted major s t e e l makers to determine t h e i r r e a c t i o n to the p o s s i b i l i t y of purchasing coke from B.C. His study found that they p r e f e r to buy raw c o a l because each s t e e l m i l l ( p a r t i c u l a r l y the Japanese) uses i t s own r e c i p e f o r a blending of coals to produce the coke which best s u i t s the s i z e of i t s b l a s t furnace and the type of s t e e l being 63 made. The s t e e l m i l l s expressed doubt about the q u a l i t y of coke which could be produced i n B.C. s i n c e a blending of B.C. coals alone would not r e s u l t i n a high q u a l i t y product. S t r a t e g i c c o n s i d e r a t i o n s a l s o m i t i g a t e d against the purchase of coke from e x t e r n a l sources; i f problems i n t e r r u p t e d supply, a l t e r n a t e producers could be found more e a s i l y f o r c o a l r e q u i r e -ments than f o r coke. In a d d i t i o n , t a r i f f d u t i e s i n h i b i t e d the export of coke ( f o r example, i n 1976 there was a 4 percent duty r a t e on the import of coke i n t o Japan and a 5 percent r a t e i n Korea). Thus the study concluded that the c o n s t r u c t i o n of a major coking operation i n B.C. i n the near f u t u r e could not be recommended. As a f i n a l point i t i s i n t e r e s t i n g to note that forward l i n k a g e s from the r e g i o n a l s t a p l e were b e t t e r developed i n e a r l i e r phases of E l k V a l l e y c o a l mining and have g r a d u a l l y weakened. As mentioned e a r l i e r , i n the 1940's the Crows Nest Pass Coal Company produced coke, operated a by-products p l a n t , and shipped t h e i r coke to f u e l West Kootenay smelters. Technological change which saw o i l . and gas replace c o a l as a f u e l meant a l o s s of markets and c o n t r i b u t e d to the d e c l i n e of these f o r w a r d l y - l i n k e d a c t i v i t i e s . When Japanese i n d u s t r i a l i s t s began buying c o a l from the region i n 1959 they were i n t e r e s t e d only i n o b t a i n i n g a secure supply of raw m a t e r i a l s , not semi-processed goods. B.C. Coal d i d continue producing a small amount of coke up u n t i l 1982 when coke operations were stopped be-23 cause t h e i r f i n a l customer, a smelter i n Idaho, ceased op e r a t i o n , (c) The Development of F i s c a l Linkages The hypothesis being tes t e d here i s that f i s c a l l i n k a g e s are more l i k e l y to be r e t a i n e d and invested i n r e g i o n a l economic development when the s t a p l e i n d u s t r y i s d o m e s t i c a l l y - c o n t r o l l e d as i s p o s s i b l e under the 64 Japanese s t r a t e g y of resource procurement. However, an attempt to c a l c u l a t e the f i s c a l l i n k a g e c u r r e n t l y being generated i n the E l k V a l l e y was not s u c c e s s f u l due to a number of data c o n s t r a i n t s . E s t i m a t i o n of a company's p r o f i t p o s i t i o n and generation of resource rents should be done over a pro-longed period of time i n order to even out annual f l u c t u a t i o n s . Crows Nest Resources has only been i n operation f o r one year and thus i t i s too e a r l y to analyze i t s p r o f i t p o s i t i o n . In the case of Byron Creek C o l l i e r i e s and B.C. Coal, t h e i r f i n a n c i a l data i s not disaggregated from that of t h e i r parent companies, Imperial O i l and B.C.R.I.C. r e s p e c t i v e l y . This makes i t very d i f f i c u l t to q u a n t i f y t h e i r i n d i v i d u a l p r o f i t p o s i t i o n s . Thus i t was not p o s s i b l e to show the extent of normal p r o f i t s and resource rents earned by the current four companies i n the E l k V a l l e y or any d i f f e r e n c e s i n the way t h i s income i s being used by the domestic and f o r e i g n c o n t r o l l e d operations. However, two surrogate examples re l e v a n t to the region are presented. An examination of K a i s e r Coal L t d . , the American company which domi-nated the E l k V a l l e y c o a l i n d u s t r y throughout the 1970's, has shown that f o r e i g n c o n t r o l of a resource venture can r e s u l t i n a s u b s t a n t i a l leakage of income,from the r e g i o n . Gunton examined f i n a n c i a l data f o r K a i s e r ' s operations and was able to c a l c u l a t e the extent of the f i s c a l l i n k a g e 24 stemming from the r e g i o n a l s t a p l e . Examination of Table 6 shows that K a i s e r ' s average annual t o t a l revenue f o r the period from 1975 to 1977 amounted to $283 m i l l i o n . A f t e r deducting a l l costs of production, the sum of $131 m i l l i o n remains, representing the average annual amount of the f i s c a l l i n k a g e generated by K a i s e r ' s c o a l operations. This amount can then be d i v i d e d i n t o a "normal r e t u r n on c a p i t a l i n v e s t e d " , and an "above normal r e t u r n " or "resource r e n t " . Gunton defines a "normal r e t u r n " i n 65 TABLE 6. F i n a n c i a l data f o r K a i s e r Resources ( f i g u r e s are annual averages i n m i l l i o n s of d o l l a r s f o r the years 1975 to 1977) T o t a l revenue $283 Costs of p r o d u c t i o n ^ ^ 152 .". T o t a l income $131 (2) Normal p r o f i t allowance 41 .". Above normal p r o f i t $ 90 (3) D i r e c t and i n d i r e c t taxes 48 .". U n c o l l e c t e d resource rent $ 42 NOTES: (1) Includes a l l costs of products s o l d ( i . e . wages, m a t e r i a l s , a d m i n i s t r a t i o n , i n t e r e s t d e p r e c i a t i o n , a m o r t i z a t i o n , and depl e t i o n ) as per balance sheets from Annual Reports. (2) The f i g u r e shown i s the before tax p r o f i t necessary to pay the average current corporate income tax (26%) and provide an a f t e r tax r e t u r n of 15% on shareholders e q u i t y . (3) D i r e c t payments in c l u d e payments to the p r o v i n c i a l government under the M i n e r a l Land Tax and the B.C. Mining Tax. I n d i r e c t payments are the ext r a current corporate income tax o b l i g a t i o n s i n c u r r e d as a r e s u l t of the ext r a p r o f i t generated.by K a i s e r ' s r e t e n t i o n of a p o r t i o n of the r e n t . SOURCE: Adapted from Thomas Gunton, Resources, Regional Development and  P r o v i n c i a l P o l i c y : A Case Study of B r i t i s h Columbia (Ottawa: Canadian Centre f o r P o l i c y A l t e r n a t i v e s , 1982), p. 19 as computed from data i n va r i o u s issues of Ka i s e r Resources Annual Reports. 66 t h i s case as an amount s u f f i c i e n t to pay corporate income tax and provide an a f t e r tax r e t u r n of 15 percent on shareholders equity. Using t h i s d e f i n i t i o n , a normal r e t u r n f o r K a i s e r i n t h i s case would be $41 m i l l i o n , l e a v i n g an above normal p r o f i t or "resource r e n t " amounting to the average annual amount of $90 m i l l i o n . Table 6 shows that of t h i s sum, the s t a t e was able to c o l l e c t $48 m i l l i o n through mining taxes and e x t r a corporate income tax o b l i g a t i o n s l e a v i n g $42 m i l l i o n f o r K a i s e r Coal L t d . as u n c o l -l e c t e d resource r e n t . As to how K a i s e r used the income i t obtained through e x t r a c t i n g and exporting B.C.'s c o a l resources, Gunton shows that during the period 1975 to 1979, about 84 percent of K a i s e r ' s cash flow was l e a v i n g the p r o v i n c i a l economy (see Table 7). About 25 percent of K a i s e r ' s income accrued to f o r e i g n shareholders as dividend payments w h i l s t 59 percent c o n s t i t u t e d r e t a i n e d earnings which were leaked from B.C.; the major p o r t i o n was apparently used by K a i s e r to purchase Ashland O i l i n A l b e r t a . This opera-t i o n was subsequently s o l d and the proceeds used to strengthen c o n t r o l over K a i s e r Coal. In 1980, K a i s e r Coal was s o l d to B.C.R.I.C. w i t h the p r o f i t s r e v e r t i n g to K a i s e r S t e e l i n C a l i f o r n i a . This d i s c u s s i o n i l l u s t r a t e s that l a r g e sums of money can be made from s t a p l e a c t i v i t y . However, when that a c t i v i t y i s under f o r e i g n ownership and c o n t r o l and when there i s l i m i t e d s t a t e i n t e r v e n t i o n to capture the rents generated, s t a p l e earnings flow out of the r e g i o n a l economy and may be invested i n economic a c t i v i t y elsewhere. Thus the income created through resource e x t r a c t i o n i s not a v a i l a b l e to encourage more sustained or d i v e r -s i f i e d development i n the r e g i o n a l economy i t s e l f . In the second example, an examination of f i n a n c i a l data f o r B.C.R.I.C. (which owns 67 percent of B.C. Coal) i n d i c a t e s that although domestic owner-67 TABLE 7. D i s t r i b u t i o n of K a i s e r ' s cash flow (1975-1979) Amount Amount leaked remaining T o t a l from B.C. i n B.C. Dividend payments* 28% 25% 3% Retained earnings 72% 59% 13% 100% 84% 16% NOTES: * I t i s assumed that the r a t i o of B.C. shareholders to t o t a l Canadian shareholders i s s i m i l a r to the r a t i o of the B.C. popula-t i o n to the Canadian pop u l a t i o n . SOURCE: Adapted from Thomas Gunton, Resources, Regional Development and  P r o v i n c i a l P o l i c y : A Case Study of B r i t i s h Columbia (Ottawa: Canadian Centre f o r P o l i c y A l t e r n a t i v e s , 1982), p. 20 as computed from data i n v a r i o u s issues of K a i s e r Resources Annual Reports. ship may r e s u l t i n domestic r e t e n t i o n of the income, i t does not ensure that t h i s income w i l l be invested i n the r e g i o n a l economy e i t h e r . B.C.R.I.C. i s a B.C.-based company w i t h 64 percent of i t s r e g i s t e r e d shares owned by B.C. r e s i d e n t s and another 16 percent owned by r e s i d e n t s of Ontario and 25 Quebec as of December 1981. Thus the income earned through B.C.R.I.C.'s a c t i v i t i e s i n the n a t u r a l resource i n d u s t r i e s of western Canada i s l a r g e l y r e t a i n e d by domestic i n t e r e s t s . However, r e t a i n e d earnings are not n e c e s s a r i l y used to promote f u r t h e r backward and forward linkag e s from these resource i n d u s t r i e s or encourage d i v e r s i f i c a t i o n of r e g i o n a l economies away from dependence on resource e x t r a c t i o n . For example, one of B.C.R.I.C.'s three major c a p i t a l p r o j e c t s i s an o i l and gas f i e l d known as South Brae 68 located o f f the northeast coast of Scotland. B.C.R.I.C. i s p a r t i c i p a t i n g i n t h i s venture through B.C. Coal which has a 7.7 percent i n t e r e s t i n the p r o j e c t . I n i t i a l production was expected to begin by June 1983 and although a temporary oversupply of o i l on the world market has depressed p r i c e s , the company i s confident that i t s investment w i l l develop i n t o a h i g h l y p r o f i t a b l e asset i n the long term. B.C.R.I.C.'s c a p i t a l expendi-ture f o r t h i s p r o j e c t amounted to $71 m i l l i o n i n 1981 and $66 m i l l i o n i n 1982. Some of t h i s c a p i t a l came from the earnings generated by B.C. Coal's e x p l o i t a t i o n of the E l k V a l l e y c o a l resource f o r B.C.R.I.C. estimates that B.C. Coal w i l l have c o n t r i b u t e d $260 m i l l i o n to the t o t a l cost of b r i n g i n g the South Brae p r o j e c t i n t o commercial production. Thus part of the income generated by the publicly-owned c o a l resource of the E l k V a l l e y i s being used by domestic entrepreneurs to fund resource development elsewhere i n the g l o b a l economy and promote f u r t h e r earnings f o r corporate i n t e r e s t s . 69 B. The I m p l i c a t i o n s of Long-term- Contracts w i t h Japanese Buyers This second s e c t i o n of the chapter t e s t s the hypothesis that resource i n d u s t r i e s and s t a p l e regions involved i n long-term c o n t r a c t s w i t h Japanese buyers w i l l experience greater s t a b i l i t y than those operating under the American resource procurement s t r a t e g y . The d i s c u s s i o n w i l l deal f i r s t w i t h the extent to which such con t r a c t s provide s t a b i l i t y f o r the s t a p l e producers, and second the degree to which t h i s i s r e f l e c t e d i n the r e g i o n a l economy. (a) Long-term Contracts and Staple Producers I t i s d i f f i c u l t to make g e n e r a l i z a t i o n s about long-term c o n t r a c t s between Japanese buyers and resource s e l l e r s because these c o n t r a c t s are complex documents and are not p u b l i c l y a v a i l a b l e . In a d d i t i o n , each con t r a c t i s d i f f e r e n t ; one company p u b l i c a t i o n notes that "no two co n t r a c t s are e x a c t l y the same re c o g n i z i n g the i n d i v i d u a l concerns and preferences 26 of each party to the t r a n s a c t i o n . " However, one can say that long-term cont r a c t s w i t h the Japanese do not i n d i c a t e the presence of a guaranteed market f o r a resource. An i n i t i a l c o ntract l a s t i n g on the average f o r ten to f i f t e e n years i s e s t a b l i s h e d when the two p a r t i e s f i r s t enter i n t o a t r a d i n g r e l a t i o n s h i p . This w i l l i n d i c a t e the t o t a l q u a n t i t y demanded of the resource and a p r i c e c a l c u l a t i o n formula f o r the l i f e of the c o n t r a c t . However, these should be seen only as " l e t t e r s of i n t e n t " f o r the co n t r a c t s 27 are not s t r i c t l y adhered t o . A c t u a l p r i c e s and q u a n t i t i e s ( i n c l u d i n g a ±5 to 10 percent clause) are e s t a b l i s h e d during annual n e g o t i a t i o n s each March. As described i n a B.C.R.I.C. p u b l i c a t i o n , "B.C. Coal s e l l s most of i t s c o a l under long-term c o n t r a c t s which contain d e t a i l e d q u a l i t y s p e c i f i -c a t i o n s , are subject to p e r i o d i c p r i c e review and s p e c i f y the annual 70 volumes of c o a l to be purchased and shipped." I t should a l s o be noted that these c o n t r a c t s are not enforceable; there are no "take or pay" i 29 c l a u s e s . ( i ) S t a b i l i t y of Demand In l o o k i n g at whether long-term c o n t r a c t s o f f e r s t a b l e demand f o r a r e g i o n a l s t a p l e i t was found that there are a number of ways whereby co n t r a c t s are changed and cut. F i r s t , the annually negotiated tonnages may w e l l d i f f e r from the amount i n d i c a t e d i n the i n i t i a l c o n t r a c t . For example, K a i s e r ' s i n i t i a l c o n t r a c t w i t h the Japanese s t e e l m i l l s i n d i c a t e d the annual q u a n t i t y to be shipped as 4.75 m i l l i o n long tons ±5 percent. However, from 1980 to 1982 the annually negotiated amounts have a c t u a l l y 30 been 4.30 m i l l i o n long tons ±5 percent. For 1983, t h i s amount f e l l to 31 3.1 m i l l i o n long tons ±5 percent. Second, there may be cut backs on these annually negotiated amounts during the course of the year i f the Japanese decide that they need l e s s c o a l . A l t e r n a t i v e l y , i f the s t e e l m i l l s discover they need more c o a l than supplied by current c o n t r a c t s , they are able to supplement t h e i r long-term c o n t r a c t u a l purchases by buying on the spot market.* Examination of Table 8 shows the annually negotiated amounts f o r B.C. Coal from 1976 to 1982 as compared to the amounts which the Japanese s t e e l m i l l s a c t u a l l y purchased. I t may be seen that 1980 was the only year when the Japanese purchased a l l of the contracted amount. Cut backs are p a r t i c u l a r l y evident This i s o f t e n the case w i t h American c o a l s u p p l i e r s w i t h whom the Japanese have fewer long-term c o n t r a c t s . The American mines produce a more s p e c i a l i z e d , high q u a l i t y c o a l which the Japanese apparently p r e f e r to buy on the spot market according to t h e i r changing needs f o r t h i s more expensive coal.32 71 TABLE 8. Contracted tonnages versus a c t u a l purchases from B.C. Coal L t d . by Japanese s t e e l m i l l s , 1976-1982 ( i n m i l l i o n s of long tonnes). Amount a c t u a l l y Contracted amount purchased 1976 4.75 (±5%) 4.10 1977 4.75 (±5%) 4.14 1978 4.75 (±5%) 4.07 1979 4.75 (±5%) 3.73 1980 4.30 (±5%) 4.30 1981 4.30 (±5%) 4.00 1982 4.30 (±5%) 3.23 SOURCE: B.C. Coal L t d . , 1983: personal communication. f o r 1982 when the Japanese bought only 75 percent of contracted tonnage. Table 9 shows annual amounts purchased by the Japanese from Fording Coal L t d . which may be compared to the contracted amount ( i t should be noted that s t a r t - u p problems and s t r i k e s i n h i b i t e d Fording from supplying the annually contracted amount during the i n i t i a l years of the o p e r a t i o n ) . In 1983, B.C. Coal shipped 66 percent of c o n t r a c t volume and Fording shipped 34 75 percent i n response to Japanese cut backs. F i n a l l y , i t was discovered that i n extreme cases the Japanese may cancel long-term c o n t r a c t s before t h e i r completion i f the resource s u p p l i e r i s not competitive w i t h regard to a l t e r n a t e producers. This i s accomplished by r e - n e g o t i a t i n g the contract and e s t a b l i s h i n g a "winding-down" or 35 " f u n e r a l " c o n t r a c t . One example of t h i s i s Coleman C o l l i e r i e s whose operations s t r a d d l e d the B.C. - A l b e r t a border. The company had a contract wit h the Japanese s t e e l i n d u s t r y which c a l l e d f o r the d e l i v e r y of 1.5 m i l l i o n 72 TABLE 9. Contracted tonnages versus a c t u a l purchases from Fording Coal L t d . by Japanese s t e e l m i l l s , 1972-1982 ( i n m i l l i o n s of metric tonnes). Amount a c t u a l l y Contracted amount purchased 1972 1 3.0 (±10%) 1.24 1973 1 3.0 (±10%) 1.98 19742 3.0 (±10%) 2.27 1975 3.0 (±10%) 2.91 1976 2 3.0 (±10%) 1.74 1977 3.0 (±10%) 2.44 1978 3.0 (±10%) 2.69 1979 3.0 (±10%) 2.74 1980 3.0 (±10%) 2.65 1981 3.0 (±10%) 2.81 1982 3.0 (±10%) 2.40 NOTES: J-Year of 1 ow production l e v e l s due to i n i t i a l s t a r t - u p problems. 2 Year of lower than expected production l e v e l s due to miners' s t r i k e . SOURCE: Fording Coal L t d . , 1983: personal communication. tonnes of co a l annually from 1967 to 1982. This c o n t r a c t was re-negotiated i n 1977 and a " f u n e r a l c o n t r a c t " e s t a b l i s h e d from 1977 to 1980 to terminate the r e l a t i o n s h i p between buyer and s e l l e r . The o r i g i n a l c o n t r a c t was wound up because Coleman was not competitive due t o : low q u a l i t y r e s e r v e s , a long distance between mine and pr e p a r a t i o n p l a n t , and a need f o r new c a p i t a l 36 investment to make the operation v i a b l e . Another example i s the Smokey River Coal mine owned by Mclntyre Mines and l o c a t e d at Grand Cache i n A l b e r t a . This company had a contract to produce m e t a l l u r g i c a l c o a l f o r the Japanese s t e e l m i l l s u n t i l 1983, but the Japanese r e c e n t l y stepped i n 73 and negotiated a f u n e r a l contract from 1982 to 1984 to terminate the . . 37 r e l a t i o n s h i p because operations were not competitive, ( i i ) S t a b i l i t y of P r i c e I t was found that there are two ways whereby c o a l p r i c e i s d e t e r -mined but i n n e i t h e r case w i l l a set p r i c e n e c e s s a r i l y be adhered to f o r the d u r a t i o n of the c o n t r a c t . In the f i r s t i nstance, the p r i c e of c o a l produced by new mines i s determined according to a "base p r i c e plus e s c a l a t i o n c l a u s e " formula which takes i n t o account changes i n the cost 38 of inputs such as m a t e r i a l s , labour, and f u e l . This method of deter-mining resource p r i c e s i s used f o r the two newest mines i n the southeast, G r e e n h i l l s and Line Creek, to help reduce u n c e r t a i n t y f o r the operator 39 during the s t a r t - u p p e r i o d . However, t h i s method of p r i c e c a l c u l a t i o n w i l l not be adhered to i f . . . 40 the derived p r i c e d i f f e r s s i g n i f i c a n t l y from the world p r i c e of c o a l . This may work to the advantage of e i t h e r p a r t y ; f o r example, during the f i r s t f i v e years of K a i s e r ' s operations the p r i c e was determined by a base p r i c e plus e s c a l a t i o n clause formula u n t i l r a p i d increases i n the p r i c e of o i l i n 1975 meant that the world p r i c e of c o a l was f a r above that derived from the contract formula. At that p o i n t t h i s method of p r i c e determina-t i o n was replaced by annual n e g o t i a t i o n which r e s u l t e d i n a p r i c e r e f l e c t -41 ing the world p r i c e of c o a l . This represents the second way of d e t e r -mining resource p r i c e i n the long-term c o n t r a c t ; that i s , the p r i c e i s e s t a b l i s h e d during the annual n e g o t i a t i o n s and b a s i c a l l y f o l l o w s the world p r i c e . Thus, i t cannot be s a i d that long-term c o n t r a c t s engender p r i c e s t a b i l i t y f o r the s t a p l e producer. F i n a l l y , i n d i s c u s s i n g p r i c e determination w i t h the c o a l company r e p r e s e n t a t i v e s , another important element of the Japanese strategy was 74 revealed. The Japanese i n s i s t on F.O.B. (free-on-board) p r i c e s because they handle a l l shipping of the c o a l from Roberts Bank to Japanese p o r t s . * This p r i c i n g arrangement and c o n t r o l over shipping gives the Japanese buyers the power to enforce any d e c i s i o n s they make with regard to c u t t i n g back on contracted tonnages. For example, during the c o a l cut backs i n the summer of 1982, the Vancouver Sun reported the f o l l o w i n g : Shipments are being delayed as long as i s f e a s i b l e . Coal c a r r i e r s at sea are being ordered to reduce speed to delay t h e i r a r r i v a l here.^3 The Japanese s t e e l m i l l s simply inform the c o a l company of t h e i r d e c i s i o n to cut back on the negotiated amounts and then send fewer ships to c o l l e c t the c o a l at Roberts Bank. ( i i i ) Concluding Remarks In summarizing, one c o a l company r e p r e s e n t a t i v e suggested that a contract i s not always a c o n t r a c t , there i s no f i x e d resource p r i c e or q u a n t i t y demanded which can be depended upon, and the q u a n t i t y of c o a l s o l d i s b a s i c a l l y determined by how much the Japanese are prepared to buy 44 f o r any p a r t i c u l a r year. However, these conclusions should be q u a l i f i e d by a number of other statements which the c o a l company spokesmen made about long-term c o n t r a c t s w i t h the Japanese. F i r s t , i t should be pointed out that the c o a l companies much p r e f e r t h i s type of c o n t r a c t u a l purchasing arrangement to s e l l i n g t h e i r resources on the spot market. Long-term contr a c t s represent a commitment between buyer and s e l l e r and serve as a s t a r t i n g p o i n t f o r the annual n e g o t i a t i o n s concerning tonnages to be shipped. T h e o r e t i c a l l y contacts could be cut to zero but r e a l i s t i c a l l y , F.O.B. means that the p r i c e i s quoted at the p o i n t of production and thus does not include the cost of transport.^2 75 as long as operations remain competitive, there i s a b a s i c tonnage which 45 the Japanese w i l l buy annually. Thus, the existence of a long-term contract provides p r o t e c t i o n f o r the resource s u p p l i e r during periods of economic downturn. This i s a p t l y i l l u s t r a t e d i n the current s i t u a t i o n where many of the smaller American mines which s e l l t h e i r c o a l on the spot market to Japan are having t h e i r sales cut by 100 percent, as compared to the 25 percent cut backs experienced on most long-term c o n t r a c t u a l arrange-*- 4 6 ments. Second, a l l of the c o a l company r e p r e s e n t a t i v e s interviewed s t a t e d that when the Japanese cut back on c o n t r a c t s they do so f a i r l y and e q u a l l y from a l l e s t a b l i s h e d and competitive mines. For example, at present t h e i r three main c o a l supplying regions around the world are a l l experiencing 47 contract cut backs of 20 to 30 percent. The company spokesmen a l s o s t a t e d that the Japanese are not l i k e l y to cut back purchases from newly-e s t a b l i s h e d mines f o r t h i s would severely a f f e c t the p r o f i t margins during the most r i s k y stage i n the l i f e of a resource venture. However, recent events do not support t h i s statement. For example, i t has been reported that the Japanese s t e e l i n d u s t r y has f o r m a l l y asked B.C. Coal f o r a reduc-t i o n , i n the p r i c e of m e t a l l u r g i c a l c o a l from i t s r e c e n t l y completed G r e e n h i l l s mine, even though the contract does not provide f o r such a - 4 8 request. T h i r d , i t should be noted that the existence of long-term c o n t r a c t s plays an important r o l e i n f a c i l i t a t i n g a mining company's access to the c a p i t a l needed to e s t a b l i s h a new mine. Contracts are taken as an i n d i c a -t i o n of market demand and consequent v i a b i l i t y of the operation thus encouraging banks to i n v e s t i n the resource p r o j e c t . In some instances long-term c o n t r a c t s were a n e c e s s i t y i n order f o r the c o a l mines to begin 76 op e r a t i o n . Such comments are supported and emphasized by other sources. Galway, i n h i s study of Japanese involvement i n B.C. copper, concluded that long-term c o n t r a c t s were regarded by lending i n s t i t u t i o n s as a c o n f i -dence s u s t a i n i n g f a c t o r which made debt f i n a n c i n g f e a s i b l e . S m i t h , i n l o o k i n g at long-term c o n t r a c t s and the A u s t r a l i a n c o a l i n d u s t r y states that t h i s was a l s o the case f o r many of the mines there. Thus i t may be concluded that long-term c o n t r a c t s do not provide a s t a b l e market f o r the r e g i o n a l s t a p l e , although they do tend to lessen the s e v e r i t y of economic downturns. In f u r t h e r support of t h i s f i n d i n g some data on c o a l production and employment l e v e l s f o r the two major companies i n the region i s presented. These companies are chosen because they have been supplying the Japanese on long-term contract f o r some time whereas Byron Creek C o l l i e r i e s and Crows Nest Resources have only r e c e n t l y begun supplying the P a c i f i c Rim. Examination of Table 10 shows c o a l production l e v e l s f o r B.C. Coal and the e a r l i e r K a i s e r . I t may be seen that production has not been con-stant or i n c r e a s i n g but has f l u c t u a t e d , p a r t i a l l y i n response to p e r i o d i c cut backs by the Japanese, the major buyers. For example, cut backs i n 1976 and 1977 due to a d e c l i n i n g demand f o r s t e e l are r e f l e c t e d i n lower annual production l e v e l s . Continued c o n t r a c t cut backs by the Japanese i n 1978, 1979 and 1981 are l e s s evident i n o v e r a l l production l e v e l s be-cause B.C. Coal began to expand shipments to other customers ( e s p e c i a l l y 52 Korea) at t h i s time. The cut backs of 1982 had such a pronounced impact on production l e v e l s because not only the Japanese but a number of other 53 customers began c u t t i n g back on contracted tonnages. Table 11 shows c o a l production f i g u r e s f o r Fording Coal L t d . and i n d i c a t e s that Fording has been l e s s a f f e c t e d by cut backs than B.C. Coal. 77 TABLE 10. Annual production l e v e l s f o r Kaiser/B.C. Coal L t d . , 1968-1982 ( i n m i l l i o n s of long tonnes of clean c o a l ) . 1968/69 1 approximately 0.446 19701 approximately 1.785 1971 1 approximately 5.357 19721 approximately 5.357 19731 4.910 1974 5.714 1975 6.428 1976 2 5.428 1977 2 5.419 1978 5.803 1979 6.607 1980 3 5.267 1981 7.500 1982 2 5.200 F l u c t u a t i n g production l e v e l s due to i n i t i a l s t a r t - u p problems. 2 Contract cut backs by the Japanese are r e f l e c t e d m lower produc-t i o n l e v e l s . 3 . Miners s t r i k e l e d to lower production l e v e l . SOURCE: B.C. Coal L t d . , 1982: personal communication; B.C.R.I.C. Annual Report, 1982. 78 TABLE 11. Annual production l e v e l s f o r Fording Coal L t d . , 1972-1982 ( i n m i l l i o n s of long tonnes of clean c o a l ) . 1972 1 1.009 1973 1 2.206 1974 2 2.012 1975 2.833 1976 2 1.611 1977 2.763 1978 2.746 1979 2.876 1980 3.432 1981 3.690 1982 3.940 NOTES: F l u c t u a t i n g production l e v e l s due to i n i t i a l s t a r t - u p problems. 2 . Miners s t r i k e l e d to lower production l e v e l . SOURCE: Fording Coal L t d . , 1982: personal communication. The company d i d not experience any major cuts i n co n t r a c t s u n t i l 1982 and thus production l e v e l s have been b a s i c a l l y constant or i n c r e a s i n g . The impact of these cut backs i s not apparent i n the 1982 production l e v e l s but i s suggested when one considers that the planned production l e v e l f o r that year was 4.35 m i l l i o n tonnes whereas a c t u a l production reached only 54 3.94 m i l l i o n tonnes. The i m p l i c a t i o n s of f l u c t u a t i n g demand and co n t r a c t cut backs f o r workers i n the s t a p l e sector are i n d i c a t e d i n Tables 12 and 13. The s i z e of the B.C. Coal (and e a r l i e r K a i s e r ) labour f o r c e has been constant or i n c r e a s i n g since 1970 except f o r a d e c l i n e i n 1977, 1982, and 1983. These d e c l i n e s were the r e s u l t of l a y o f f s due to contract cut backs by the 79 TABLE 12. Annual size of Kaiser/B.C. Coal Ltd. labour force, 1970-1983 (includes a l l employees on salary and hourly wages). 1970 1384 1971 1377 1972 1517 1973 1653 1974 1871 1975 1888 1976 1896 19771 1774 1978 1794 1979 2058 1980 2065 1981 2153 19821 1912 19831 1479 NOTES: Contract cut backs by Japanese resulted in worker layoffs. SOURCE: B.C. Coal Ltd., 1983: personal communication. TABLE 13. Annual size of Fording Coal Ltd. labour force, 1972-1982 (includes a l l employees on salary and hourly wages). 1972 614 1973 677 1974 846 1975 917 1976 945 1977 1043 1978 1041 1979 1206 1980 1365 1981 1543 Oct. 1982 1545 SOURCE: Fording Coal Ltd., 1982: personal communication. 80 Japanese and consequent lower production requirements. The impact on workers has been most severe during the most recent cut backs; 200 employees were l a i d o f f i n September of 1982, and 397 the f o l l o w i n g February. Workers have a l s o been d e t r i m e n t a l l y a f f e c t e d by the p e r i o d i c shutdown of B.C. Coal's operations f o r seven weeks i n the f a l l of 1982 and s i x weeks i n the 56 s p r i n g of 1983 as an attempt to lower production and s t o c k p i l e l e v e l s . The f i g u r e s f o r Fording Coal L t d . i n d i c a t e that t h e i r labour f o r c e has not yet experienced any a c t u a l l a y o f f s r e s u l t i n g from contract cut backs. However, r a t h e r than l a y o f f workers, Fording has i n s t i t u t e d a "work-sharing" program whereby the work week i s shortened by one day during the current period of decreased demand.^ A number of temporary shutdowns have occurred i n c l u d i n g one i n l a t e 1982 and four f o r 1983; on each occasion 58 about 1500 employees are temporarily l a i d o f f . (b) Long-term Contracts and Regional S t a b i l i t y Having examined the workings of long-term c o n t r a c t s and concluded that they do not provide a great deal of s t a b i l i t y f o r s t a p l e producers, the d i s c u s s i o n now deals w i t h the extent to which t h i s i s r e f l e c t e d i n the s t a p l e s economy. How s t a b l e has the E l k V a l l e y r e g i o n a l economy been from 1970 to 1982, the period during which i t s s t a p l e sector has been supplying c o a l on long-term contract f o r the Japanese market? This w i l l be assessed by examining a number of i n d i c a t o r s of r e g i o n a l economic growth i n c l u d i n g employment l e v e l s , income l e v e l s , population f i g u r e s , vacancy r a t e s , and c o n s t r u c t i o n a c t i v i t y . No d e t a i l e d annual data concerning the composition of the E l k V a l l e y labour f o r c e could be found which would a l l o w one to assess f l u c t u a t i o n s i n employment l e v e l s f o r various economic s e c t o r s . Some data on r e g i o n a l 81 unemployment f i g u r e s i s a v a i l a b l e , but only f o r the p e r i o d a f t e r March 59 1979. Examination of t h i s information showed dramatic increases i n the number of unemployed i n the region between December 1981, and December 1982. In December of 1979, there were 283 unemployed i n the E l k V a l l e y , 313 i n December 1980, 464 i n December of 1981, and 1,182 i n December 1982. By February of 1983 these f i g u r e s had r i s e n r a p i d l y again to reach 1,749. Examination of Table 14 shows that the occupation most a f f e c t e d was "Mining and Quarrying" where the number of unemployed rose from 5 i n December 1981, to 727 i n February 1983. The number of unemployed miners increased by 145 times during t h i s 14 month pe r i o d r e f l e c t i n g the impact of contract cut backs and subsequent l a y o f f s . * I n a c t i v i t y i n the s t a p l e sector a l s o a f f e c t e d unemployment l e v e l s i n r e l a t e d occupations. Table 14 shows that between December 1981 and February 1983, the number of unemployed i n " c l e r i c a l " occupations rose by 2.4 times, i n " c o n s t r u c t i o n " 3.7 times, i n " t r a n s p o r t a t i o n equipment" 4.1 times, and i n the " s e r v i c e " sector 2.8 times. Thus i n 1982 there was a sudden increase i n r e g i o n a l unemployment due to f l u c t u a t i o n s i n the s t a p l e s e c t o r . Table 15 shows income l e v e l s f o r the three main communities i n the E l k V a l l e y from 1970 to 1980. Apart from a d e c l i n e i n 1978, r e g i o n a l incomes have been i n c r e a s i n g throughout the contemporary phase of E l k V a l l e y c o a l mining. Indeed, comparison w i t h p r o v i n c i a l f i g u r e s shows that the Elk V a l l e y incomes have g e n e r a l l y been higher than the B.C. average income. This suggests that f o r the p e r i o d from 1970 to 1980, the region has been experiencing a high r a t e of economic growth. Data i s not yet I t should be noted that the February 1983 f i g u r e was c o l l e c t e d before the 6 week shutdown of B.C. Coal's ope r a t i o n s . 82 TABLE 14. Unemployment figures by occupation for Elk Valley region, 1981-1983. December 1981 December 1982 February 1983 T J i - l r-\ T3 I—I i u ni rt u - i c u rt 4-i<y rt 0 > v 4-> O >. W . O f - , ^ Occupation o o o o o o r ^ 1 1 — 1 4 - 1 S-Jt—I -U M i — I 4-1 <D & , a) cu a) p. E y-i flB u-i B a) o B a> o E a> O Managerial, Administrative 3 0.7% 9 0 .8% 10 0.6% Sciences, Engineering 4 1.0% 19 1 .7% 25 1.5% Social Sciences 4 1.0% 2 0 .2% 4 0.2% Teaching 5 1.2% 12 1 .1% 12 0.7% Medicine, Health 13 3.1% 17 1 .5% 23 1.3% Art, Literature 1 0.2% 2 0 .2% 1 0.1% Sport, Recreation 1 0.2% 2 0 .2% 2 0.1% Clerical 84 20.1% 225 19 .9% 203 11.9% Sales 22 5.3% 38 3 .4% 42 2.5% Service 45 10.8% 96 8 .5% 128 7.5% Farming 3 0.7% 3 0 .3% 8 0.5% Forestry, Logging 23 5.5% 23 2 .0% 23 1.3% >Mining, Quarrying 5 1.2% 266 23 .5% 727 42.6% Processing 64 15.3% 26 2 .3% 24 1.4% Machining 10 2.4% 30 2 .7% 28 1.6% Fabricating 21 5.0% 33 2 .9% 45 2.6% Construction 78 18.7% 255 22 .6% 293 17.2% Transportation Equipment 17 4.1% 54 4 .8% 70 4.1% Materials Handling 9 2.2% 9 0 .8% 21 1.2% Other craft equipment 1 0.2% 2 0 .2% 4 0.2% Occupation not stated 5 1.2% 7 0 .6% 15 0.9% Total 464 100% 1182 100% 1749 100% SOURCE: Compiled from Canada, Employment and Immigration, "U.I. Unemployed by Canada Employment Centre", 1979-1983 (unpublished information). 0 TABLE 15. Average income of tax f i l e r s for E l k V a l l e y communities and the province of B.C., 1970-1980. 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 E l k f o r d $6,745 $7,669 N.A. $9,103 $10,337 $12,581 $11,184 $14,680 $12,594 $15,548 $18,784 Sparwood 5,474 7,011 $7,667 8,393 10,117 12,276 12,294 14,630 12,837 15,152 17,277 Fernie 6,005 6,535 ' 6,747 7,565 8,419 10,804 11,232 13,055 12,171 13,856 16,522 Province of B.C. 5,842 N.A. 6,886 7,798 9,002 10,006 11,276 11,929 12,045 13,277 15,337 SOURCE: 1970-76 E l k Valley data from Revenue Canada, 1983: personal communication; 1970-76 B.C. data from Revenue Canada, Taxation S t a t i s t i c s , 1973-82 ed i t i o n s ; a l l 1977-80 data from B.C., M i n i s t r y of Industry and Small Business Development, S t a t i s t i c s Bureau, "B.C. Taxation S t a t i s t i c s 1977 and 1978", "B.C. Taxation S t a t i s t i c s 1979 and 1980". 84 a v a i l a b l e to assess the impact of the recent cut backs and l a y o f f s on r e g i o n a l incomes but one can assume that 1982 l e v e l s would be lower than those of previous years. Table 16 shows population f i g u r e s f o r the three main communities and f o r the E l k V a l l e y region as a whole where a v a i l a b l e . These f i g u r e s i n d i c a t e that the area has shown a high population growth r a t e during the period under study. In f a c t , t h i s r a t e has been higher than the r a t e of growth i n the p r o v i n c i a l p o p u l a t i o n . Between 1966 and 1971 the E l k V a l l e y population increased by about 55 percent whereas B.C.'s population rose by only 16 percent. The years from 1971 to 1976 witnessed a 32 percent r i s e i n E l k V a l l e y population compared to a 13 percent increase i n the B.C. p o p u l a t i o n . ^ Thus i n s p i t e of some f l u c t u a t i o n s i n the s t a p l e sector be-tween 1970 and 1981, the region has experienced an unusually high TABLE 16. Contemporary E l k V a l l e y population f i g u r e s . 1966 1971 1976 1981 E l k f o r d 167 1,875 4,050 4,608 14,150 3,126 4,157 5,444 Fe r n i e E l k V a l l e y region Sparwood 1,928 2,715 6,900* 2,154 4,422 10,725 N.A. NOTES: *Estimated. SOURCE: Compiled from B.C., Regional Index of B.C., 1966 and B.C. Regional  Index 1978; Canada, 1981 Census of Canada, Cat. 93-910. 85 popul a t i o n growth r a t e due to heavy i n - m i g r a t i o n . More recent f i g u r e s are not a v a i l a b l e but one would assume that the r e g i o n a l population has now s t a b i l i z e d or p o s s i b l y d e c l i n e d from the 1981 l e v e l due to contract cut backs, l a y o f f s , and p o s s i b l e out-migration. F i n a l l y , l o o k i n g at vacancy ra t e s and c o n s t r u c t i o n a c t i v i t y from 1970 to 1982, there was a shortage of accommodation i n the region through-61 out the 1970's. This was p a r t i c u l a r l y pronounced around 1980 when the El k V a l l e y appears to have experienced a "boom" i n economic a c t i v i t y due to the expansion of e x i s t i n g c o a l mines and the development of two new mines, G r e e n h i l l s , and Lin e Creek. These developments r e s u l t e d i n i n -m i g r a t i o n , a strong demand f o r r e n t a l accommodation, and a low vacancy r a t e (see Table 17 and note r e s u l t s of C.M.H.C. vacancy survey f o r October, 1980). This a c t i v i t y a l s o set o f f a boom i n c o n s t r u c t i o n as shown i n Table 18. In 1981 there occurred a major increase i n the value of b u i l d i n g permits awarded thus i n d i c a t i n g a flow of c a p i t a l i n t o the region and a TABLE 17. Apartment vacancy ra t e s f o r E l k V a l l e y communities, 1979-1982*. Oct. '79 Oct. '80 Nov. '81 Oct. E l k f o r d N.A. 0% N.A. 8.7% Sparwood 0.6% 0% 0% 7.9% Ferni e 2.0% 0% 1.3% 6.0% NOTES: *Based on C.M.H.C. surveys of r e n t a l apartments i n b u i l d i n g s con-t a i n i n g 6 or more u n i t s ; does not in c l u d e s i n g l e detached houses, mobile homes, i n d i v i d u a l s u i t e s i n condominium, n o n - p r o f i t housing, and public-sponsored r e n t a l u n i t s . SOURCE: C.M.H.C, Vancouver and Cranbrook o f f i c e s , annual apartment vacancy surveys (unpublished). 86 TABLE 18. Total value of a l l building permits awarded for Elk Valley communities, 1970-1982 (in thousands of dollars) 1970 1971 1972 1973 1974 1975 1976 Elkford $720 $1,020 $4,312 $2,211 $5,185 $5,842 $2,706 Sparwood 4,197 3,530 1,457 970 2,870 3,507 1,861 Fernie 1,890 1,551 4,337 616 1,149 3,502 5,535 1977 1978 1979 1980 1981* 1982 Elkford $582 2,710 2,546 3,356 13,293 19,614 Sparwood 7,392 4,589 1,170 3,609 17,704 5,527 Fernie 3,903 3,085 2,628 8,849 12,491 N.A. NOTES: Construction boom. SOURCE: Compiled from building permit files in Elkford Village Office, Sparwood City Office, and Fernie City Office. 87 heightened pace of economic a c t i v i t y . These comments are supported by a r t i c l e s on E l k f o r d and Sparwood which appeared i n Trade and Commerce  Magazine i n May, 1981. That year E l k f o r d was c a l l e d " B r i t i s h Columbia's f a s t e s t growing centre i n Coal Country" and witnessed the establishment of a town shopping centre, a t h i r t y - f i v e acre i n d u s t r i a l park, and a $10 m i l l i o n c o n s t r u c t i o n program to expand and improve sewage, drainage, and 6 2 road f a c i l i t i e s . Sparwood i n 1981 was experiencing a housing boom and planning the expansion and r e - v i t a l i z a t i o n of i t s commercial core plus 63 i d e n t i f y i n g land f o r an i n d u s t r i a l park. However, t h i s s i t u a t i o n changed d r a m a t i c a l l y i n 1982. Table 17 shows that apartment vacancy r a t e s rose from 0-1 percent i n 1981, to 6-9 percent i n 1982. The region no longer featured a booming economy w i t h a t i g h t housing market. This c o n c l u s i o n i s supported by d i s c u s s i o n s w i t h a C.M.H.C. r e p r e s e n t a t i v e who stated that the r e s i d e n t i a l u n i t s constructed during the 1980/81 boom cannot a l l be f i l l e d and thus the vacancy r a t e has 64 climbed. Between 1981 and 1982 there was an average 10 percent d e c l i n e i n house p r i c e s i n the three main communities i n the E l k V a l l e y and i n January of 1983, Fording Coal L t d . lowered the p r i c e s of the houses i t o f f e r e d f o r s a l e by $5,000 as an i n c e n t i v e to p u r c h a s e r s . ^ This downturn i n demand f o r housing i n the region i s due to the u n c e r t a i n economic co n d i -t i o n s stemming from c o n t r a c t cut backs by the J a p a n e s e . ^ In concluding, i n s p i t e of some contract cut backs i t may be seen that the E l k V a l l e y d i d experience a high r a t e of economic growth from 1970 u n t i l 1982. Indeed, 1980/81 was a boom period associated w i t h the s i g n i n g of new c o n t r a c t s w i t h Korean, Hong Kong, and Taiwanese customers. However, the s i t u a t i o n since 1982 of major cuts i n c o n t r a c t s by a number of customers has created i n s t a b i l i t y f o r s t a p l e producers which i s c l e a r l y 88 manifested i n the s t a p l e economy by high r e g i o n a l unemployment f i g u r e s , an increased vacancy r a t e , and a changed housing s i t u a t i o n . Thus long-term c o n t r a c t s do not i n d i c a t e the presence of a secure market f o r a r e g i o n a l s t a p l e and do not r e s u l t i n the disappearance of ' the "booms" and "busts" which so o f t e n c h a r a c t e r i z e s t a p l e economies. As to the a s s e r t i o n that these c o n t r a c t s o f f e r some p r o t e c t i o n f o r s t a p l e s e l l e r s i n times of downturn, f u r t h e r research would be needed to t r a n s -l a t e t h i s i n t o r e g i o n a l i m p l i c a t i o n s and suggest, f o r example, that regions operating w i t h long-term c o n t r a c t s might s u f f e r l e s s severe economic downturns than those producing f o r the spot market. 89 C. The I m p l i c a t i o n s of Japanese M u l t i p l e - S o u r c i n g The research f i n d i n g s appear to support the hypothesis that a resource region supplying the Japanese market as part of the m u l t i p l e -sourcing s t r a t e g y w i l l be more s e n s i t i v e to changing c o n d i t i o n s of i t s competitors than a region under the American resource procurement s t r a t e g y . In t h i s s e c t i o n of the chapter the competitive nature of the supply side which m u l t i p l e - s o u r c i n g engenders w i l l be described as w e l l as the way i n which Japanese buyers f o s t e r and take advantage of t h i s s i t u a t i o n . Second, the e f f e c t s of m u l t i p l e - s o u r c i n g f o r supplying regions w i l l be discussed and some e m p i r i c a l examples presented. (a) Competition on the Supply Side With regard to the supply and demand s i t u a t i o n f o r m e t a l l u r g i c a l c o a l i n the P a c i f i c Rim there i s one main market and a number of s u p p l i e r s . Japan i s the most important purchaser followed at some dis t a n c e by the n e w l y - i n d u s t r i a l i z i n g c o u n t r i e s of South Korea and Taiwan. European markets are too f a r away to be economically supplied to any great extent. Following the m u l t i p l e - s o u r c i n g s t r a t e g y Japanese purchasers d i v i d e t h e i r requirements among the c o a l producers of the region: A u s t r a l i a , the United States, Canada, the U.S.S.R. and China. South A f r i c a , although a r e l a t i v e l y smaller producer, a l s o exports c o a l to P a c i f i c Rim markets. This r e s u l t s i n com-p e t i t i o n between those s u p p l i e r s to increase t h e i r share of the Japanese market. Examination of Table 19 shows the percentage c o n t r i b u t i o n of each s u p p l i e r ; these f i g u r e s may vary from year to year as co n d i t i o n s i n one region change and the Japanese p a t r o n i z e an a l t e r n a t e s u p p l i e r . For example, i n 1978 the U.S. c o n t r i b u t i o n to Japanese imports of m e t a l l u r g i c a l c o a l dropped to 18 percent due to labour upheaval causing d i s r u p t i o n s i n supply. TABLE 19. Foreign suppliers of Japanese coking coal needs, 1970-1981. Au s t r a l i a ' s c o n t r i b u t i o n M i l l i o n tonnes % USA con t r i b u t i o n M i l l i o n tonnes % Canada 1s cont r i b u t i o n M i l l i o n % tonnes U.S.S.R. con t r i b u t i o n M i l l i o n % tonnes South A f r i c a ' s c o n t r i b u t i o n M i l l i o n % tonnes Other suppliers M i l l i o n % tonnes T o t a l M i l l i o n % tonnes 1970 1975 1978 1979 1980 1981 16.5 22.7 24.5 26.0 25.8 29.2 34% 37% 49% 46% 42% 44% 25.3 22.4 8.8 13.4 19.3 21.5 52% 37% 18% 24% 31% 32% 3.2 10.6 10.9 10.4 10.5 9.6 7% 18% 22% 19% 17% 15% 2.8 3.0 2.1 2.1 1.9 1.1 6% 5% 4% 4% 3% 2% 0 0 2.3 2.3 2.9 3.0 0 0 4% 4% 5% 5% 1.0 1.9 1.6 1.9 1.5 1.3 1% 3% 3% 3% 2% 2% 48.8 100% 60.6 100% 50.2 100% 56.1 100% 61.9 100% 65.7 100% SOURCE: Keith A.J. Hay, S.R. H i l l , and S.S. Rahman, Canadian Coal for Japan (Ottawa: Econolynx International Ltd., 1982), p.4. o 91 In consequence the A u s t r a l i a n , and Canadian shares both increased as the Japanese purchased more from these s u p p l i e r s . ^ Thus the c o a l i n d u s t r y supplying Japan i s h i g h l y competitive. A l l of the c o a l company r e p r e s e n t a t i v e s interviewed confirmed t h i s . At B.C. Coal i t was stated that operations must remain competitive or the company r i s k s having c o n t r a c t s cut and that volume supplied by a more e f f i c i e n t 68 producer. Spokesmen at Fording Coal emphasized that they look at the g l o b a l scene when i d e n t i f y i n g competitors. Indeed, a l l of the companies operating i n the E l k V a l l e y make e f f o r t s to monitor c l o s e l y each c o a l mine around the world w i t h regard to c o a l q u a l i t y , p r i c e , t r a n s p o r t i n f r a -s t r u c t u r e , and so f o r t h . Each company i s competing f o r the same major market yet there i s very l i t t l e any one can o f f e r to d i s t i n g u i s h i t s e l f from i t s competitors. Coal q u a l i t y i s s e t , the Japanese e s t a b l i s h the volume they are w i l l i n g to buy, and there are c o n s t r a i n t s on the p r i c e a t t a i n a b l e (the Japanese would not accept a p r i c e which i s out of l i n e w i t h that of competitors and i t i s u n l i k e l y that a company could a f f o r d to undercut p r i c e s and s t i l l earn a normal r e t u r n on investment). However, the c o a l companies do have a small degree of c o n t r o l over t h e i r r e l a t i v e competitive p o s i t i o n w i t h regard to non-fixed f a c t o r s of production. As mentioned p r e v i o u s l y , i t Is extremely important f o r the Japanese to r e c e i v e a steady i n f l o w of raw m a t e r i a l s . S u p p l i e r s may t h e r e f o r e be able to improve t h e i r competitive p o s i t i o n by paying s p e c i a l a t t e n t i o n to f a c t o r s such as labour and t r a n s p o r t a t i o n which might i n t e r r u p t resource production and flow. E f f o r t s i n t h i s d i r e c t i o n were being made' by the E l k V a l l e y c o a l producers. For example, B.C. Coal, i n an attempt to avoid labour disputes and decrease labour turnover r a t e s , has a l a r g e i n d u s t r i a l r e l a t i o n s department and o f f e r s mortgage a s s i s t a n c e encouraging 92 employees to buy houses in. the area. At Crow's Nest Resources i t was confirmed that a h i s t o r y of good management-labour r e l a t i o n s at the mine-s i t e i s very a t t r a c t i v e to Japanese b u y e r s . ^ To t h i s end the company has i n s t i t u t e d a " m u l t i p l e - s k i l l i n g " p r a c t i c e where the worker i s paid accord-ing to the number of mining s k i l l s he/she can acquire, and the same f r i n g e b e n e f i t s are o f f e r e d to union members and management.^ The degree of a t t e n t i o n paid to v a r i a b l e f a c t o r s of production, p a r t i c u l a r l y the r o l e of labour, i n d i c a t e s the h i g h l y competitive nature of the c o a l supply s i d e . As was hypothesized e a r l i e r , Japanese resource buyers are able to take advantage of the competitive s i t u a t i o n engendered by m u l t i p l e - s o u r c i n g and p i t one s u p p l i e r against the other. Each of the c o a l company repre-s e n t a t i v e s interviewed agreed that the Japanese do play company o f f against company, and c o a l region against r e g i o n . Even B.C. Coal, of which the 72 Japanese are part-owners, i s no l e s s s u s c e p t i b l e to t h i s p r a c t i c e . This " p l a y i n g o f f " of s u p p l i e r s i s p a r t i c u l a r l y n o t i c e a b l e during the annual contract n e g o t i a t i o n period each March. The Japanese s t r a t e g y i s to e s t a b l i s h a c o a l p r i c e w i t h the companies i n one supplying region and then negoti a t e c o n s e c u t i v e l y w i t h other s u p p l i e r s . They w i l l not accept a p r i c e above that already e s t a b l i s h e d and thus each r e g i o n has l i t t l e choice but to acquiesce. This was i l l u s t r a t e d during the c o a l p r i c e n e g o t i a t i o n s i n March, 1983. Representatives of the Japanese s t e e l i n d u s t r y negotiated f i r s t w i t h South A f r i c a n s u p p l i e r s and then with Chinese, both of whom accepted a U.S.$13.00 cut i n p r i c e per tonne. They then negotiated w i t h t h e i r American c o a l s u p p l i e r s f o r a p r i c e of US$54.00 per tonne and reached the same agreement w i t h A u s t r a l i a n producers (equivalent to a U.S.$12.00 73 cut from the previous year's p r i c e ) . At that point the Japanese began n e g o t i a t i o n s w i t h the western Canadian c o a l mines pressing f o r a p r i c e cut 93 which would b r i n g Canadian cont r a c t s i n l i n e w i t h those already s e t t l e d . Thus those p r i c e s were used as leverage and Canadian s u p p l i e r s had no choice but to accept a U.S.$13.00 p r i c e cut per tonne i n order to hold onto t h e i r business w i t h the Japanese. The Japanese attempt to encourage t h i s competition between c o a l s u p p l i e r s . I t i s o b viously to t h e i r advantage. One way t h i s i s done i s by keeping the supply s i d e f a i r l y transparent. For example, the Japanese s t e e l i n d u s t r y publishes an information source e n t i t l e d The Tex Report which shows contract and other p e r t i n e n t information f o r each s u p p l i e r . Apparently t h i s i s a market ploy enabling s u p p l i e r s to f i n d out about t h e i r competitor's p o s i t i o n and improve t h e i r own operation a c c o r d i n g l y , thereby encouraging competition amongst c o a l suppliers.''"' Furthermore, i t has been a l l e g e d that the Japanese f o s t e r competi-7 6 t i o n by encouraging over-capacity on the supply s i d e . Indeed t h i s s t r a t e g y was o f f e r e d by one c o a l company r e p r e s e n t a t i v e as a p o s s i b l e explanation of the motives behind Japanese i n t e r e s t i n B r i t i s h Columbia's northeast c o a l development p r o j e c t ; that i s , the Japanese may be attempt-ing to encourage an over-supply s i t u a t i o n f o r c o a l i n B.C. and i n the P a c i f i c Rim thereby a f f o r d i n g the Japanese as major buyers greater power i n p l a y i n g region o f f against r e g i o n . Dramatic evidence of t h i s over-supply s i t u a t i o n f o r m e t a l l u r g i c a l c o a l i s found i n a 1983 study by Halvorson f o r e c a s t i n g c o a l mining a c t i v i t y . ^ Examination of Table 20 shows that Japanese s t e e l i n t e r e s t s have created t h i s s i t u a t i o n by l e t t i n g out c o n t r a c t s f o r more c o a l than they r e q u i r e . For example, f o r 1985 i t i s estimated that the Japanese w i l l need to import 60 m i l l i o n tonnes of m e t a l l u r g i c a l c o a l . Based on t h e i r t r a d i t i o n a l c o n t r i b u t i o n s , about 36 m i l l i o n tonnes of that amount 94 TABLE 20. Comparison of forecasted Japanese metallurgical coal requirements from Australia and western Canada with contracted amounts (in trillions of tonnes). 1983 1985 1990 1995 2000 Japan's crude stee l production^-.'. Amount of coal required Amount supplied domestically Amount needed to be imported B. SUPPLY Amount required from Australia and Canada^ Amount required from other suppliers^ 93 59 4 55 34 21 102 64 4 60 36 24 108 71 4 67 36 31 119 78 4 74 43 31 132 86 4 82 51 31 C. CONTRACTED AMOUNTS A 3 B 4 A 3 B 4 A 3 B 4 A u s t r a l i a 29 39 37 45 8 45 Western Canada 15 15 16 22 13 22 Total 44 54 53 67 21 67 D. SURPLUS Amount required from A u s t r a l i a and Canada 34 34 36 36 36 36 Amount contracted from Australia and Canada 44 54 53 67 21 67 Surplus 10 20 17 31 -15 31 NOTES: Based on current forecasts by Japanese Steel Industry and the International Iron and Steel Industry to 1990, followed by a 2% per year growth to 2000. 2 Based on past contributions to Japanese market and expected future performance. Case A assumes that existing contracts due to expire by t h i s date are not renewed. Case B assumes that existing contracts due to expire by this date are renewed. SOURCE: Adapted from H.N. Halvorson Consultants Ltd., Forecast of Coal Mining A c t i v i t y to 2002 for B.C. Hydro  and Power Authority, March 1983, p. 37, 39. 95 would come from A u s t r a l i a n and western Canadian s u p p l i e r s . However, assuming that c o n t r a c t s due to e x p i r e by t h i s date are renewed, the Japanese w i l l have a c t u a l l y contracted f o r 67 m i l l i o n tonnes. This r e s u l t s i n a surplus of 31 m i l l i o n tonnes. Even i f one assumes that c o n t r a c t s due to e x p i r e by 1985 are not renewed, the Japanese w i l l have contracted f o r 17 m i l l i o n tonnes more than they need. Such a s t r a t e g y ensures that Japanese i n d u s t r y r e c e i v e s a s t a b l e supply of raw m a t e r i a l s w h i l s t height-ening competition amongst i t s s u p p l i e r s and f a c i l i t a t i n g Japanese a b i l i t y to p l a y weakened s u p p l i e r s o f f against each other. (b) The E f f e c t s f o r Coal Supplying Regions Japanese m u l t i p l e - s o u r c i n g means that there i s l e s s s e c u r i t y of market demand f o r any one s u p p l i e r than under the American resource pro-curement s t r a t e g y where the penetrated resource region c o n s t i t u t e s the main or only s u p p l i e r . Demand f o r a region's resource w i l l be a f f e c t e d not only by f l u c t u a t i o n s i n demand f o r the f i n a l product, but a l s o by any changes i n the competitive p o s i t i o n of that r e g i o n r e l a t i v e to Japan's other s u p p l i e r s . This was confirmed by one of the c o a l company represen-t a t i v e s who a t t e s t e d that i f one s u p p l i e r i s performing p o o r l y , the Japanese w i l l wind down purchases and buy from a more r e l i a b l e s u p p l i e r . I t should a l s o be noted that any change i n the t o t a l number of s u p p l i e r s a f f e c t s e x i s t i n g supply regions. Some e m p i r i c a l examples are presented to i l l u s t r a t e these themes. Recent d e c l i n e s i n the competitive p o s i t i o n s of A u s t r a l i a n and American c o a l s u p p l i e r s are a l l e g e d to have aided B r i t i s h Columbia i n i n c r e a s i n g i t s share of the Japanese market. An a r t i c l e f o l l o w i n g a symposium on the P a c i f i c Rim c o a l trade i n January 1982 declared that 96 "B.C. i s now set to p i c k up b i l l i o n s of d o l l a r s worth of c o a l c o n t r a c t s as f a l t e r i n g A u s t r a l i a n and U.S. s u p p l i e r s face labour s t r i f e i n t h e i r mines and long delays at t h e i r c o a l ports."'' 8 I t was reported that the U.S. has poor port c a p a c i t y on i t s west coast and customers had exper-ienced s e r i o u s delays i n s h i p p i n g . For example, i n 1981 Japanese c o a l companies had to pay about $300 m i l l i o n , i n demurrage charges at Hampton Roads c o a l port i n V i r g i n i a . A u s t r a l i a i s a l s o s t r i k e prone both at the mines and p o r t s ; i n 1981 A u s t r a l i a n mines were able to supply only 80 percent of contracted c o a l due to labour d i s r u p t i o n s at both of the country's p o r t s . B.C.'s c o a l handling port apparently b e n e f i t t e d from these problems as Japanese ships were d i v e r t e d from A u s t r a l i a n and U.S. 79 ports to c o l l e c t c o a l from Roberts Bank. In t h i s instance i t may be c l e a r l y seen that v a r i a b l e f a c t o r s of production, labour and t r a n s p o r t a t i o n , were r e s p o n s i b l e f o r weakening the competitive p o s i t i o n of A u s t r a l i a n and American s u p p l i e r s . In consequence Japanese c o a l buyers turned t h e i r a t t e n t i o n to B.C. According to p a r t i -c i p a n t s at the symposium, "....B.C.'s labour c l i m a t e i s s t a b l e compared to that of A u s t r a l i a and i t s r a i l t r a n s p o r t a t i o n i s the most e f f i c i e n t i n 8 0 the world." Furthermore i t has been suggested that these f a c t o r s encouraged the development of B.C.'s northeast c o a l mines as w e l l as new mines i n the E l k V a l l e y . The executive v i c e - p r e s i d e n t of B.C. Coal was quoted as saying, "The northeast c o a l producers won the c o n t r a c t s . . . . because of labour s t r i f e i n A u s t r a l i a and the port and t r a n s p o r t a t i o n 81 problems in. the U.S." A second example i l l u s t r a t e s that under the m u l t i p l e - s o u r c i n g s t r a t e g y changes i n the performance of one s u p p l i e r coupled w i t h a d e c l i n e i n demand f o r the f i n a l product can. a f f e c t a l l supplying regions. During 1981/82 the 97 Japanese s t e e l m i l l s increased t h e i r purchase of American c o a l on the spot market i n a n t i c i p a t i o n of renewed labour problems i n the A u s t r a l i a n c o a l 82 f i e l d s . Thus American s u p p l i e r s b e n e f i t t e d from a perceived d e c l i n e i n the competitive p o s i t i o n of A u s t r a l i a n c o a l producers. However, the a n t i -c i p a t e d labour problems d i d not m a t e r i a l i z e , plus g l o b a l demand f o r s t e e l began to d e c l i n e s h a r p l y . The Japanese discovered that they had over-purchased and began to cut back on c o n t r a c t s w i t h a l l s u p p l i e r s i n the summer of 1982.^ F i n a l l y , an a d d i t i o n to the number of raw m a t e r i a l sources on which the Japanese depend i n t e n s i f i e s competition f o r a l l supplying regions. For example, Byron Creek C o l l i e r i e s i n i d e n t i f y i n g i t s competitors in c l u d e s both present and f u t u r e thermal c o a l m i n e s . ^ * The emergence of a new raw m a t e r i a l source i n the form of B.C.'s northeast c o a l development w i l l a f f e c t the o v e r a l l supply and demand p i c t u r e f o r the P a c i f i c Rim c o a l trade. This p r o j e c t w i l l be producing about 7 m i l l i o n tonnes of m e t a l l u r g i c a l c o a l f o r Japan and w i l l mean an increased number of s u p p l i e r s f o r the Japanese to play o f f against each other. The impact of t h i s i n c r e a s e i n c o a l supply becomes very s e r i o u s i n the present s i t u a t i o n of d e c l i n i n g demand f o r m e t a l l u r g i c a l c o a l . As Table 21 shows, Japanese s t e e l output has been g r a d u a l l y d e c l i n i n g s i n c e i t s peak i n 1973 and i s understood to be entering a long-term and permanent phase of d e c l i n e ; f o r example, the i n f l u e n t i a l Japanese M i n i s t r y of I n t e r -n a t i o n a l Trade and Industry (M.I.T.I.), has been discouraging domestic 86 investment i n s t e e l s i n c e 1974. However, i n the short-term there has Seven new thermal c o a l mines are proposed i n the area of A l b e r t a west of Edmonton. A l l w i l l be supplying p r i m a r i l y the P a c i f i c Rim.85 98 TABLE 21. Japanese coking c o a l requirements i n r e l a t i o n to s t e e l production, 1970-1983 ( i n m i l l i o n s of tonnes). Imported coking c o a l Crude s t e e l production 1970 46.73 93.32 1971 43.47 88.56 1972 43.78 96.90 1973 53.72 119.32 1974 58.90 117.13 1975 57.82 102.31 1976 56.45 107.40 1977 56.27 102.40 1978 48.95 102.11 1979 52.15 111.75 1980 58.31 111.40 1981 66.60 112.00 1982 N.A. 99.55 1983 N.A. 92.50 NOTES: ''Estimated by Japan Iron and S t e e l Federation. SOURCE: 1970-1981 f i g u r e s from K e i t h A.J. Hay, S.R. H i l l , and S.S. Rahman, Canadian Coal f o r Japan (Ottawa: Econolynx I n t e r n a t i o n a l L t d . , 1982), p. 27, 31; 1982 and' 1983 f i g u r e s from Vancouver Sun, Jan. 19, 1983, p. F7 as quoted by Japan Iron and S t e e l Federation. 99 been a sudden and u n a n t i c i p a t e d d e c l i n e i n s t e e l production stemming from the g l o b a l r e c e s s i o n and a drop i n the demand. T o t a l s t e e l production f o r 1982 was i n i t i a l l y planned to reach 115 m i l l i o n tonnes but lowered demand l e d to a r e v i s e d production schedule and only 93.5 m i l l i o n tonnes were - j 8 7 a c t u a l l y produced. As p r e v i o u s l y mentioned, t h i s d e c l i n e i n demand f o r s t e e l has l e d the Japanese to cut back on cont r a c t s w i t h a l l s u p p l i e r s . This s i t u a t i o n w i l l be aggravated when northeast c o a l begins production i n 1984. For example, B r i t i s h Columbia i s c u r r e n t l y i n the i r o n i c p o s i t i o n of having i t s c o a l i n d u s t r y c a p a c i t y doubled w h i l s t one-third of the i n d u s t r y ' s 88 workforce has been l a i d o f f due to poor markets. M u l t i p l e - s o u r c i n g i n t h i s instance means that a d e c l i n i n g demand f o r t h i s raw m a t e r i a l must be shared amongst an increased number of s u p p l i e r s and thus cut backs w i l l be more severe than would have been the case i f the northeast c o a l p r o j e c t had not been developed. The s e c u r i t y of market demand f o r a l l supplying regions has been threatened not only by a d e c l i n e i n demand f o r the f i n a l product, but a l s o by the emergence of a new s u p p l i e r under the Japanese m u l t i p l e - s o u r c i n g s t r a t e g y . 100 D. The I m p l i c a t i o n s of Japanese Consortium Resource Purchasing The research f i n d i n g s appear to support the hypothesis that consor-tium resource purchasing r e s u l t s i n l e s s than e q u i t a b l e returns f o r the r e g i o n a l resource as i s the case under the American str a t e g y which permits t r a n s f e r p r i c i n g . Consortium purchasing means that one or two of the nine Japanese s t e e l m i l l s act as r e p r e s e n t a t i v e s of the i n d u s t r y as a whole and n e g o t i a t e the annual c o n t r a c t s w i t h each c o a l s u p p l i e r around the world. Two of the s t e e l m i l l s , Nippon Kokan and Kobe" (N.K.K.), represent the nine i n n e g o t i a t i n g and c o o r d i n a t i n g a l l m e t a l l u r g i c a l c o a l purchases from southeastern B.C. and the new northeast c o a l p r o j e c t . Nippon S t e e l , the l a r g e s t Japanese s t e e l producer, coordinates purchases from A u s t r a l i a n and 89 American s u p p l i e r s . These nine s t e e l m i l l s always act i n conjunction and are the same u n i t which owns 33 percent of B.C. Coal and has a combined 90 10 percent equity i n the Q u i n t e t t e mine of the northeast c o a l p r o j e c t . Two Japanese u t i l i t y c o n s o r t i a , Japan Coal Development Corporation (J.C.D.C.) and the E l e c t r i c Power Development Company (E.P.D.C), are r e s p o n s i b l e f o r c o o r d i n a t i n g purchases of thermal c o a l from the E l k V a l l e y . This manner of purchasing raw m a t e r i a l s r e f l e c t s the group o r i e n t a -ti o n , of Japanese s o c i e t y and i s seen in, numerous aspects of Japanese business. One c o a l company spokesman explained that during annual n e g o t i a -t i o n s w i t h the Japanese i t must be remembered that one i s d e a l i n g not w i t h an i n d i v i d u a l but w i t h a group which w i l l have reached a consensus before-91 hand. Moreover, once t h i s group makes a d e c i s i o n , they adhere to i t and 92 the customer must behave a c c o r d i n g l y or r i s k l o s i n g the business. What are the i m p l i c a t i o n s of t h i s manner of resource buying f o r the c o a l producers? Keeping i n mind the b a s i c supply and demand s i t u a t i o n and the m u l t i p l e - s o u r c i n g s t r a t e g y p r e v i o u s l y described, i t i s argued that 101 consortium purchasing complements m u l t i p l e - s o u r c i n g and aids Japanese c o a l buyers i n taking advantage of the competitive c o a l supply s i t u a t i o n . The Japanese are able to present a u n i f i e d bargaining p o s i t i o n to s u p p l i e r s so that not only are c o a l producers i n the P a c i f i c Rim competing f o r one major n a t i o n a l market, but they are a l s o competing to do business w i t h one purchasing u n i t i n that market. This i n s t i t u t i o n a l arrangement allows the. buyers a great deal of power i n s e t t i n g the terms and c o n d i t i o n s of t h e i r purchases i n c o n t r a c t s w i t h the weak, fragmented, and g e o g r a p h i c a l l y separated c o a l s u p p l i e r s . The f o l l o w i n g d e s c r i p t i o n of the A u s t r a l i a n c o a l i n d u s t r y a p p l i e s e q u a l l y w e l l to the s i t u a t i o n of c o a l s u p p l i e r s i n the E l k V a l l e y : ...fragmented A u s t r a l i a n exporters were placed i n a weak bargaining p o s i t i o n by the organized and u n i t e d purchasing p o l i c i e s of Japanese importers. This problem was seen to be p a r t i c u l a r l y acute i n the c o a l trade where a consortium of Japanese s t e e l m i l l s negotiated s e p a r a t e l y w i t h the i n d i v i d u a l A u s t r a l i a n c o a l producers.93 Further evidence was provided through the Interviews. When asked how consortium resource purchasing a f f e c t e d t h e i r p o s i t i o n , one respondent stated that customers who ne g o t i a t e as a group have much more power to o b t a i n the c o n d i t i o n s they want than i f they were n e g o t i a t i n g as i n d i v i d u a l 94 companies w i t h each s u p p l i e r . Group purchasing puts each fragmented supplier, at a disadvantage and enables the consortium to p r a c t i s e monopoly 95 p r i c i n g . This comment i s supported by statements made by Walter R i v a , the c h i e f executive of B.C. Coal, who suggests that B.C. mines are not g e t t i n g a high enough p r i c e f o r t h e i r c o a l i n the c o n t r a c t s stemming from 96 1980. In consequence i t was i n d i c a t e d that the c o a l r e g i o n of the E l k 97 V a l l e y may not be g e t t i n g a f a i r r e t u r n f o r i t s resources. 102 FOOTNOTES 1. B.C. Coal 1982: personal communication. 2. I b i d . 3. M.H. Watkins, "A Staple Theory of Economic Growth", i n Approaches to  Canadian Economic H i s t o r y , ed. W.T. Easterbrook and M.H. Watkins (Toronto: Macmillan Company of Canada L t d . , 1978), p. 55. 4. Adapted from: Canada, Energy, Mines, and Resources, M i n e r a l P o l i c y - A Discus s i o n Paper, 1981, p. 115. 5. B.C., M i n i s t r y of Industry and Small Business Development, Manufac- t u r e r s ' D i r e c t o r y 1982-83, Part I I I , p. 4, 12; and B.C. Coal 1982: personal communication. 6. B.C., M i n i s t r y of Industry and Small Business Development, B r i t i s h  Columbia's Coal Development Business O p p o r t u n i t i e s , 1981, pp. 12-15. 7. I b i d . , p. 12. 8. Canada, Energy, Mines and Resources, M i n e r a l P o l i c y - A D i s c u s s i o n  Paper, 1981, p. 113. 9. B.C. Coal 1982: personal communication. 10. P.E. N i c k e l et a l . , Economic Impacts and Linkages of the Canadian  Mining Industry (Kingston: Centre f o r Resource Studies, Queens U n i v e r s i t y , 1978), p. 115. 11. Canada, Energy, Mines, and Resources, M i n e r a l P o l i c y - A D i s c u s s i o n Paper, 1981, p. 114. 12. B.C. Coal 1982: personal communication. 13. Canada, Energy, Mines, and Resources, M i n e r a l P o l i c y - A D i s c u s s i o n  Paper, 1981, p. 114. 14. Rod Nutt, "Coal harbour view g i r d l e s the globe," i n Vancouver Sun, February 13, 1982, p. CI. 15. Westshore Terminals L t d . 1982: personal communication. 16. Byron Creek C o l l i e r i e s 1982: personal communication. 17. Canada, Energy, Mines, and Resources, M i n e r a l P o l i c y - A D i s c u s s i o n  Paper, 1981, p. 115. 18. I b i d . , p. 113, 115. 103 19. B.C. Coal, Byron Creek C o l l i e r i e s , Crows Nest Resources, Fording Coal 1932: personal communication. 20. K e i t h A.J. H i l l , S.R. H i l l , S.S. Rahman, Canadian Coal f o r Japan (Ottawa: Econolynx I n t e r n a t i o n a l L t d . , 1982), p. 26. 21. Crows Nest Resources 1982: personal communication. 22. B.C., M i n i s t r y of Economic Development, E v a l u a t i o n of Coke Manufacture  i n B r i t i s h Columbia by H.N. Halvorson Consultants L t d . , 1976. 23. B.C. Coal, The Energy L i n e , A p r i l 1982. 24. Thomas I . Gunton, Resources, Regional Development, and P r o v i n c i a l  P o l i c y : A Case Study of B r i t i s h Columbia (Ottawa: Canadian Centre f o r P o l i c y A l t e r n a t i v e s , 1982), p. 17-22. 25. B r i t i s h Columbia Resources Investment Corporation, Annual.Report, 1981 and 1982. The f o l l o w i n g d i s c u s s i o n i s based on these annual r e p o r t s . 26. Janeen Bowes, "Byron Creek C o l l i e r i e s " , Byron Creek C o l l i e r i e s , 1982. 27. Rod Nutt, "Latest c o a l p r i c e s u n s a t i s f a c t o r y . . . " , i n Vancouver Sun, Sept. 21, 1982, p. C5. 28. B r i t i s h Columbia Resources Investment Corporation (B.C.R.I.C), "Prospectus Summary", 1982, p. 21, (emphasis mine). 29. B.C. Coal 1982: personal communication. 30. I b i d . 31. B.C.R.I.C, " F i r s t Quarter Report", 1983. 32. Fording Coal L t d . 1982: personal communication. 33. B.C. Coal 1982: .personal communication. 34. H.N. Halvorson Consultants L t d . , Forecast of Coal Mining A c t i v i t y to  2002 f o r B.C. Hydro and Power A u t h o r i t y , March 1983, p. 48. 35. B.C. Coal 1982:' personal communication. 36. Coleman C o l l i e r i e s 1982: personal communication. 37. B r i a n K i e r a n , "Coal town i n A l b e r t a a warning f o r B.C.", i n Vancouver  Sun, Nov. 13, 1982, p. DI. 38. B.C. Coal 1982: personal communication. 39. I b i d . 40. Crows Nest Resources 1982: personal communication. 104 41. B.C. Coal 1982: personal communication. 42. Peter E. Ll o y d and Peter Dicken, L o c a t i o n i n Space (New York: Harper and Row, 1977), p. 182. 43. Geoff Murray, "Japan's s t e e l m i l l s over-estimated need f o r c o a l , " i n Vancouver Sun, Aug. 18, 1982. 44. Byron Creek C o l l i e r i e s 1982: personal communication. 45. Fording Coal 1982: personal communication. 46. B.C. Coal 1982: personal communication. 47. Geoff Murray, "1-million-tonne drop i n sales p o s s i b l e , " i n Vancouver Sun, Sept. 18, 1982. 48. The Globe and M a i l , Oct. 1, 1983, p. B6. 49. Byron Creek C o l l i e r i e s 1982: personal communication. 50. M.A. Galway, Japanese Involvement i n B r i t i s h Columbia Copper (Ottawa: Information Canada,1975), p. 26. 51. Ben Smith 1982: personal communication. 52. B.C. Coal 1983: personal communication. 53. B.C. Coal 1983: personal communication. 54. Fording Coal 1982: personal communication. 55. B.C. Coal 1982: personal communication. 56. I b i d . 57. Fording Coal 1982: personal communication. 58. F e r n i e Free Press, March 2, 1983. 59. Canada Employment and Immigration, Vancouver O f f i c e 1983: personal communication. 60. Computed from: Canada, S t a t i s t i c s Canada, 1966 census of Canada, Cat. 92-601 and 1976 census of Canada, Cat. 92-80U 61. B.C., Department of Economic Development, Interim Planning Agreement S t a f f , A Summary Report of Development P o s s i b i l i t i e s i n the Kootenay  Region, 1976, p. 261. 62. , C r a i g Weir, "Boom Proj e c t e d f o r Resource Centre," i n Trade and Commerce Magazine, May 1981. 105 63. C r a i g Weir, "Regional Coal Prospects Spark L o c a l Economy," i n Trade and Commerce Magazine, May 1981. 64. Canada Mortgage and Housing Corporation (C.M.H.C.), Cranbrook o f f i c e 1982: personal communication. 65. I b i d . 66. I b i d . 67. K e i t h A.J. Hay, S.R. H i l l , and S.S. Rahman, Canadian Coal f o r Japan (Ottawa: Econolynx I n t e r n a t i o n a l L t d . , 1982), p. 5. 68. B.C. Coal 1982: personal communication. 69. I b i d . 70. Crows Nest Resources 1982: personal communication. 71. I b i d . 72. B.C. Coal 1982: personal communication. 73. Rod Nutt, "On the menu: $100 m i l l i o n c o a l c u t , " i n Vancouver Sun, March 19, 1983. 74. Rod Nutt, "Coal shipped to Japan m i l l s at cheap r a t e , " i n Vancouver Sun, A p r i l 6, 1983, p. C7. 75. Crows Nest Resources 1982: personal communication. 76. See f o r example: Ben Smith, "The Japanese Connection - N e g o t i a t i n g A Two-Way S t r e e t " i n A u s t r a l i a ' s Resources Future, ed. Peter Hastings and Andrew Farran (Melbourne: Thomas Nelson A u s t r a l i a Party L t d . , 1978). 77. H.N. Halvorson Consultants L t d . , Forecast of Coal Mining A c t i v i t y to  2002 f o r B.C. Hydro and Power A u t h o r i t y , March 1983, p. 37, 39. 78. Rod Nutt, Sun, Jan. "B.C. leads race 19, 1982, p. F l . f o r P a c i f i c Rim c o a l t r a d e , " i n Vancouver 79. I b i d . 80. I b i d . 81. I b i d . 82. B.C. Coal and Fording Coal 1982: personal communication. 83. Rod Nutt, Sun, Aug. "Charges soar as 25, 1982, p. C6. s t o c k p i l e s of c o a l mount," i n Vancouver 84. Byron Creek C o l l i e r i e s 1982: personal communication. 106 85. I b i d . 86. I r a Magaziner and T. Hout, Japanese I n d u s t r i a l P o l i c y (London: P o l i c y Studies I n s t i t u t e , 1980), p. 46. 87. Rod Nutt, "Japan s t e e l t a rget drops once again," i n Vancouver Sun, Sept. 15, 1982. 88. B.C., M i n i s t r y of Energy, Mines, and Petroleum Resources, B.C. M i n e r a l  Q u a r t e r l y , Feb. 1983, p. 3, 6. 89. Rod Nutt, "Surplus of c o a l 'won't c a n c e l ' B.C. p r o j e c t s , " i n Vancouver Sun, Aug. 26, 1982, p. DI. 90. Rod Nutt, "Japanese 'balk' at s h o v e l l i n g funds i n t o c o a l , " i n Vancouver Sun, Nov. 26, 1982, p. E5. 91. B.C. Coal 1982: personal communication. 92. Fording Coal 1982: personal communication. 93. Ben Smith, "The Japanese Connection - N e g o t i a t i n g A Two-Way S t r e e t , " i n A u s t r a l i a ' s Resources Future, ed. Peter Hastings and Andrew Farran (Melbourne: Thomas Nelson A u s t r a l i a Party L t d . , 1978), p. 122. 94. B.C. Coal 1982: personal communication. 95. Fording Coal 1982: personal communication. 96. Rod Nutt, "Latest c o a l p r i c e s ' u n s a t i s f a c t o r y ' . . . , " i n Vancouver Sun, Sept. 21, 1982, p. C5. 97. B.C. Coal 1982: personal communication. 107 VI. ANALYSIS OF FINDINGS The question posed at the outset of t h i s study was, "what are the implications of the Japanese resource procurement strategy for a staple resource region such as the Elk Valley?" I suggested that t h i s strategy d i f f e r s i n s i g n i f i c a n t respects from the American strategy with which we are more f a m i l i a r and as such might have a d i f f e r e n t impact on a staples region. The major c h a r a c t e r i s t i c s of the Japanese strategy were described and i t was hypothesized that i n some ways t h i s strategy could have p o s i t i v e e f f e c t s , but i n other respects i t may present d i f f e r e n t sets of problems for a staples resource region. In t h i s section I summarize the research fin d i n g s , r e l a t e them to the i n i t i a l hypotheses, and then t i e together the various strands of information to elucidate the implications of the Japanese strategy for a resource region. A. Summary of Research Findings Looking f i r s t at the p o s s i b i l i t y for domestic entrepreneurs to respond to Japanese market demand and e s t a b l i s h a resource venture, we were interested i n the difference t h i s might make to the development of backward, forward, and f i s c a l linkages. With regard to stimulating back-ward linkages from Elk Valley coal mining i t was found that there i s no apparent difference between the purchasing patterns of the foreign and domestic coal companies. However, th i s f i n d i n g i s rather tenuous for i t i s based only on general discussions with purchasing agents since d i r e c t l y comparable data on purchasing patterns could not be obtained. Thus one cannot extrapolate from t h i s example to the broader issue and conclude that domestic companies do not buy more inputs from Canadian manufacturers 108 than do f o r e i g n companies. Other f a r more d e t a i l e d and comprehensive stu d i e s have c o n v i n c i n g l y determined that d o m e s t i c a l l y - c o n t r o l l e d companies are indeed more l i k e l y to purchase inputs from domestic over f o r e i g n 1 sources. I t was a l s o found that backward linkages from c o a l mining are not st r o n g l y developed i n the domestic economy. Some manufacturing of l o w - l e v e l technology inputs does occur i n the p r o v i n c i a l and n a t i o n a l economy but w i t h regard to the more s o p h i s t i c a t e d , high-technology i n p u t s , Canadian p a r t i c i -p a t i o n i s l i m i t e d to the assembly of inputs manufactured elsewhere. These f i n d i n g s are supported by l a r g e r works d e a l i n g w i t h the development of back-ward linkages i n the Canadian economy f o r the mining in d u s t r y as a whole. Returning to the o r i g i n a l hypothesis, what can be i n f e r r e d from these f i n d i n g s ? I t i s f e l t that although the backward l i n k a g e s from the s t a p l e sector are i n t h i s case underdeveloped, one cannot immediately conclude that domestic c o n t r o l does not play a r o l e i n s t i m u l a t i n g investment i n domestic input supplying i n d u s t r i e s . For example, i n the case of manufacture of co a l mining equipment i t appears that B r i t i s h and American manufacturers gained the i n i t i a l advantage because the market f o r such products was q u i t e large there. The Canadian market i n comparison was s m a l l . Furthermore, c l o s e r examination of the extent of domestic c o n t r o l of the s t a p l e sector i n t h i s case study r e v e a l s that t h i s c o n t r o l of a major p o r t i o n of the in d u s t r y i s only recent. The contemporary phase of c o a l mining i n the E l k V a l l e y was i n i t i a t e d by K a i s e r , a f o r e i g n - c o n t r o l l e d company which dominated the sta p l e i n d u s t r y f o r twelve years. This company may w e l l have purchased inputs from f o r e i g n sources e s t a b l i s h e d through the connections of i t s parent company, K a i s e r S t e e l of C a l i f o r n i a . In t h i s way access to the c o a l industry market would have been r e s t r i c t e d f o r Canadian manufacturers. I t i s only 109 r e c e n t l y (1980) that these major c o a l operations of the region have been purchased by Canadian i n t e r e s t s and thus the company may s t i l l be f o l l o w i n g the purchasing patterns e s t a b l i s h e d by i t s predecessor. A l l of the c o a l companies interviewed i n d i c a t e d that they were i n t e r e s t e d i n greater pur-chasing of inputs from Canadian manufacturers, but found that there were very few i n e x i s t e n c e . One reason behind t h i s could be that f o r e i g n c o n t r o l of the s t a p l e sector i n the recent past i n h i b i t e d market access f o r Canadian manufacturers and present attempts are unsuccessful due to an i n a b i l i t y to compete w i t h e x i s t i n g and w e l l - e s t a b l i s h e d f o r e i g n s u p p l i e r s . There are assuredly a host of other explanations as to why there are so few Canadian manufacturers of inputs to the c o a l i n d u s t r y ; lengthy f u r t h e r i n v e s t i g a t i o n would be r e q u i r e d to elaborate on these. In the case of forward linkag e s i t was found that there are no domes-t i c i n d u s t r i e s which use the region's m e t a l l u r g i c a l c o a l as an input. Canadian c o n t r o l of p a r t of the s t a p l e sector i n t h i s case does not appear to encourage the development of such linkag e s d o m e s t i c a l l y ; both f o r e i g n and Canadian companies are constrained i n any attempt to encourage f u r t h e r processing f o r there i s no Canadian market f o r m e t a l l u r g i c a l c o a l which they can supply c o m p e t i t i v e l y . The contemporary c o a l mining economy of the E l k V a l l e y has emerged purely i n response to a f o r e i g n demand f o r raw m a t e r i a l s and those f o r e i g n customers are not i n t e r e s t e d i n purchasing the r e g i o n a l s t a p l e i n f u r t h e r processed form. Thus the research f i n d i n g s suggest that domestic c o n t r o l of the s t a p l e does not ensure the development of forward linkag e s from that sector f o r market c o n s t r a i n t s may w e l l i n h i b i t any such i n t e r e s t on the part of domestic c o n t r o l l e r s . Turning f i n a l l y to the f i s c a l linkages from c o a l mining, i t was found that domestic c o n t r o l of part of the s t a p l e sector may lead to domestic 110 r e t e n t i o n of the income created through s t a p l e e x t r a c t i o n . However, t h i s does not ensure that the income w i l l be used to d i v e r s i f y the s t a p l e economy or otherwise b e n e f i t the people of the province who u l t i m a t e l y own that s t a p l e resource. In summarizing, the Japanese investment strategy allows greater o p p o r t u n i t i e s f o r domestic c o n t r o l over s t a p l e development. As such i t w i l l be p r e f e r r e d by economic n a t i o n a l i s t s such as Watkins, L e v i t t , and Gray who argue that f o r e i g n c o n t r o l of resource development under the American strategy i n h i b i t s the growth of linkages from the s t a p l e s e c t o r . However, the f i n d i n g s of t h i s study suggest that domestic c o n t r o l of the s t a p l e cannot n e c e s s a r i l y i n and of i t s e l f a u t o m a t i c a l l y generate backward, forward, and f i s c a l linkages from that s e c t o r . The data presented here i n d i c a t e s that there remain a number of other f a c t o r s which impede domestic development of those l i n k a g e s ; f o r example, h i s t o r i c a l reasons of i n i t i a l advantage, problems of competition encountered by domestic i n t e r e s t s , market c o n s t r a i n t s , and d i f f e r i n g opinions oh how s t a p l e income should be spent. The second hypothesis suggested that the purchase of the r e g i o n a l s t a p l e on the b a s i s of long-term c o n t r a c t s would engender economic s t a b i l i t y f o r the s t a p l e r e g i o n . The research f i n d i n g s concluded that the p r i c e and q u a n t i t y s p e c i f i c a t i o n s of the long-term c o n t r a c t s were not always adhered to and that a d e c l i n e i n demand f o r the f i n a l product d i d produce a d e c l i n e i n Japanese demand f o r the r e g i o n a l s t a p l e . Such f l u c t u a t i o n s i n demand r e s u l t e d i n s o c i a l and economic i n s t a b i l i t y i n the s t a p l e r e g i o n . Thus the i m p l i c a t i o n s of the Japanese strategy f o r r e g i o n a l economic s t a b i l i t y are not much d i f f e r e n t from the f l u c t u a t i o n s i n demand and i n s t a b i l i t y witnessed under the American strategy of overseas resource procurement. However, the existence of long-term c o n t r a c t s may w e l l provide some p r o t e c t i o n f o r the I l l staple industry during periods of severe economic downturn and as such are c e r t a i n l y preferable to s e l l i n g the staple on the open market. Third, the Japanese practice of multiple-sourcing and consortium resource purchasing was examined. The research findings supported the i n i t i a l hypotheses for i t was shown that multiple-sourcing does render operations i n any one staple region more sens i t i v e to competing suppliers, and that consortia purchasing from those fragmented suppliers weakens the bargaining p o s i t i o n of the staple industry and the returns received f o r the regional resource. B. The Implications of the Japanese Strategy for a Staple Resource Region The objective i n th i s section i s to l i n k these findings and demonstrate how the c h a r a c t e r i s t i c s of the Japanese resource procurement strategy r e i n -force each other to ensure Japanese resource s e c u r i t y . In so doing some of the consequences of t h i s strategy f o r supplying regions can be more c l e a r l y revealed. F i r s t , i t i s important to examine the motivations behind the Japanese preference for not investing equity i n overseas resource ventures and the implications f o r those domestic or foreign i n t e r e s t s who do control the venture. In encouraging the emergence of overseas resource suppliers, the Japanese are only interested i n acquiring a secure, uninterrupted flow of raw materials to feed Japanese industry. American multinational corpora-tions i n t h e i r overseas resource ventures are also p r i m a r i l y concerned with ensuring a stable supply of resources f o r parent company manufacturing a c t i v i t y . The American strategy i s to ensure v e r t i c a l i ntegration through d i r e c t investment and control of the foreign resource venture, and 112 associated i n f r a s t r u c t u r e i f necessary. The Japanese, i n c o n t r a s t , achieve t h i s aim by e s t a b l i s h i n g long-term con t r a c t s w i t h resource s u p p l i e r s and r e l y i n g on a number of such s u p p l i e r s around the world. Japanese indus-t r i a l i s t s w i l l provide debt f i n a n c i n g but w i l l become mi n o r i t y equity partners only under ex c e p t i o n a l circumstances where such p a r t i c i p a t i o n i s c r u c i a l to the p r o j e c t ' s s u r v i v a l . This r e l a t i o n s h i p between resource buyer and s e l l e r has been termed " q u a s i - i n t e g r a t i o n " as opposed to the f u l l 2 v e r t i c a l i n t e g r a t i o n achieved by the American strategy of d i r e c t investment. This p r a c t i c e allows the Japanese to s h i f t a l l costs and r i s k s a s s o ciated w i t h d i r e c t investment onto the domestic (or f o r e i g n ) e n t r e -preneurs who undertake to finance and operate the resource venture and the p r i v a t e or p u b l i c i n t e r e s t s who b u i l d the a s s o c i a t e d i n f r a s t r u c t u r e . In and of i t s e l f t h i s would not appear to be p a r t i c u l a r l y o b j e c t i o n a b l e . Domestic i n t e r e s t s , to the extent that they respond to Japanese market demand and are able to secure c a p i t a l to e s t a b l i s h the venture, w i l l i ncur the r i s k s of investment but w i l l a l s o experience f u l l c o n t r o l over the operation and a s s o c i a t e d p r o f i t earnings. However, the f i n d i n g s of t h i s study suggest that upon c l o s e r examination, the Japanese strategy of over-seas resource procurement gives r i s e to a set of new problems which serves to increase the costs and r i s k s a s s o c i a t e d w i t h resource development i n a s t a p l e s r e g i o n . For example, under the American resource procurement strategy there would be some s e c u r i t y of market demand f o r the s t a p l e region stemming from the f a c t that the venture was s p e c i f i c a l l y developed to supply i t s parent company and i s l i k e l y to be the main (or only) s u p p l i e r of the resource. Under the Japanese strategy that region would be one among a number of competing s u p p l i e r s , a s i t u a t i o n of which Japanese resource 113 purchasers take advantage by playing suppliers off against each other. Their a b i l i t y to do t h i s i s f a c i l i t a t e d by the r e l a t i o n s h i p of quasi-integration with resource suppliers. For example, long-term contracts require annual meetings to negotiate the s p e c i f i c s of purchasing terms and these provide an opportunity for Japanese buyers to c o l l e c t information concerning the supplier's competitive p o s i t i o n . The few instances where Japanese buyers hold minority equity positions in the resource venture also permit access to production information. Such endeavors are part of the sophisticated Japanese information gathering system which, as one coal company spokesman suggested, may r e s u l t in Japanese coal buyers knowing more about a coal 3 mine that do i t s owners. The absence of Japanese equity investment in the resource venture means there are fewer factors constraining a possible termination of the r e l a t i o n s h i p between resource buyer and s e l l e r . Under the American strategy, i f the needed resource becomes av a i l a b l e on more a t t r a c t i v e terms elsewhere in the global economy a major deterrent to r e - l o c a t i o n of operations i s the heavy investment made by the parent company in the i n i t i a l resource region. The costs of abandoning, dismantling, or s e l l i n g t h e i r operations would constrain such a r e - l o c a t i o n decision. However, under the Japanese strategy where there are generally no binding investment t i e s the Japanese can re-negotiate purchasing terms, e s t a b l i s h a funeral contract, and begin patronizing a new resource supplier with no impact on the buyer's p r o f i t p o s i t i o n . The organization of Japanese resource purchasers into one strong united consortium which sets the terms and conditions under which i t i s w i l l i n g to purchase the regional staple poses a new challenge to resource suppliers. Because they may have few alternate markets and are competing with a number 114 of other s u p p l i e r s as part of the Japanese m u l t i p l e - s o u r c i n g s t r a t e g y , r e g i o n a l resource producers have l i t t l e b a r gaining power i n d e a l i n g w i t h t h i s consortium. The i n s t i t u t i o n a l arrangement of Japanese resource buyers thus i n h i b i t s resource s e l l e r s from r e c e i v i n g adequate returns f o r the r e g i o n a l s t a p l e . One of the most important ways through which the Japanese strategy of resource procurement serves to increase the r i s k s a s s o c i a t e d w i t h s t a p l e a c t i v i t y i s t h e i r encouragement of over-capacity on the part of resource s u p p l i e r s . This i s accomplished i n the case of the c o a l i n d u s t r y by w r i t i n g c o n t r a c t s f o r more co a l than Japanese s t e e l i n t e r e s t s can buy. I t should be remembered that such "long-term c o n t r a c t s " are o f t e n instrumental i n a l l o w i n g resource developers to acquire the needed investment c a p i t a l f o r they are seen as an i n d i c a t i o n of a secure market and consequent p r o j e c t v i a b i l i t y . Thus these c o n t r a c t s play an important r o l e i n g e t t i n g the resource p r o j e c t s t a r t e d . However, as Table 20 showed, the Japanese do not r e q u i r e a l l of the c o a l which they contract to buy and thus these purchasing agreements are not always honoured. Furthermore, any change i n Japanese demand ( r e s u l t i n g from a d e c l i n e i n the demand f o r the f i n a l product or the emergence of a r e l a t i v e l y more e f f i c i e n t producer) w i l l r e s u l t i n cut backs or the p o s s i b l e winding-down of e x i s t i n g c o n t r a c t s . Japanese c o n t r o l over the shipping of the raw m a t e r i a l gives the buyer the power to enforce such cut back d e c i s i o n s . This means that resource developers, to the extent that they used i n i t i a l c o n t r a c t s as a b a s i s f o r mine design and production c a p a c i t y and had been producing to f u l f i l l the terms of such c o n t r a c t s , w i l l bear the cost of unused capacity and unsold c o a l . The owners of the a s s o c i a t e d t r a n s p o r t a t i o n system w i l l be a f f e c t e d by r e v i s e d production l e v e l s and 115 subsequent lowered p a t r o n i z a t i o n of t h e i r s e r v i c e s . These costs w i l l then be t r a n s l a t e d i n t o lessened job s e c u r i t y f o r workers and economic i n s t a -b i l i t y i n the s t a p l e r e g i o n . F i n a l l y , i f the s t a t e was involved i n c a r r y i n g or s u b s i d i z i n g the costs of i n f r a s t r u c t u r e development i n the resource r e g i o n , expected returns on investment w i l l be lowered due to decreased tax revenues. I t may be seen that the absence of equity investment, the encouragement of a number of competing s u p p l i e r s , and the manipulation of purchasing c o n t r a c t s are mutually r e i n f o r c i n g features of the Japanese strategy which e f f e c t i v e l y s h i f t the r i s k s of resource development onto the owners of the venture and the i n h a b i t a n t s of the s t a p l e region while achiev-ing the.primary goal of ensuring a secure i n f l o w of raw m a t e r i a l s f o r Japanese i n d u s t r y . I f , as has been suggested, part of the motivation behind the c r e a t i o n of the northeast c o a l p r o j e c t was a d e s i r e by the Japanese to encourage over-capacity and an increased number of competing s u p p l i e r s i n western Canada, these f i n d i n g s do not bode w e l l f o r the economic f u t u r e of t h i s resource venture. Northeast coal may w e l l prove to be a c o s t l y example of the r i s k s engendered by the Japanese resource procurement s t r a t e g y , aggra-vated by f a u l t y government decision-making. Since the p r o j e c t was f i r s t announced questions have been r a i s e d as to whether there i s s u f f i c i e n t market demand to j u s t i f y the investment i n . . . 4 t h i s new and i s o l a t e d c o a l r e g i o n . Nevertheless, government and business i n t e r e s t s have proceeded with the venture. The B.C. and f e d e r a l governments are i n v e s t i n g $1.3 b i l l i o n to develop the new townsite, new p o r t , r a i l w a y s , roads, and power l i n e s , and people have migrated to the region to take part i n the a n t i c i p a t e d economic boom based on coal."' One study c a l c u l a t e s the B.C. government subsidy f o r northeast c o a l to amount to $120 an annual tonne 116 w h i l s t each job i s c o s t i n g the government $400,000 to cr e a t e . Meanwhile, e a r l i e r doubts about the a b i l i t y of the Japanese market to absorb t h i s new s u p p l i e r appear to be v a l i d f o r the Japanese s t e e l m i l l s are seeking to b r i n g down the p r i c e s t i p u l a t e d i n the c o n t r a c t s . ^ The impact of p r i c e and q u a n t i t y cuts on the v i a b i l i t y of the resource venture would be d i s a s -t r o u s : mining companies would not get the expected r e t u r n on t h e i r i n v e s t -ment, lowered production l e v e l s would mean l e s s than a n t i c i p a t e d tax revenues f o r the government, and the workers i n the new town would e x p e r i -8 ence economic i n s t a b i l i t y w i t h no o p p o r t u n i t i e s f o r a l t e r n a t e employment. Turning now to other i m p l i c a t i o n s of the Japanese s t r a t e g y , some comments can be made regarding the r e l a t i o n s h i p of q u a s i - i n t e g r a t i o n be-tween resource buyer and s e l l e r and the extent to which t h i s might lessen the o p p o r t u n i t i e s f o r Canadian manufacturers to supply inputs to the resource venture. As p r e v i o u s l y suggested, q u a s i - i n t e g r a t i o n permits r e g u l a r contact between the two p a r t i e s and access to production information. In so doing i t increases the l i k e l i h o o d that Japanese i n d u s t r i a l i n t e r e s t s p a r t i c i p a t i n g i n the purchasing consortium w i l l be aware of equipment needs and may o f f e r to supply inputs from w i t h i n t h e i r own div e r s e network of business i n t e r e s t s i n Japan. Hay confirms t h i s p o s s i b i l i t y i n acknowledging that one of the b e n e f i t s of m i n o r i t y Japanese equity i n an overseas resource venture i s the opportunity which t h i s provides to c o l l e c t market information and t e c h n o l o g i c a l know-how w i t h which to develop products s u i t a b l e f o r 9 f o r e i g n markets. One such example where a Japanese manufacturer was patronized over a Canadian s u b s i d i a r y of an American company occurred during the awarding of co n t r a c t s f o r st a c k e r - r e c l a i m e r s to be used at the new R i d l e y Terminal c o a l -117 handling port b u i l t f o r the northeast c o a l p r o j e c t . Apparently the $19 m i l l i o n c ontract was awarded to M i t s u b i s h i Canada L t d . f o r reasons of " t i m i n g and technology"; t h i s d e c i s i o n r e s u l t e d i n job and income l o s s f o r Canadians since the Canadian s u b s i d i a r y had i n d i c a t e d that i t would have kept 96 percent of i t s sub-contracts w i t h i n Canada whereas M i t s u b i s h i w i l l keep only 53.2 percent w i t h i n the c o u n t r y . ^ A r e p r e s e n t a t i v e of the sub-s i d i a r y stated that no s p e c i f i c reason was given f o r the r e j e c t i o n Of the b i d , nor was the company allowed an opportunity to improve i t s b i d and r e -tender."^ One cannot conclude from t h i s that M i t s u b i s h i was patronized as a favour to the Japanese resource buyers. However, i t can be suggested that the q u a s i - i n t e g r a t i v e r e l a t i o n s h i p w i t h resource s e l l e r s which charac-t e r i z e s the Japanese strategy may w e l l f a c i l i t a t e access f o r Japanese manufacturers to the Canadian market f o r resource equipment. F i n a l l y , some remarks can be o f f e r e d concerning the Japanese resource procurement strategy and the p o s s i b i l i t y f o r exporting raw m a t e r i a l s i n f u r t h e r processed form from s t a p l e regions. The l i t e r a t u r e on Japanese economic p o l i c y r e f e r s to recent moves to r e s t r u c t u r e Japanese ind u s t r y 12 and encourage greater o f f s h o r e resource processing. However, upon c l o s e r examination i t appears that t h i s i s only o c c u r r i n g i n s p e c i f i c i n d u s t r i e s and f o r s p e c i f i c reasons. Perhaps the most important motivation i s the r i s e i n the cost of imported f u e l s and hence the increased costs a s s o c i a t e d . 1 3 . . . w i t h processing i n Japan i t s e l f . One of the Japanese i n d u s t r i e s which has been most a f f e c t e d by increased o i l p r i c e s i s aluminum r e f i n i n g ; t h i s i s a l s o one of the major examples where Japanese i n d u s t r i a l i n t e r e s t s have encouraged greater processing of the raw m a t e r i a l i n overseas resource 14 regions and are prepared to purchase the goods i n semi-processed form. The r a t i o n a l e behind t h i s move i s a d e s i r e to take advantage of abundant 118 yet inexpensive f u e l and power sources which can be found i n the same l o c a -t i o n as the raw m a t e r i a l . For example, a h y d r o - e l e c t r i c power pla n t and aluminum r e f i n i n g p l a n t are being b u i l t i n Indonesia to produce aluminum ingots f o r the Japanese market, and two huge aluminum smelters are being developed i n A u s t r a l i a to e x p l o i t bauxite deposits and energy supplies."''^ Increased l o c a l processing of raw m a t e r i a l s destined f o r Japan i s not being witnessed i n a great number of other i n d u s t r i e s . In the case of copper mining, high energy costs have a f f e c t e d the competitive p o s i t i o n of smelting a c t i v i t y but apparently i t s t i l l remains more economical f o r the Japanese to use domestic c a p a c i t y and thus they are r e l u c t a n t to see greater copper smelting o c c u r r i n g i n B.C. The Japanese a l s o appear r e l u c t a n t to buy processed products of the p r o v i n c i a l f o r e s t i n d u s t r y . P r o t e c t i o n of the Japanese sawmill i n d u s t r y , surcharges on dressed lumber, and a d e s i r e to maintain t r a d i t i o n a l wood processing methods i n h i b i t s B.C. attempts to export the f o r e s t r y s t a p l e i n a more processed form to J a p a n . ^ As previous-l y i n d i c a t e d i t seems extremely u n l i k e l y that the Japanese s t e e l i n d u s t r y would change i t s p o l i c y toward c o a l s u p p l i e r s and encourage p r o v i n c i a l pro-duction of coke which i t would be prepared to buy. I t i s concluded that the Japanese resource procurement strategy does set c o n s t r a i n t s on the degree of resource processing which i s l i k e l y to occur i n the s t a p l e r e g i o n . Japanese i n d u s t r i a l i n t e r e s t s are b a s i c a l l y concerned w i t h securing supplies of raw m a t e r i a l s from overseas to produce manufactured goods f o r export. The success of the Japanese economy stems from the e f f i c i e n c y of t h i s manufacturing sector and the competitive p o s i t i o n of t h e i r exports i n world trade. As such i t i s u n l i k e l y that Japanese economic planners would encourage l a r g e - s c a l e d e c e n t r a l i z a t i o n of domestic processing c a p a c i t y . Some forward linkages from resource a c t i v i t y 119 are being encouraged in foreign resource regions but only under s p e c i f i c circumstances where that region o f f e r s a cost advantage which renders t r a d i t i o n a l domestic processing uneconomical i n comparison. 120 FOOTNOTES See i n p a r t i c u l a r : Canada, S t a t i s t i c s Canada, c a t . 67-509, Canadian  Imports by Domestic and Foreign C o n t r o l l e d E n t e r p r i s e s , 1978. Joseph R. D'Cruz, " Q u a s i - i n t e g r a t i o n i n Raw M a t e r i a l Markets - The Overseas Procurement of Coking Coal by the Japanese S t e e l Industry" (Ph.D. d i s s e r t a t i o n , Harvard Business School, 1979), a b s t r a c t . Crows Nest Resources 1982: personal communication. See f o r example: Dr. H.N. Halvorson, "P r e s e n t a t i o n on Northeastern B.C. Coal Development to Standing Committee on N a t i o n a l Resources and P u b l i c Works", Oct. 3, 1980. H.N. Halvorson, "The dubious economics of developing northeast c o a l , " i n The Sun, A p r i l 21, 1983, p. A5. I b i d . Rod Nutt, "Northeast c o a l p r i c e f a l l of $14 proposed," i n The Sun, Dec. 24, 1983, p. DI. H.N. Halvorson i n The Sun, A p r i l 21, 1983, p. A5. K e i t h . A . J . Hay and S.R. H i l l , Canada-Japan Trade and Investment (Ottawa Economix I n t e r n a t i o n a l , 1978), p. 105. "Contract sparks row" i n Vancouver Sun, Feb. 18, 1982, p. HI. I b i d . See f o r example: B.C., M i n i s t r y of Industry and Small Business Development, P a c i f i c Rim Export Markets - A B.C. P e r s p e c t i v e , 1981; T. Magaziner and T. Hout, Japanese I n d u s t r i a l P o l i c y , 1980; Terutomo Ozawa, M u l t i n a t i o n a l i s m , Japanese S t y l e , 1979. B.C., M i n i s t r y of Industry and Small Business Development, Economic A n a l y s i s and Research Bureau, " P r o j e c t on Japanese I n d u s t r i a l Strategy and Approach to Economic Cooperation," i n B r i t i s h Columbia's Trade Prospects i n A s i a ( V i c t o r i a , B.C.: M i n i s t r y of Industry and Small Business Development, Province of B.C., 1981), p. 28. I b i d . , p. 29. I b i d . I b i d . , p. 30, 27. I b i d . , p. 30, 31. 121 V I I . CONCLUSION Having discussed the Japanese resource procurement strategy and i t s i m p l i c a t i o n s f o r a s t a p l e resource region I w i l l conclude by focusing on some of my more general f i n d i n g s and r e l a t i n g these to b a s i c questions concerning n a t i o n a l i t y of ownership and the development of l i n k a g e s . Some p o l i c y recommendations are made i n t h i s area. I then suggest a r e v i s e d emphasis i n de a l i n g w i t h s t a p l e economies'and present some p o l i c y d i r e c t i o n s to cope w i t h the p a r t i c u l a r problems posed by the Japanese resource procure-ment st r a t e g y . The f i n a l s e c t i o n deals w i t h the l i m i t a t i o n s of my study and discusses f r u i t f u l areas f o r f u r t h e r research. A. P o l i c y Suggestions Much of the work d e a l i n g w i t h s t a p l e regions and the resource-based nature of the Canadian economy i t s e l f has focused on the need to capture backward and forward linka g e s and on the r o l e of domestic ownership of the resource sector i n f a c i l i t a t i n g such growth. However, the research f i n d -ings presented here i n d i c a t e that some degree of domestic c o n t r o l i s not s u f f i c i e n t to encourage the development of l i n k e d a c t i v i t y . I t i s suggested that s t a t e i n t e r v e n t i o n i s needed to ensure that more of the economic oppor-t u n i t i e s a f f o r d e d by the resource base are taken advantage o f . Based on di s c u s s i o n s w i t h government o f f i c i a l s and c o a l company purchasing agents as w e l l as c o n s u l t a t i o n of secondary sources on mineral p o l i c y , I o f f e r some suggestions to encourage greater domestic input p r o v i s i o n and resource processing. There are two general d i r e c t i o n s which government p o l i c y can pursue to f o s t e r the development of backward linkages from the st a p l e s e c t o r . 122 F i r s t , we can t r y to ensure that resource i n d u s t r i e s are p a t r o n i z i n g e x i s t -ing Canadian equipment manufacturers to the f u l l e s t degree p o s s i b l e ; that i s , make sure that e x i s t i n g c a p a c i t y i s being used. E f f o r t s i n t h i s d i r e c t i o n have been made through the establishment of f e d e r a l and p r o v i n -c i a l procurement p o l i c i e s f o r a l l mega-projects. In B.C., f o r example, the p r o v i n c i a l procurement p o l i c y attempts to ensure that a l l B.C. companies supplying the req u i r e d resource equipment are able to b i d f o r the co n t r a c t s stemming from major resource projects.''' However, these p o l i c i e s are only newly e s t a b l i s h e d (1981) and are not enforceable, as i n d i c a t e d by the example of the^purchase of st a c k e r - r e c l a i m e r s from Japanese manufacturers in s t e a d of Canadian s u p p l i e r s (an i n t e r e s t i n g t o p i c f o r f u r t h e r study would be an examination of the e f f e c t s of these new procurement p o l i c i e s f o r Canadian s u p p l i e r s ) . Second, government p o l i c y could encourage greater development of Canadian input manufacturers; that i s , attempt to increase Canadian c a p a c i t y . Based on my research f i n d i n g s and the co n c l u s i o n that few of the inputs to mining are do m e s t i c a l l y manufactured, I w i l l t r y to develop t h i s idea f u r t h e r and o u t l i n e the bas i c components of such a s t r a t e g y . I t i s obviously impossible at t h i s stage to capture a l l of the back-w a r d l y - l i n k e d a c t i v i t y and manufacture a l l of the inputs to mining i n Canada. Such an attempt would r e q u i r e a massive r e - d i r e c t i o n of investment c a p i t a l , would take years to come to f r u i t i o n , and i s u n l i k e l y to produce a v i a b l e i n d u s t r y which could e f f e c t i v e l y compete w i t h experienced and w e l l -e s t a b l i s h e d operations elsewhere. Yet there does e x i s t a large market f o r mining machinery and economic planners should ensure that Canadian in d u s t r y i s b e t t e r prepared to take advantage of t h i s market opportunity. 123 One way to accomplish t h i s would be to i d e n t i f y areas where Canadian c a p a c i t y i s weak or underdeveloped and provide s t a t e a i d to f a c i l i t a t e growth. This would be a s e l e c t i v e process f o c u s i n g only on those sectors where i t i s f e l t that Canadian c a p a c i t y could be v i a b l y developed; the process of product i d e n t i f i c a t i o n and development would be based on c l o s e c o n s u l t a t i o n between the mining i n d u s t r y and the equipment manufacturers w i t h government serving to i n i t i a t e and f a c i l i t a t e the i n t e r a c t i o n . Such a strategy would have three general components: (1) To be e f f e c t i v e t h i s strategy would r e q u i r e a f i r m d e c i s i o n on the part of government and i n d u s t r y that i t i s both d e s i r a b l e and worth-while to a c t i v e l y develop a greater p o r t i o n of backwardly-1inked a c t i v i t y i n Canada. The mining in d u s t r y must be cognizant of the b e n e f i t s to be experienced from proximity to input manufacturers ( f o r example, greater f a c i l i t y i n a c q u i r i n g replacement p a r t s , r e p a i r s , and s e r v i c e ) . Govern-ments a l s o stand to b e n e f i t from such development through job c r e a t i o n , i n d u s t r i a l growth, and increased tax revenue. As such both p a r t i e s have to be f i r m l y committed to take long-term a c t i o n , f o r h a l f h e a r t e d and p i e c e -meal e f f o r t s are i n e f f e c t u a l . (2) As part of the process of c o n s u l t a t i o n between the various p l a y e r s , the mining companies would be c a l l e d upon to provide information concerning the sectors where Cana*dian goods and s e r v i c e s were not competi-t i v e or were not a v a i l a b l e . This would be followed by d i s c u s s i o n w i t h equipment manufacturers to determine i n which of these areas Canadian ca p a c i t y could be developed or improved. The r o l e of government would be to i n i t i a t e and maintain communication between the two p a r t i e s and to provide f i n a n c i a l a i d to nascent equipment manufacturers where needed. I t should be noted that i n i d e n t i f y i n g these areas i t may w e l l be necessary 124 to ensure that the goods have export p o t e n t i a l . Although the Canadian market f o r mining s u p p l i e s i s l a r g e i n t o t a l , the market f o r i n d i v i d u a l 2 inputs may be small and thus f o r e i g n markets w i l l have to be pursued. (3) F i n a l l y , there would need to be a f i r m commitment by the mining i n d u s t r y to buy from the new Canadian equipment manufacturers i n the i n i t i a l s t a r t - u p phase and provide feedback on performance so that the operations could become e f f i c i e n t producers. P a t r o n i z a t i o n of domestic manufacturing c a p a c i t y during i t s infancy i s c r u c i a l i n g i v i n g the operation the e x p e r i -ence needed to become competitive. This i s w e l l i l l u s t r a t e d by the example of Swan Wooster which was only a small Vancouver-based engineering f i r m u n t i l awarded the contract to b u i l d Roberts Bank. This opportunity gave the company valuable experience and i t i s now one of the major world com-panies designing and b u i l d i n g bulk commodity handling t e r m i n a l s . The n o t i o n of equipment buyer and manufacturer c o n s u l t a t i o n i n i t i a t e d and overseen by government could a l s o be a p p l i e d to the research and develop-ment of new equipment and technology r e l e v a n t to mining. N i c k e l et a l . , i n t h e i r study of the Canadian mining i n d u s t r y , suggest the f o l l o w i n g : More cooperation between mining and i t s s u p p l i e r s might prove u s e f u l , p a r t i c u l a r l y given the s t r u c t u r e of the i n n o v a t i v e process i n mining. T y p i c a l l y the d e f i n i t i o n of the problem comes from the mining company; the supply f i r m then d i r e c t s i t s research e f f o r t s accordingly.3 In attempting to develop forward linkages from the s t a p l e sector one must be more cautious about making a general statement promoting s t a t e i n t e r v e n t i o n f o r there may be a number of problems which government p o l i c y alone cannot overcome. As Payne notes, f u r t h e r resource processing may be p o l i t i c a l l y r e l a t i v e l y easy to encourage v i a j o i n t - v e n t u r e s or s u b s i d i e s 125 but i n s p i t e of s i g n i f i c a n t e f f o r t , no government i n B.C. has yet been 4 p a r t i c u l a r l y s u c c e s s f u l i n t h i s end. There are d i f f e r e n t c o n s t r a i n t s a s s o c i a t e d w i t h d i f f e r e n t minerals and w i t h the various stages i n resource p r o c e s s i n g ; the a b i l i t y of government to encourage forward linkages w i l l vary according to the nature of these c o n s t r a i n t s . ^ In the case of a s t a p l e region producing f o r Japan i t i s c l e a r l y the nature of market demand which i n h i b i t s f u r t h e r domestic processing and i t i s doubtful that govern-ment i n t e r v e n t i o n could change t h i s . Thus c a r e f u l case by case a n a l y s i s i s r e q u i r e d to i d e n t i f y the f a c t o r s i n h i b i t i n g forward l i n k a g e s . Government should intervene only i n s i t u a t i o n s where such a c t i o n can c l e a r l y play a r o l e i n a l l e v i a t i n g those c o n s t r a i n t s . Furthermore, forwardly-1inked a c t i v i t y should be encouraged only when i t i s c l e a r l y v i a b l e . A f e d e r a l d i s c u s s i o n paper on mineral p o l i c y concurs s t a t i n g : ... because of the general l e v e l of tax expenditures and other s u b s i d i e s , governments should determine whether the p u b l i c cost of job c r e a t i o n i n smelting and r e f i n i n g i s worthwhile; . . . f o r each case, other o p p o r t u n i t i e s that pay a higher s o c i a l r a t e of r e t u r n and generate greater employment at lower p u b l i c cost should be considered.^ This point must be kept i n mind when advocating greater s t a t e i n t e r -v e n t i o n to encourage both backward and forward l i n k a g e s . The development of such a c t i v i t y must represent the best use of scarce c a p i t a l resources. An over-emphasis on investment i n l i n k e d a c t i v i t i e s must not lead to the growth of i n e f f i c i e n t i n d u s t r y f o r which a region has no comparative advantage. In the case of the B.C. c o a l i n d u s t r y , f o r example, my f i n d i n g s suggest that attempts to manufacture more domestic mining equipment would encounter a number of obstacles and that coke production i s not f e a s i b l e . 126 In such instances e f f o r t s to develop l i n k a g e s may not be the best p o l i c y d i r e c t i o n to pursue. Instead, a t t e n t i o n should be focused on s t a t e i n t e r -v e n t i o n to b e t t e r manage the s t a p l e i n d u s t r y and a l l e v i a t e the p a r t i c u l a r problems posed by f o r e i g n resource procurement s t r a t e g i e s . In the case of the B.C. c o a l i n d u s t r y and those s t a p l e regions dependent on the export of resources to Japan, the development of an appropriate p o l i c y should have three aims: (1) to strengthen the bargaining p o s i t i o n of the resource s e l l e r s and ensure adequate returns f o r the r e g i o n a l resource, (2) to properly plan the extent and r a t e of growth of the s t a p l e i n d u s t r y , and (3) to c o l l e c t wherever p o s s i b l e the resource rents generated and i n v e s t t h i s income to b e n e f i t the people of the province, who are u l t i m a t e l y the owners of the resource. We need to respond to the Japanese m u l t i p l e - s o u r c i n g strategy which r e s u l t s i n competing s u p p l i e r s being played o f f against each other. This problem becomes p a r t i c u l a r l y acute when competing s t a p l e regions emerge w i t h i n the same province as i s p r e s e n t l y the case f o r c o a l i n B r i t i s h Columbia. Our p o s i t i o n as resource s e l l e r s i n P a c i f i c Rim trade must be strengthened by achieving greater c o o r d i n a t i o n and c o n t r o l of the supply s i d e . To do so we w i l l have to counter i n s t i t u t i o n a l purchasing arrange-ments p r a c t i s e d by the Japanese w i t h changes i n the o r g a n i z a t i o n of s t a p l e producers. One way would be to form what might be termed a "resource c a r t e l " composed of a l l the producers i n the p r o v i n c i a l or n a t i o n a l s t a p l e i n d u s t r y . This would l e s s e n competition and a l l o w resource s u p p l i e r s to n e g o t i a t e the terms of sale to the Japanese as one u n i t e d group. Apparently 127 t h i s has been p r a c t i s e d by c o a l producers i n New South Wales, A u s t r a l i a . Further research a n a l y z i n g the e f f e c t i v e n e s s of t h i s strategy f o r those producers would be h e l p f u l i n developing an appropriate p o l i c y to manage the B.C. c o a l i n d u s t r y . A second option would be to e s t a b l i s h a government marketing board to oversee developments i n the s t a p l e i n d u s t r y and purchase the output from g each p r o v i n c i a l producer to be r e - s o l d to the Japanese. In t h i s way the c o a l producers, f o r example, would be represented as one s e l l i n g u n i t w i t h a set p r i c e at which i t i s w i l l i n g to s e l l i t s product. The aim would be to counter the monopoly p r i c i n g p r a c t i s e d by the Japanese and attempt to achieve a b e t t e r r e t u r n f o r our resources. Government involvement i n resource marketing would provide s e l l e r s w i t h greater leverage i n bargaining and help r a i s e such trade issues to a l e v e l of i n t e r n a t i o n a l diplomacy. This would f o r c e the Japanese to be more cautious i n overextending c o n t r a c t s and then c u t t i n g back on them. The p o s s i b i l i t y of greater communication with competing resource s e l l e r s l o c a t e d i n other c o u n t r i e s should a l s o be considered i n t h i s e f f o r t to achieve greater c o o r d i n a t i o n on the supply s i d e . A government marketing board would help r e a l i z e the second p o l i c y aim f o r i t would be r e s p o n s i b l e f o r overseeing the pace and timing of new resource p r o j e c t s as w e l l as expansions i n the capacity of e x i s t i n g ventures. This should prevent the development of excess capacity and emergence of competing s u p p l i e r s . The board could a l s o c o l l e c t and exchange production information and conduct market a n a l y s i s ; f o r example, before any major new contract i s signed, market research conducted by the board must determine that there i s s u f f i c i e n t long-term demand to warrant production so that resource s e l l e r s do not f a l l prey to Japanese e f f o r t s to create over-128 c a p a c i t y . Such a c t i o n would represent an attempt to respond to the sophis-t i c a t i o n of information gathering systems on the part of the Japanese by greater o r g a n i z a t i o n and sharing of information on the supply s i d e . The board should a l s o make every e f f o r t to encourage market d i v e r s i f i c a t i o n and avoid dependence of the s t a p l e i n d u s t r y on the Japanese market. F i n a l l y , having attempted b e t t e r o r g a n i z a t i o n of the s t a p l e i n d u s t r y and a strengthened b a r g a i n i n g p o s i t i o n to earn higher returns f o r our resources, we must ensure that these returns are used to a l l e v i a t e some of the problems a s s o c i a t e d w i t h s t a p l e economies. Resource rents should be used to avoid over-concentration on the s t a p l e sector and the economic f l u c t u a t i o n s a s s o c i a t e d w i t h changes i n e x t e r n a l demand, the e f f e c t s of which are p a r t i c u l a r l y severe i n those communities dependent on the s t a p l e i n d u s t r y . The research f i n d i n g s presented here i n d i c a t e that we cannot r e l y on f o r e i g n or domestic c o n t r o l l e r s of resource ventures to i n v e s t the income from s t a p l e a c t i v i t y i n promoting economic d i v e r s i f i c a t i o n . The development of an appropriate p o l i c y to b e t t e r manage the s t a p l e i n d u s t r y must include s t a t e i n t e r v e n t i o n to capture resource rents and d i r e c t t h i s c a p i t a l toward p u r s u i t s which would provide greatest b e n e f i t to the p r o v i n c i a l economy as a whole.^ There are a number of ways by which t h i s may be done. Gunton o u t l i n e s some of the p o s s i b i l i t i e s i n c l u d i n g the t a x i n g of resource companies where taxes are set e i t h e r as a percentage of the p r o f i t generated, a percentage of t o t a l revenue, or as a r o y a l t y on the q u a n t i t y of resource p r o d u c e d . ^ A l t e r n a t i v e l y , Payne suggests d i r e c t p u b l i c entrepreneurship where crown corporations are d i r e c t l y i nvolved i n mineral e x p l o r a t i o n , production, and marketing so that the s t a t e can create and r e t a i n the rents from resource development.''"''" As to how these rents should then be used, the general aim 129 would be to d i v e r s i f y the economy away from the dominant s t a p l e export and attempt to achieve greater s o c i a l and economic s t a b i l i t y i n those p a r t i c u l a r communities dependent on s t a p l e production. I t i s d i f f i c u l t to be more s p e c i f i c at t h i s p o i n t ; d e t a i l e d suggestions would r e q u i r e c a r e f u l a n a l y s i s of the p r o v i n c i a l economy and i t s v a r i o u s regions to determine economic o p p o r t u n i t i e s which could be developed to provide v i a b l e long-term, p r o f i t -generating, and j o b - c r e a t i n g p r o j e c t s . B. Concluding Comments In d i s c u s s i n g the l i m i t a t i o n s of t h i s study c e r t a i n problems were encountered i n t e s t i n g some of the hypotheses and producing c o n c l u s i v e evidence concerning the i m p l i c a t i o n s of the Japanese resource procurement s t r a t e g y . One of the main d i f f i c u l t i e s was i n t e s t i n g the hypothesis con-cerning the i m p l i c a t i o n s of domestic c o n t r o l of the s t a p l e sector f o r the development of backward l i n k a g e s . In a t h e o r e t i c a l context i t i s q u i t e s t r a i g h t f o r w a r d to suggest a r e l a t i o n s h i p between these two f a c t o r s but i t i s more c h a l l e n g i n g to a c t u a l l y show t h i s e m p i r i c a l l y . The attempt was complicated by the f a c t that the case study,chosen does not represent a c l e a r example of a dom e s t i c a l l y c o n t r o l l e d s t a p l e s e c t o r . The co a l indus-t r y of the E l k V a l l e y includes both f o r e i g n and do m e s t i c a l l y c o n t r o l l e d companies; furthermore, one of these (B.C. Coal) has only r e c e n t l y come under domestic c o n t r o l w h i l s t another (Byron Creek C o l l i e r i e s ) was r e c e n t l y purchased by f o r e i g n i n t e r e s t s . This posed a problem when attempting to t e s t the f i r s t hypothesis which compared purchasing patterns of domestic and f o r e i g n c o n t r o l l e d f i r m s . Only one of the four companies has a strong h i s t o r y of domestic ownership and that company (Fording Coal Ltd.) d i d not complete the forms regarding source of i n p u t s . B.C. Coal L t d . completed 130 the forms but may s t i l l be f o l l o w i n g the purchasing patterns e s t a b l i s h e d by i t s previous f o r e i g n owner. I t i s f o r these reasons and the f a c t that the sample s i z e i s extremely small that the r e s u l t s of t h i s part of the study comparing purchasing patterns are not p a r t i c u l a r l y u s e f u l . There was a l s o a problem i n attempting to l i n k the evidence concern-ing the development of backward linkage s back to the question of domestic c o n t r o l of the st a p l e s e c t o r . For example, how can one i s o l a t e the f a c t o r s r e s p o n s i b l e f o r the underdevelopment of domestic input manufacturing f o r c o a l mining? To what extent has f o r e i g n c o n t r o l of part of the c o a l i n d u s t r y c o n t r i b u t e d to t h i s and to what extent would a stronger degree of domestic c o n t r o l change t h i s s i t u a t i o n ? I d e a l l y , to examine the r e l a t i o n s h i p between domestic c o n t r o l of a s t a p l e i n d u s t r y and the development of d e s i r e d linkage e f f e c t s one would need to compare the linkages generated by an indu s t r y w i t h a strong h i s t o r y of domestic c o n t r o l w i t h those stemming from an ind u s t r y under c l e a r and long-term f o r e i g n c o n t r o l . S i m i l a r problems i n p r o v i d i n g c o n c l u s i v e evidence were encountered when examining the i m p l i c a t i o n s of the Japanese m u l t i p l e - s o u r c i n g strategy and the e f f e c t s of consortium resource purchasing. I t i s d i f f i c u l t to produce hard data which e f f e c t i v e l y "proves" that Japanese resource buyers play s u p p l i e r s o f f against each other or that operations i n each supplying region stand to be a f f e c t e d by changes i n the competitive p o s i t i o n of other s u p p l i e r s . Instead I had to r e l y on statements from the resource s u p p l i e r s themselves and d e s c r i p t i o n s of past i n c i d e n t s where a s u p p l i e r may have b e n e f i t t e d or s u f f e r e d from the behaviour of i t s competitors. Likewise i t f o l l o w s t h e o r e t i c a l l y that consortium resource purchasing on the part of the Japanese allows monopoly p r i c i n g ; however, i t i s f a r more d i f f i c u l t to i l l u s t r a t e i n q u a n t i t a t i v e terms how a b e t t e r resource p r i c e could be 131 obtained i f s u p p l i e r s were able to deal w i t h i n d i v i d u a l Japanese resource buyers. F i n a l l y , data l i m i t a t i o n s i n h i b i t e d the c a l c u l a t i o n of f i s c a l l i n k a g e s and the resource rent component generated by the E l k V a l l e y c o a l i n d u s t r y . I t would have been i n t e r e s t i n g to discover the s i z e of rents being generated (although due to the current downturn the rents would not be large) and the economic sectors and geographic regions i n which t h i s income was subsequently inv e s t e d . Nevertheless i t i s f e l t that the surrogate examples do i l l u s t r a t e that we cannot depend on f o r e i g n or domestic c o n t r o l l e r s of s t a p l e i n d u s t r i e s to i n v e s t the income generated from the e x p l o i t a t i o n of a commonly-held resource i n ways which would a l l e v i a t e the problems of s t a p l e economies and generate more sustained r e g i o n a l economic development. I t should be pointed out that my p o l i c y suggestions are p r e l i m i n a r y i n nature and r e q u i r e f u r t h e r research. The aim of the study was not to produce p o l i c y recommendations but r a t h e r to i n v e s t i g a t e the i m p l i c a t i o n s of the Japanese resource procurement strategy f o r s t a p l e resource regions. However, having concluded that the strategy produces a number of new problems and challenges f o r s t a p l e regions i t seemed u s e f u l to o f f e r some pr e l i m i n a r y suggestions which might form the b a s i s f o r f u r t h e r p o l i c y d i s -cussion and i n v e s t i g a t i o n . Another area f o r f u r t h e r research suggested by the f i n d i n g s of my study i s a thorough a n a l y s i s of the new northeast c o a l p r o j e c t and the s t a p l e s region being created i n northern B.C. We need to c l o s e l y monitor t h i s p r o j e c t over the next few years to determine i f the p r e d i c t i o n s of t h i s study and others prove t r u e . I f so, f u r t h e r evidence concerning the i m p l i c a t i o n s of the Japanese resource procurement strategy and the need f o r e f f e c t i v e p o l i c y a c t i o n w i l l be generated. The r o l e played by Japanese 132 m i n o r i t y i n v e s t o r s i n a resource p r o j e c t was not d i r e c t l y addressed i n my study and i s more important i n the northeast p r o j e c t where Japanese i n t e r e s t s c o n t r o l about 40 percent of the l a r g e s t mining company, Quintette 12 Coal L t d . A study of northeast c o a l should include an examination of the r o l e and i n f l u e n c e of the Japanese partners i n the j o i n t - v e n t u r e ; f o r example, how much input do they have i n t o production d e c i s i o n s concerning items such as equipment purchases, mine c a p a c i t y , and resource p r i c e ? F i n a l l y , we need to b e t t e r monitor the extent and nature of Japanese investment i n B.C. as w e l l as the e f f e c t s of having many of our resource i n d u s t r i e s dependent on the Japanese market. There appears to be l i t t l e a n a l y t i c a l and p o l i c y o r i e n t e d research being conducted on the important economic t i e s l i n k i n g B.C. and Japan. This study represents an a d d i t i o n to that work and h o p e f u l l y a u s e f u l one i n i t s attempt to o u t l i n e some of the i m p l i c a t i o n s of Japanese involvement i n the co a l i n d u s t r y i n south-eastern B.C. We need to examine other s t a p l e i n d u s t r i e s such as f o r e s t r y and f i s h i n g to see i f the c h a r a c t e r i s t i c s of Japanese involvement are s i m i l a r and i f the r e s u l t s of t h i s involvement corroborate the f i n d i n g s presented here. Such research would add to our knowledge base and a i d i n the development of e f f e c t i v e p o l i c y to b e t t e r manage our st a p l e i n d u s t r i e s and respond to the problems posed by the Japanese resource procurement st r a t e g y . Without such a c t i o n s t a p l e regions such as the E l k V a l l e y are doomed to continue over-expanding ca p a c i t y i n response to i n f l a t e d Japanese demand, competing i n t e n s e l y to s e l l to a monopolistic buyer, and then i n c u r r i n g a l l the costs of con t r a c t cut backs i n i t i a t e d by that buyer. 133 FOOTNOTES 1. M i n i s t r y of Industry and Small Business Development 1982: personal communicat i o n . 2. P.E. N i c k e l et a l . , Economic Impacts and Linkages of the Canadian  Mining Industry (Kingston: Centre f o r Resource Studies, Queens U n i v e r s i t y , 1978), p. 118; and Fording Coal L t d . 1982: personal communication. 3. N i c k e l et a l . , p. 122. 4. Raymond W. Payne, "Coping w i t h the Japanese Connection: Lessons from the Mining Industry i n B.C." (Paper presented to the Canadian Regional Science A s s o c i a t i o n , Vancouver, June 1983), p. 33. 5. N i c k e l et a l . , p. 125. 6. Canada, Energy, Mines and Resources, M i n e r a l P o l i c y - A D i s c u s s i o n Paper, 1981, p. 109. 7. Ben Smith, "The Japanese Connection - Ne g o t i a t i n g A Two-Way S t r e e t , " i n A u s t r a l i a ' s Resources Future, ed. Peter Hastings and Andrew Farran (Melbourne: Thomas Nelson Party L t d . , 1978), p. 125. 8. Payne, p. 36. 9. I b i d . , p. 35. 10. Thomas I . Gunton, Resources, Regional Development and P u b l i c P o l i c y :  A Case Study of B r i t i s h Columbia (Ottawa: Canadian Centre f o r P o l i c y A l t e r n a t i v e s , 1982), p. 23. 11. Payne, p. 35, 36. 12. 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Canadian Mines Handbook, 1982-83. Toronto: Northern Miner Press L t d . , 1982. Wright, Richard. "Foreign Investment Between Neighbours: Canada and Japan." Canadian P e r s p e c t i v e s on Economic R e l a t i o n s w i t h Japan. Edited by K e i t h A.J. Hay. Montreal: I n s t i t u t e f o r Research on P u b l i c P o l i c y , 1980. Yoshino, M.Y. "Japanese Foreign D i r e c t Investment." The Japanese Economy  i n I n t e r n a t i o n a l P e r s p e c t i v e . Edited by I s i a h Frank. Baltimore: Johns Hopkins U n i v e r s i t y Press, 1975. APPENDIX A: Coal Mining Statistics for Elk Valley Region, 1898-1979. (production figures are in tonnes; employment figures include both wage earners and salaried employees) 1898 1899 1900 1901 19022 1903 1904 (A) Coal Production1 9,334 103,000 206,803 379,355 393,961 589,888 662,685 Coke Production 361 30,000 65,915 111,683 107,837 149,764 218,857 Volume of coal for Canadian markets n.a. n.a. n.a. n.a. 111,701 173,949 168,980 Volume of coal for U.S. n.a. n.a. n.a. n.a. 101,776 146,010 118,188 Volume of coal for Japan _ _ _ _ _ _ _ Volume of coal for other foreign markets _ _ _ _ _ _ _ Volume of coke for Canadian markets n.a. n.a. n.a. n.a. 81,073 122,006 119,004 Volume of coke for U.S. n.a. n.a. n.a. n.a. 26,764 27,758 97,690 (B) Number employed n.a. 450 477 989 984 1,271 1,439 Coal Production Coke Production Volume of coal for Canadian markets Volume of coal for U.S. Volume of coal for Japan Volume of coal for other foreign markets Volume of coke for Canadian markets Volume of coke for U.S. Number employed APPENDIX A (continued) 1905 1906 1907 19082 1909 1910 19112 831,933 720,449 876,731 883,205 923,865 1,365,119 442,057 256,125 189,385 206,541 234,869 245,017 215,696 66,005 148,939 150,793 218,221 200,908 136,406 182,578 95,139 246,002 230,863 291,410 266,829 353,389 751,087 204,894 145,044 134,646 140,987 206,413 205,391 204,947 66,034 113,337 53,400 59,890 34,196 40,478 8,730 1,267 1,490 1,745 2,290 2,524 2,427 3,111 2,427 APPENDIX A (continued) 1912 1913 1914 1915 1916 1917 1918 Coal Production1 1,261,212 1,331,725 955,183 852,572 882,270 551,751 732,864 Coke Production 264,333 286,045 234,577 240,421 240,121 129,499 164,080 Volume of coal for Canadian markets 231,076 287,410 140,094 82,594 75,319 73,797 77,642 Volume of coal for U.S. 551,742 527,620 389,383 370,020 386,953 225,847 342,218 Volume of coal for Japan - - - - - - -Volume of coal for other foreign markets - _ _ _ _ _ Volume of coke for Canadian markets 213,041 236,465 177,853 215,982 207,413 116,252 147,725 Volume of coke for U.S. 50,257 50,626 54,313 24,597 34,377 12,711 17,404 Number employed 2,410 2,666 2,397 1,748 1,674 1,481 2,327 (A) Coal Production1 Coke Production Volume of coal for Canadian markets Volume of coal for U.S. Volume of coal for Japan Volume of coal for other foreign markets Volume of coke for Canadian markets Volume of coke for U.S. (B) Number employed APPENDIX A (continued) 1919 1920 1921 1922 1923 19242 1925 558,806 847,389 759,755 554,361 740,531 273,518 854,480 57,067 67,792 59,434 41,400 58,919 30,615 75,185 65,927 205,076 104,261 138,735 236,796 128,861 431,206 373,348 479,342 495,331 333,451 353,725 70,674 249,436 48,996 35,805 41,878 25,742 34,818 22,687 53,153 8,134 31,718 18,092 15,524 23,564 8,232 21,936 1,369 1,582 1,774 1,538 1,434 1,147 1,466 APPENDIX A (continued) 1926 1927 1928 1929 1930 1931 1932 Coal Production1 848,448 907,519 1,001,523 886,706 689,236 661,426 587,875 Coke Production 92,137 86,855 61,964 n.a. 65,848 65,264 29,452 Volume of coal for Canadian markets 418,724 445,478 587,548 474,607 456,933 481,051 466,126 Volume of coal for U.S. 197,233 271,995 240,023 231,655 76,752 43,023 27,665 Volume of coal for Japan - - - - - - -Volume of coal for other foreign markets - ' - - -Volume of coke for Canadian markets 65,841 63,936 48,002 n.a. 43,176 48,592 16,597 Volume of coke for U.S. 26,296 21,919 13,902 n.a. 22,672 16,672 12,855 Number employed 1,431 1,494 1,621 1,503 1,252 1,211 1,001 APPENDIX A (continued) 1933 1934 1935 1936 1937 1938 1939 Coal Production1 477,677 627,619 407,110 470,606 459,136 434,068 561,958 Coke Production 5,906 21,887 24,375 30,392 43,012 48,814 48,501 Volume of coal for Canadian markets 409,237 505,079 338,200 362,210 319,318 293,364 384,706 Volume of coal for U.S. 18,588 23,532 23,091 38,565 43,018 47,400 57,820 Volume of coal for Japan _ _ _ _ _ _ Volume of coal for other foreign markets _ _ _ _ _ _ _ Volume of coke for Canadian markets 451 15,278 8,812 15,706 18,933 25,283 26,531 Volume of coke for U.S. 4,455 6,609 15,563 14,686 24,079 23,531 21,970 Number employed 698 754 819 606 628 693 732 APPENDIX A (continued) 1940 1941 1942 1943 1944 1945 1946 Coal Production1 776,518 1,026,053 1,047,713 927,482 1,120,665 869,647 862,669 Coke Production 60,437 82,325 86,454 78,585 74,036 63,188 69,638 Volume of coal for Canadian markets 548,412 731,015 719,333 600,428 745,197 587,282 557,032 Volume of coal for U.S. 74,690 84,632 126,580 154,239 156,225 111,928 108,094 Volume of coal for Japan - - - - - - -Volume of coal for other foreign markets ' - - -Volume of coke for Canadian markets 38,862 52,588 55,230 43,247 38,702 35,176 32,688 Volume of coke for U.S. 21,575 29,737 31,224 35,338 35,334 28,012 36,950 Number employed 731 921 864 1,150 1,179 1,067 1,083 Coal Production 1 Coke Production Volume of coal for Canadian markets Volume of coal for U.S. Volume of coal for Japan Volume of coal for other foreign markets Volume of coke for Canadian markets Volume of coke for U.S. Number employed APPENDIX A (continued) 1947 1948 1949 1950 1951 1952 1,162,426 1,289,185 1,238,576 1,138,389 1,249,501 1,198,293 106,523 103,371 151,141 136,740 172,449 177,266 735,851 798,485 1,242,979 752,953 811,733 761,470 133,219 192,045 105,442 72,362 77,936 60,601 41,965 39,601 64,558 63,770 1,215 1,326 83,893 78,028 67,248 68,712 1,129 1,176 92,984 104,908 79,465 77,533 1,101 1,045 APPENDIX A (continued) 1953 1954 1955 1956 1957 1958 1959 Coal Production1 1,255,620 1,169,788 1,164,438 1,302,584 994,635 691,642 597,540 Coke Production 166,579 172,635 183,946 198,675 148,805 161,241 129,162 Volume of coal for Canadian markets 816,696 783,785 686,678 793,601 585,767 333,575 256,494 Volume of coal for U.S. 62,169 36,296 116,447 93,499 91,767 68,300 40,097 Volume of coal for Japan _ _ _ _ _ _ 62,683 Volume of coal for other foreign markets - - - - - -Volume of coke for Canadian markets 99,757 90,857 117,945 128,276 77,026 87,515 69,683 Volume of coke for U.S. 66,822 81,778 66,946 70,399 71,779 73,726 59,479 Number employed 1,147 1,095 1,136 1,048 995 725 724 Coal Production Coke Production Volume of coal for Canadian markets Volume of coal for U.S. Volume of coal for Japan Volume of coal for other foreign markets Volume of coke for Canadian markets Volume of coke for U.S. Number employed APPENDIX A (continued) 1960 743,979 139,041 179,925 20,128 272,729 72,304 66,737 786 1961 932,191 160,703 253,300 9,041 375,487 89,034 71,669 797 1962 823,785 152,885 197,584 3,610 331,095 79,703 73,182 630 1963 883,303 154,843 188,809 1,799 367,331 76,770 78,073 611 1964 1,050,286 149,759 243,719 2,055 393,491 76,218 73,541 607 1965 1,058,446 167,271 288,844 998 402,693 96,059 71,212 562 1966 1,058,679 173,336 202,859 1,171 376,249 94,192 79,144 522 APPENDIX A (continued) 19672'3 1968 1969 1970 1971 19724 19732 Coal Production1 946,224 1,107,258 1,084,940 3,480,631 5,602,000 6,552,155 7,772,070 Coke Production n.a. n.a. n.a. n.a. n.a. n.a. n.a. Volume of coal for Canadian markets 252,061 244,586 231,557 430,497 74,367 70,781 74,690 Volume of coal for U.S. 10,266 660 37,581 11,083 754 302 224 Volume of coal for Japan 407,198 449,845 326,184 1,786,855 4,063,778 5,695,028 7,306,327 Volume of coal for other foreign markets - 128,785 207,101 38,876 Volume of coke for Canadian markets n.a. n.a. n.a. n.a. n.a. n.a. n.a. Volume of coke for U.S. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Number employed 446 544 695 1,270 1,457 1,969 2,180 APPENDIX A (continued) (A) Coal Productions-Coke Production Volume of coal for Canadian markets Volume of coal for U.S. Volume of coal for Japan Volume of coal for other foreign markets Volume of coke for Canadian markets Volume of coke for U.S. 1974 n .a. 10,514 n .a. n.a. 1975 1976' 1977 1978 n .a. n.a. n.a. n .a. 194,420 490,125 301,432 312,987 463,970 2,877 321 1,783 3,791 n .a. n.a. n .a. n.a. n .a. n .a. n .a. n.a. 1979 8,531,941 9,542,100 7,498,155 8,580,418 9,093,776 10,583,425 n .a. 773,026 7,630,659 7,706,993 6,429,299 6,865,306 7,019,275 7,911,170 459,786 465,005 640,215 1,089,118 1,676,941 1,720,428 n .a. n.a. (B) Number employed 2,498 2,647 2,627 2,868 2,983 n.a. NOTES: These are "raw coal" production figures; some of this coal is then used to produce coke. A year when mine disasters or strikes affected production. Coke was s t i l l produced from 1967-1981 but the production figures do not appear in the Annual .Reports of the Minister of Mines and Petroleum Resources. Coal production figures changed in 1972 from "raw coal" to "clean coal" masking major changes in production levels between 1971 and 1972. SOURCES: Compiled from: B.C., Department of Mines, Annual Report of the Minister of Mines, 1898-1959 editions and Department of Mines and Petroleum Resources, Minister of Mines and Petroleum  Resources Annual Report, 1960-1977 editions, and Department of Energy, Mines and Petroleum Resource. Annual Report of the Ministry of Energy, Mines and Petroleum Resources, 1977-1979 editions. 154 APPENDIX B MAIN STAGES INVOLVED IN THE MINING AND PREPARATION OF COAL Surface Coal Mining (a) F i r s t d r i l l i n g and b l a s t i n g occurs to expose the co a l seams. Large r o t a r y d r i l l s produce b l a s t h o l e s which are f i l l e d w i t h e x p l o s i v e s to loosen the rock overburden. (b) Trucks and e l e c t r i c shovels (e.g. a 200 tonne truck matched with a 25 cubic yard e l e c t r i c shovel) are used to haul the loosened rock to d i s p o s a l areas. (c) Coal recovery begins and b u l l d o z e r s are used to move the co a l to a lo a d i n g p o i n t . There the c o a l i s loaded onto 100 or 200 tonne trucks by front-end l o a d e r s . The trucks transport the co a l to a c e n t r a l breaker s t a t i o n where i t i s crushed and sent on a conveyor b e l t to storage s i l o s at the pre p a r a t i o n p l a n t . (d) Throughout the mining process haul roads must be maintained to keep equipment and t i r e costs at a minimum. Underground Coal Mining - - Machines known as continuous miners (equipped w i t h spinning c y l i n d e r s or d i s k s studded w i t h metal teeth) are used to cut tunnels which are then supported by s t e e l arches. H y d r a u l i c monitors using a high pressure water j e t dislodge the co a l which i s then c a r r i e d away i n s t e e l flumes to a dewatering p l a n t on the surface. 155 (3) Preparation Plant Procedure The raw c o a l i s conveyed on b e l t s from the storage s i l o s to the wash plant where i t i s screened and washed to produce clean c o a l . The c o a l i s then d r i e d and conveyed to clean c o a l s i l o s from which i t i s loaded onto u n i t t r a i n s destined f o r Roberts Bank. Residue from the washing procedure i s dumped i n t o adjacent s e t t l i n g ponds. SOURCE: Coal A s s o c i a t i o n of Canada, Coal i n Canada, n.d. and K a i s e r Resources, "Coal Mining and Processing i n B r i t i s h Columbia," n.d. 156 APPENDIX C MAIN STAGES INVOLVED IN THE HANDLING OF COAL AT  ROBERTS BANK PORT (a) T r a i n reaches port and enters the dumping s t a t i o n where the contents of each u n i t car are a u t o m a t i c a l l y dumped. A r o t a r y dumper with a re m o t e l y - c o n t r o l l e d indexing arm l i f t s each car and empties the co a l onto a hopper. Coal i s then transported on a conveyor b e l t to one of the s t o c k p i l i n g areas, or the s h i p l o a d i n g system. (b) I f the c o a l i s being s t o c k p i l e d the conveyor b e l t s w i l l feed the co a l to one of three huge stacker r e c l a i m e r s which can s t o c k p i l e c o a l at the r a t e of 4,000 tonnes an hour. (c) The stacker r e c l a i m e r s are al s o used to r e c l a i m c o a l and convey i t to any of the three shiploaders which then load the co a l d i r e c t l y onto the ship's h o l d . SOURCE: Westshore Terminals L t d . , "Westshore Terminals L t d . " n.d. APPENDIX D INTERVIEW QUESTIONS For each piece of equipment please i n d i c a t e on the accompanying forms the l o c a t i o n of your s u p p l i e r and the l o c a t i o n where the piece was o r i g i n a l l y manufactured. (e.g. l o c a l E l k V a l l e y r e g i o n , outside E l k V a l l e y but w i t h i n n a t i o n a l economy, USA, or elsewhere). For each of the r e t a i l and commercial s e r v i c e s r e l a t e d to mining please i n d i c a t e on the accompanying form the l o c a t i o n of your sup-p l i e r (e.g. l o c a l E l k V a l l e y r e g i o n , outside E l k V a l l e y but w i t h i n B.C., outside B.C. but w i t h i n Canada, or elsewhere). At what stage of processing i s the c o a l mined by your company when i t leaves the E l k V a l l e y ? What p o s s i b i l i t i e s are there f o r f u r t h e r processing w i t h i n the l o c a l region? What are the a t t i t u d e s of the Japanese purchasers toward f u r t h e r processing? How many co u n t r i e s do you supply with c o a l and what percentage of t o t a l production goes to each? Is a l l the co a l you mine so l d on long-term contract? Who are your long-term c o n t r a c t s with? How long does each co n t r a c t l a s t and what are the terms of each co n t r a c t w i t h regard to p r i c e and quantity? Who sets the p r i c e and qu a n t i t y of the co a l and how o f t e n do these f i g u r e s change? What have your annual production l e v e l s been f o r each year of operation? Do you f e e l that long-term c o n t r a c t s w i t h the Japanese engender s t a b i l i t y of production and s t a b i l i t y of p r i c e ? How have your operations been a f f e c t e d by the recent cut backs by Japanese purchasers? Have there been any cut backs before now? 158 What i s the s i z e of your labour f o r c e and how has i t changed f o r each year of operation? How has labour been a f f e c t e d by recent cut backs i n cont r a c t s by the Japanese? Who are your major competitors f o r the Japanese market? How does t h e i r c o a l q u a l i t y , labour c o s t , resource p r i c e , and transport cost compare w i t h yours? What do you th i n k of the B.C. labour s i t u a t i o n ? Are you aware of any attempts on the part of the Japanese to play one s u p p l i e r against another? I f so, how does t h i s a f f e c t your p o s i t i o n ? What features of the B.C. supply s i t u a t i o n do you t h i n k the Japanese buyers f i n d a t t r a c t i v e ? Do you make any s p e c i a l e f f o r t s to provide u n i n t e r r u p t e d supply to your Japanese customers? Is i t p o s s i b l e f o r a contract to not be renewed because a s u p p l i e r i s not competitive? How f a r can signed c o n t r a c t s be cut? What i s the d i f f e r e n c e between customers who negotia t e i n d i v i d u a l l y and those who negotia t e as a consortium? How does i t a f f e c t your p o s i t i o n to be n e g o t i a t i n g w i t h a powerful and un i t e d Japanese consortium? 159 Manufactured Inputs Used: Location of Supplier Location of Manufacturer Open P i t Equipment 200 tonne trucks 100 tonne trucks 350 tonne trucks 170 tonne trucks Water trucks 35 ton trucks Coal bucket f r o n t end loaders Rock bucket f r o n t end loaders H y d r a u l i c shovel 25 cu. yard e l e c t r i c shovels 15 cu. yard e l e c t r i c shovels 8 cu. yard e l e c t r i c shovels Rotary d r i l l s Crawler & rubber t i r e dozers Graders Main conveyors Truck boxes Hyd r a u l i c c y l i n d e r s 160 Manufactured Inputs Used: Location of Supplier Location of Manufacturer Underground Equipment Continuous miners Pipes Flumes Hyd r a u l i c monitor S h u t t l e cars B e l t conveyors S t e e l arches Feeder-breaker Supply v e h i c l e s Pumps Double-deck v i b r a t i n g screens S l u r r y pumps Gland water pumps Emergency pumps Compressors Exhaust fans Pipe couplings Screens Underground transformers 161 Manufactured Inputs Used: Location of Supplier Location of Manufacturer P r e p a r a t i o n P l a n t Equipment Breakers Heavy media bath HM cyclones F r o t h f l o t a t i o n c e l l s Hydro cyclones Magnetic separators Centrifuges Desliming screens Clean c o a l screens Refuse screens Vacuum f i l t e r s Vacuum pumps Abrasive s l u r r y pumps Heavy media pumps Sump pumps General pumps Scrubber pumps Rotary breaker Conveyor b e l t s Raw co a l s i l o s Exhaust fans f o r dryer Rotary crusher B e l t feeders Clean c o a l s i l o s Refuse b i n 162 Manufactured Inputs Used: Location of Supplier Location of Manufacturer A n c i l l a r y Equipment Mobile cranes Conveyor housing tubes Transformers E l e c t r i c cable & couplings E l e c t r i c motors High pressure pipes High strength s t e e l c u l v e r t s Bins Hoppers Chutes Cables 163 Manufactured Inputs Used: Location of Supplier Location of Manufacturer Wear P a r t s Toothed buckets Blade buckets D r i l l b i t s Tracks Gearing & d r i v e s Wear p l a t e s S k i r t i n g Transmissions Wire rope D i e s e l engines & parts E l e c t r i c a l components B e l t i n g H y d r a u l i c s & hosing Rubber t i r e s Power u n i t components -Cutter heads & components E l e c t r i c motors Transmission 164 Road Equipment Requirements: Location of Supplier Location of Manufacturer C ompactors Water t r u c k s Boom t r u c k s P i c k u p s Crewcabs F u e l t r u c k s Lube t r u c k s L i n e t r u c k s Ambulances Tow t r u c k s F i r e t r u c k s T i r e t r u c k s Dewatering t r u c k s M o b i l e pumps M o b i l e w e l d e r s Compressors Backhoe T o w e r l i g h t s L u b r i c a t i o n s t a t i o n s F o r k l i f t s 165 R e t a i l & Commercial Services Related to mining: Location of Supplier C a t e r i n g Welding Machining Engine r e b u i l d i n g H y d r a u l i c s r e b u i l d i n g Auto/truck r e p a i r I n d u s t r i a l equipment supply Brake s e r v i c e Concrete c o n s t r u c t i o n forms & accessories Ready-mix concrete Contractors equipment r e p a i r , supply Crane r e n t a l d e l i v e r y s e r v i c e E l e c t r i c motor r e p a i r F i r s t a i d equipment & supp l i e s Furnace c l e a n i n g & r e p a i r Heating c o n t r a c t o r s Plumbing c o n t r a c t o r s I n s u l a t i o n c o n t r a c t o r s Mechanical c o n t r a c t o r s P a i n t c o n t r a c t o r s Excavating c o n t r a c t o r s D r i l l i n g c o n t r a c t o r s E l e c t r i c c o n t r a c t o r s Machinery d i s t r i b u t i o n , l e a s e , r e n t a l Radio communications equipment & systems Sand & g r a v e l Haulage Tool sharpening S e c u r i t y s e r v i c e s Steam c l e a n i n g & thawing Sandblasting 166 R e t a i l & Commercial Services Related to mining: (continued) Location of Supplier T i r e sales & s e r v i c e Towing 167 APPENDIX E: FORMS COMPLETED BY B.C. COAL REGARDING SOURCING OF INPUTS AND SERVICES 1 Manufactured Inputs Used: 4-1 O c u O CD •H "rl 4-1 rH CD (X o a. O 3 i-l co 4-1 CU M 3 a o •H . 4-1 4H cfl 3 a c O CD •4 s Open P i t Equipment 200 tonne trucks l o c a l Canada & USA 100 tonne trucks l o c a l Canada & USA 350 tonne tru c k s l o c a l Canada & USA 170 tonne trucks l o c a l Canada & Water trucks l o c a l Canada & USA 35 ton trucks l o c a l Canada & USA Coal bucket f r o n t end loaders l o c a l Canada & USA Canada & USA Rock bucket f r o n t end loaders l o c a l H y d r a u l i c shovel l o c a l France 25 cu. yard e l e c t r i c shovels l o c a l USA 15 cu. yard e l e c t r i c shovels l o c a l USA 30 cu. yard e l e c t r i c shovels l o c a l USA Rotary d r i l l s l o c a l USA Crawler & rubber t i r e dozers l o c a l USA Graders l o c a l USA Main conveyors l o c a l USA Truck boxes l o c a l USA Hy d r a u l i c c y l i n d e r s l o c a l Spain Summary: 100 percent supplied through l o c a l E l k V a l l e y supply o u t l e t s ; approximately 50 percent manufactured i n Canada and 50 percent manu-fa c t u r e d i n USA. 168 Manufactured Inputs Used: Location of Supplier Location of Manufacturer Underground Equipment Canada & USA U.K. & USA Continuous miners Pipes Japan Japan Flumes Canada Canada Hydraulic monitor Japan Japan Shuttle cars USA USA Belt conveyors Canada & UK Japan Canada & UK Japan Steel arches U.K. U.K. Feeder-breaker USA USA Supply vehicles U.K. & USA U.K. & USA Pumps Canada & USA, Japan Canada & USA, Japan Double-deck vibrating screens USA Spain Slurry pumps USA USA Gland water pumps USA USA Emergency pumps USA USA Compressors USA USA Exhaust fans USA & U.K. USA & U.K. Pipe couplings Canada Canada Screens USA USA Underground transformers UK UK Summary: Very l i t t l e supplied in local or national economy; mostly manufactured in USA, U.K., and Japan. 169 Manufactured Inputs Used: Location of Supplier Location of Manufacturer P r e p a r a t i o n P l a n t Equipment Breakers USA USA Heavy media bath USA USA HM cyclones USA USA Frot h f l o t a t i o n c e l l s Vancouver USA Hydro cyclones USA USA Magnetic separators USA USA Centrifuges USA USA Desliming screens Canada USA Clean c o a l screens Vancouver USA Refuse screens Vancouver USA Vacuum f i l t e r s USA USA Vacuum pumps Canada Canada Abrasive s l u r r y pumps Canada USA Heavy media pumps Canada USA Sump pumps Canada USA General pumps Canada & USA Canada & USA Scrubber pumps Canada USA Rotary breaker USA USA Conveyor b e l t s Canada Canada & USA, Japan Raw co a l s i l o s ? Exhaust fans f o r dryer Vancouver Canada Rotary crusher Canada Canada B e l t feeders Canada Canada Clean c o a l s i l o s ? ? Refuse b i n Canada Canada Summary: About 50 percent a v a i l a b l e from Canadian (but not l o c a l ) s u p p l i e r s : almost a l l manufactured i n USA. 170 Manufactured Inputs Used: Location of Supplier Location of Manufacturer A n c i l l a r y Equipment Mobile cranes Canada USA Conveyor housing tubes l o c a l Canada Transformers Canada Canada E l e c t r i c cable & couplings l o c a l USA E l e c t r i c motors Canada & Japan USA & U.K. High pressure pipes Canada Canada High strength s t e e l c u l v e r t s Canada Canada Bins Vancouver Canada Hoppers Vancouver Canada Chutes Vancouver Canada Cables Canada Canada Summary: About 50 percent a v a i l a b l e from p r o v i n c i a l s u p p l i e r s and a l l a v a i l a b l e from Canadian s u p p l i e r s ; about 50 percent manufactured i n Canada and 50 percent i n USA. 171 Manufactured Inputs Used: Location of Supplier Location of Manufacturer Wear P a r t s Toothed buckets l o c a l USA & Canada Blade buckets l o c a l USA D r i l l b i t s B.C. USA Tracks Canada USA Gearing & d r i v e s l o c a l USA & Canada Wear p l a t e s l o c a l Canada S k i r t i n g l o c a l Canada Transmissions l o c a l Canada Wire rope l o c a l Canada D i e s e l engines & parts l o c a l USA E l e c t r i c a l components l o c a l USA B e l t i n g l o c a l Canada, UK,Japan Hydr a u l i c s & hosing l o c a l Canada Rubber t i r e s l o c a l Canada, USA, Japan Power u n i t components l o c a l Canada, USA Cutter heads & components Saskat-chewan USA E l e c t r i c motors Calgary Canada Transmission l o c a l USA Summary: Approximately a l l l o c a l l y s u p p l i e d ; about 75 percent manufactured i n USA and 25 per-cent i n Canada. 172 Road Equipment Requirements: Location of Supplier Location of Manufacturer Compactors l o c a l USA Water trucks Canada USA Boom trucks l o c a l Canada Pickups l o c a l Canada Crewcabs l o c a l Canada Fuel trucks l o c a l Canada Lube trucks l o c a l Canada Lin e trucks l o c a l Canada Ambulances l o c a l Canada Tow trucks l o c a l Canada F i r e trucks Canada Canada T i r e t r u c k s l o c a l Canada Dewatering trucks l o c a l USA Mobile pumps l o c a l USA Mobile welders l o c a l USA Compressors l o c a l Canada, USA Backhoe Canada USA Towerlights Vancouver Vancouver L u b r i c a t i o n s t a t i o n s Canada USA Fork l i f t s Canada USA Summary: About 100 percent l o c a l l y s u p p l i e d ; about 50 percent manufactured i n Canada and 50 percent i n USA. 173 R e t a i l & Commercial Services Related to mining: Location of Supplier C a t e r i n g Vancouver Welding B.C. Coal & l o c a l Machining B.C. Coal & l o c a l Engine r e b u i l d i n g B.C. Coal & l o c a l H y d r a u l i c s r e b u i l d i n g l o c a l Auto/truck r e p a i r B.C. Coal I n d u s t r i a l equipment supply l o c a l Brake s e r v i c e B.C. Coal & Calgary Concrete c o n s t r u c t i o n forms & accessories l o c a l Ready-mix concrete l o c a l Contractors equipment r e p a i r , supply B.C. Coal & l o c a l Crane r e n t a l d e l i v e r y s e r v i c e l o c a l E l e c t r i c motor r e p a i r B.C. Coal & Calgary F i r s t a i d equipment & s u p p l i e s l o c a l Furnace c l e a n i n g & r e p a i r l o c a l Heating c o n t r a c t o r s l o c a l Plumbing c o n t r a c t o r s l o c a l I n s u l a t i o n c o n t r a c t o r s l o c a l Mechanical c o n t r a c t o r s l o c a l P a i n t c o n t r a c t o r s l o c a l Excavating c o n t r a c t o r s l o c a l D r i l l i n g c o n t r a c t o r s A l b e r t a E l e c t r i c c o n t r a c t o r s l o c a l Machinery d i s t r i b u t i o n , l e a s e , r e n t a l l o c a l Radio communications equipment & systems l o c a l Sand & g r a v e l l o c a l Haulage l o c a l Tool sharpening B.C. Coal S e c u r i t y s e r v i c e s l o c a l Steam c l e a n i n g & thawing l o c a l Sandblasting B.C. Coal & l o c a l 174 R e t a i l & Commercial Services Related to mining: (continued) 4-1 O o o a, 3 hJ OO o 3 o CD U 3 O rt 4 J U - l T i r e sales & s e r v i c e l o c a l & Vancouver & Calgary Towing B.C. Coal Summary: About 100 percent l o c a l l y a v a i l a b l e , NOTES: This information i s summarized from the data r e c e i v e d from B.C. Coal L t d . I t i s extremely d i f f i c u l t to be a b s o l u t e l y accurate about the source of each piece of equipment and i t s components but i t i s f e l t that t h i s information i s a good i n d i c a t i o n of the sources of B.C. Coal's inputs and s e r v i c e s as of 1982. SOURCE: B.C. Coal L t d . 1982: personal communication. 175 APPENDIX F: FORMS COMPLETED BY WESTSHORE TERMINALS LTD. REGARDING SOURCING OF INPUTS AND SERVICES 1 Equipment Used: UJ O C w o oi •H -t-l 4-1 t - J tu Cu O CL, o 3 H J CO w m co o H 3 4 J O tt! u-i 3 C ni ,-J S Major Equipment Rotary dumper USA Conveyor b e l t s Canada Japan/USA 62-metre boom stacker r e c l a i m e r Canada Canada/ Japan Trimmer Canada Shiploaders Canada Canada/ Germany Pumping system Canada Tank trucks Canada High volume pumps l o c a l & USA Wear Pa r t s For excavators and stacker reclaimers; Tracks USA & l o c a l Bucketwheel teeth l o c a l Idlers l o c a l & USA B e l t i n g l o c a l , Japan & USA E l e c t r i c a l components l o c a l & USA For conveyor b e l t s ; I d l e r s Canada & USA Sections Canada Wear p l a t e s Canada S k i r t i n g Canada Drives and gearing Canada & USA B e l t i n g Canada & USA & Japan 176 Location of Supplier Location of Manufacturer Others: A u x i l i a r y conveyors Canada Bins Canada Hoppers Canada Chutes Canada E l e c t r i c Motors Canada & USA E l e c t r i c c o n t r o l systems Canada & USA Toothed buckets Canada Blade buckets Canada Transmissions Canada Wire rope Canada D i e s e l engine and parts Canada & USA 177 R e t a i l and Commercial Se r v i c e s : Location of Supplier Location of Manufacturer C a t e r i n g l o c a l Welding l o c a l Machining l o c a l Engine r e b u i l d i n g l o c a l Auto/truck r e p a i r l o c a l I n d u s t r i a l equipment supply l o c a l Brake s e r v i c e l o c a l Compressors l o c a l Compressors l o c a l Contractors equipment r e p a i r , supply l o c a l Crane r e n t a l s e r v i c e l o c a l E l e c t r i c motor r e p a i r l o c a l Mechanical c o n t r a c t o r s l o c a l & p r o v i n c i a l E l e c t r i c a l c o n t r a c t o r s l o c a l & p r o v i n c i a l Machinery d i s t r i b u t i o n , l e a s e , r e n t a l l o c a l Radio communications equipment and systems l o c a l Tool sharpening l o c a l S e c u r i t y s e r v i c e s l o c a l Steam cl e a n i n g and thawing l o c a l F i r s t a i d equipment and su p p l i e s l o c a l NOTES: ^This information i s summarized from the data rec e i v e d from Westshore Terminals L t d . Unfortunately i t i s incomplete because I f a i l e d to d i f f e r e n t i a t e between the l o c a t i o n of the manufac-t u r e r and the s u p p l i e r at the time of the i n t e r v i e w . SOURCE: Westshore Terminals 1982: personal communication. 

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