Group Assignment: BHP BILLITON
International Business Theory & Practice (MGF 5966)

Lecturer/Tutor
Mr. Sharif Rasel

Name & ID
Junaidul Haque – 263 512 50
Dalaphone Phengrattanavong – 266 785 94
Girish Balar – 274 718 53
Maike Nan – 263 994 90

Due Date – Week 11

Introduction
BHP Billiton, which is Broken Hill Proprietary Billiton, is an Anglo-Australian multinational mining and petroleum company. BHP started its operation in Melbourne in 1885 which is one of Australia’s largest and oldest companies, and it focused on development, discovery, production, and marketing of natural resources. In value-added flat steel products, BHP was also a market leader. In 1860, Billiton was established in The Hague, Netherlands. Billiton developed a growing and substantial copper portfolio. It was also a global leader in the metals and mining sector, and a major producer of aluminum and alumina, steaming coal, nickel, and titanium, chrome and manganese ores and alloys. BHP Ltd of Australia and Billion Plc of UK established merger in 2001, and the result was the dual listed company (DLC). BHP Billion becomes one of the world’s largest mining and Petroleum Company. It expands its business in twenty countries, and its major commodities are iron ore, metallurgical coal, energy coal, conventional and unconventional oil and gas, copper, aluminum, manganese, uranium, nickel, and silver. This essay will deeply analysis the effects of BHP Billiton’s sustainability practice on the ownership advantages. It also explains the expansion strategy of BHP Billiton, which is Joint venture and mergers and acquisitions. At last, it will show some risks which are created by the macro and external factors in the mining industry and give some strategies to reduce these risks.

Sustainability Practice to Improve O Advantages in the Mining Sector
The mining industry such as BHP Billiton have encountered constraint to ensure that they adhere to a CSR protocol. CSR is a famous program for the firm to take action for their corporation sustainability. Jenkins and Yakovleva (2006) researched that the firm’s contribution to achieving social, environmental and economic sustainability; all of these and even business activities are described by CSR. Also, Matten and Moon (2008) illustrated that CSR empirically forms of distinctly articulated and convey company practices and policies that manifest responsibility of business for certain of the broader social good.
Extraction and processing of mineral resources are broadly considered as one of the substantial way of disrupting environment undertaken by businesses of the mining industry. Due to the method requires removal of large amount of rock, soil and others to expose the goods, which made energy use for overburden removal increased (Australian Bureau of Statistics, 2016). The major issues in Australian mining are related to climate changes, with according to greenhouse gas emissions have risen up to 12 percent in 2013 which was higher than in the previous year (Australian Bureau of Statistics, 2016). Therefore, the Australian government changed in policy by increasingly imposed environmental taxes to 9 percent in 2013 to 2014 period for mining industry (Australian Bureau of Statistics, 2016), which indicated the impact on the mining firm of BHP Billiton of a drop of 8.7 percent in the financial year 2013 compared to 2012.
According to the case, BHP’s sustainability practices emphasize the importance of safety and health of its people in every view of its business and its way of delivering its social, environmental, ethical and economic responsibilities in a style that is accordingly with its values.
From sustainability practices, supporting communities and show a positive contribution to society can improve O advantage of BHP Billiton in such a way of boosting an organization’s reputation as a brand image (Eden and Dai, 2010). Porter and Kramer (2006) demonstrated that the CSR programs join by the company, provides the firm’s reputation, improve a firm’s image, strengthen its brand and even increase the value of its inventory. Meanwhile, the CSR activities create communities a trustworthy of the organization by contributing benefit for society. For example, BHP Billiton has been a part of communities which made the grant to ANDA project to help vulnerable and displaced people in Colombia. The company also invested $13.4 m in the five rivers conservation project. This will create secure, lasting conservation position for the land and make an endowment for the long-term management of the property in Tasmania, Australia. Those projects have assisted human perception to think positive regarding the organization.
In addition, BHP Billiton works to improve risk profile by enhancing the identification and management of health, safety, society and environment risks. The company has shown a reduction of 5.7 % in potential employee exposures to carcinogens and airborne pollutants. It is their sustainability focus on people to maintain people and operation safe, concentrate on people health and well-being as well as developing their employee. Thus, it is a motive for the BHP Billiton’s employee to bring up the innovation.
Apart from that, BHP Billiton also developed a code of business conduct by initiated land and biodiversity management plans for all of its operations as these included controls to prevent the damage of the environment and compensation influence to biodiversity and ecosystems services. With this plan, the firm has created the value of operational efficiency for environmental sustainability. Business is more productive by efficiently utilize energy, land, water and other natural resources (Porter and Kramer, 2006).
As the firm gain, a loss in 2013 is because Australian government changed policy to increase the environmental tax for the mining industry, it is due to the operation of BHP Billiton had emissions above the limit. If the firm can reduce these emissions as well as protecting the environment, they may pay lesser for environmental tax. This help improve profit of BHP Billiton to get rid of heavily environmental tax.

JV and M&A as Market Expansion Strategy
BHP Billiton has three major expansion strategy to increase global market share and establish long term sale relation which are a joint venture, merger, and acquisition. The approach of BHP Billiton is to own and function low cost, extensive life asset in a different market and geography (Billiton, A disciplined approach. A proven strategy, 2015).
The company have a joint venture with top iron ore producer in Western Australia and hold 85% of the share in those companies (Ashby, 2005). As China is the largest buyer of iron ore, the company have JV with the top four steel producer Wugang, Magang, Shagang, tagging and have a contract of supplying iron ore from Australia plant (Billiton, WHEELARRA JOINT VENTURE, 2004). The mining sectors require huge capital investment; JV helps the company to increase their production capacity at a faster rate. JV help the company in using the competency of the other firm. The mining sector faces a problem with price volatility, as products price are determined by the global market. So JV with steel producer helped to overcome this problem as the sales contract are fixed for the long term.
The second strategy used by BHP Billiton is a merger with the various company. Merger helps the company to expand the sales rapidly. As a new distribution network takes the time to develop, the merger helped them to develop the distribution in North America and Canada and increase their market share more rapidly.
As the company has huge capital and asset, the third strategy is to acquire existing business. One of the major acquisition was of WMC resources which were an Australia mining company in 2005. The acquisition was made to improve nickel and copper business. The acquisition helped to satisfy the demand from China and other countries (Billiton, BHP Billiton Announces US$7.3 Billion Cash Offer For WMC Resources, 2005). The company also acquired Athabasca Potash in Canada and Chesapeake Energy Corporation in the US.
The company has used Uppsala Internalization theory model to expand its business. In the starting, the company had JV with the local iron ore producer and had the majority of stake in the company. This helped them to increase their production unit and also there were no cultural conflicts as the JV was within Western Australia. They also had a JV with a shipping company so that they can reduce the transaction cost. Then they started sales subsidiary by having JV with American company Alcoa Inc. and also with Indonesian Coal Company. The largest buyer of Iron ore were Japan, China, and Korea (Facts, 2015). To cater to these market with the high liability of foreignness, the company started JV with largest steel producer in China and Korea. This helped them to enter the Asian market. JV helped the firm to have a sales contract with large companies, which would overcome the risk of price volatility. The internalization of production through JV, Merger and Acquisition helped the company to rapidly expand their market and become the largest producer after Glencore Xtrata.

Macro & External Factors that Creating Vulnerability
In recent days, the mining industry is facing challenges like social, economic and political but not limited to that. Thus, the intensifying situation foretells the industry that companies should incorporate strategic planning in their operation to face off the upcoming challenges. According to Ramiah (2012) from the report “Tracking the Trends” it is a warning referred as “perfect storm” which means global forces like adamant price inflation, unexceptional price instability of commodity, squeezed regulation and skill labor shortage are coming together which already started suffering the mining industry.

Commodity Prices
The main commodities in the mining industry are aluminum, alumina, copper, iron ore, nickel, ferroalloys, metallurgical and energy coal, oil, gas and liquefied petroleum gas. Commodities like aluminum and copper are usually traded under contract which sometimes are long term (Heber, 2013). The price determination of commodities is regulated through the price variation in global commodity markets which fluctuate because of the ups and down of demand and supply. Especially petroleum, iron and some certain major components in the mining industry (Jamasmie, 2011). Moreover, it is predicted that the price volatility of some commodities will continue for some period in near future. And this volatility in price has already an impact on the gross income and profits time to time.
One of the major buyers is China. As their demand is strong in the market followed by Middle East, Indonesia, India, and Russia. The impact from slow consumption has already started. China has started seeking self-sufficiency in major commodities like iron ore, and copper by investing in existing business and new development in other countries.

Commodity Demand Uncertainty
The demand uncertainty of commodity has already started showing up though much debate has taken place over this matter. It has been assumed that the ambiguity will get stronger if companies start slowing down production because of increased capital cost and also the shareholders interest to receive a more instant return from the investment. The growth forecast of real GDP in China might fall back to an average percent of 8.1 by 2013 to 2016 (Economic Intelligence Unit, 2012). Such indication is slowing down Chinese economy that creates a ripple effect for companies who are in the industry. As a result, such uncertainty makes it challenging for mining businesses to forecast any strategy for upcoming demand. This fluctuation may constraint the future supply and affect in the long term.

Increasing Costs of Doing Business
Australian mining now become more expensive than ever before as the cost of labor and compliance are being driven up. And these are the result of taxes introduction on mining and carbon, royalty hike in Queensland and unexpected price fall of the commodity in the global. According to a recent report, in Australia the production cost for one ton coal is $176 compare to the other producer at $106 whereas Australia used to be the cheapest place to produce coal.

Demand for Heightened Corporate Social Responsibility
To meet the demand of higher level of engagement in CSR, mining company are developing strategies like risk-based corporate social responsibility and follow up major performance indicators. The responsibility for doing social responsibility are now even more than ever before and beyond to the extent what is legally required. Expectations from government and NGO, commitment in a higher level for transparency and operational sustainability are now putting companies into more pressurized situation for doing CSR. Failing to realize these liabilities may result in costly project delays.

Fighting for Funds
As in the global market, investors are moving their way from the mining sector, the debt for financing become tighter and the battle to get fun remain in the market. Such situation lead mining companies to look for capital elsewhere and find interest in the road of joint ventures, mergers, and acquisitions. As a result, giant companies are building up and small companies forced to get out of the industry which has a huge cost to exit.

Skills Shortages
There are still a shortage of skills in the Australia’s mining industry and are predicted to be stayed there for sometimes. According to the report of “The Minerals Council of Australia,” the demand for mining professionals and skilled workers are 86,000 that expected to be fill in by 2020. The inconvenient location of mines become a stance to appeal skilled professionals and workers. Though it can be counter by wage hikes but not a permanent solution for all companies who cannot rise salary periodically.

Price Fallen of Iron Ore
The main raw material of steel industry is iron ore, and the largest buyer in the international market for iron ore is China. But in recent days, the price of iron ore start facing downward since the steel industry is cooling down in China domestically. As a result, it gives a blow in the Australian share market hence the profit of minor decrease because of declining commodity price and share investors adversely affected by this.
China Cools Down
China being a major trader in the global mining industry play the significant role in manipulating the market. Recent days squeezed monetary policy by government and regulation on domestic housing purchase including inflated property prices force to implement measures to cool down property demand. As a result construction work across China slow down and decrease the demand for steel. And as iron ore is the main ingredient of making steel now the price of iron ore has gone down in the international market. Overall china is now going under a slow growth which affecting the global mining industry.

Strategies Firm Should Adopt to Minimize Risks
The mining industry is going through a tough commercial context as commodity prices in a global context have gone done, and major buyers like China is also facing slow economic growth which results them to slow down in buying commodities for their industries where several types of minerals are used as raw materials for the production. Collaboration with the major players in the global market to schedule production in a timely manner to keep the unnecessary cost down in a standard level so that decreased commodity price can be a counter in a moderate level. It will be wise for mining companies to look ahead for other buyers without only depending on China to avoid long-term demand uncertainty. It is important to identify the costs drivers and improve investment project management to enhance energy efficiency and supply chain operation to keep the cost under control. Through providing opportunities like employment focusing on local people, building infrastructure, development program through training, facilities like education and healthcare can serve the purpose of doing corporate social responsibilities to an extent level. Other more effective approaches like providing sponsorship for local university program to train local talent and cross training session for workers are good ways of creating skilled people for the industry as well as for company. In regard to the BHP Billiton case, it is facing several factors that are giving them challenges in their operation in global which can be minimized with a collaboration like merging with a major player in the market. Rio Tinto mining giant proposal for merging with BHP Billiton wasn’t successful, but this could have been a great way to dominate the industry and have some control in the global market in confronting macro and external factors.

References:

Alcoa. (2001, August 19). Alcoa and BHP Billiton Agree to Merge North American Metals Distribution Businesses. Retrieved from Alcoa.com: http://www.alcoa.com/global/en/news/news_detail.asp?pageID=BHP_Billiton&newsYear=2001
Ashby, I. (2005). BHP Billiton Iron Ore – Western Australia.
Billiton, B. (2004). WHEELARRA JOINT VENTURE. Retrieved from Bhpbilliton.com: http://www.bhpbilliton.com/~/media/bhp/documents/investors/news/wheelarrajv.pdf?la=en
Billiton, B. (2005, March 8). BHP Billiton Announces US$7.3 Billion Cash Offer For WMC Resources. Retrieved from Bhpbilliton.com.
Billiton, B. (2015). A disciplined approach. A proven strategy. Retrieved from Bhpbilliton.com: http://www.bhpbilliton.com/aboutus/strategy
Facts. (2015). Iron Ore And Global market. Retrieved from Ironorefacts.com: http://www.ironorefacts.com/the-facts/iron-ore-global-markets/
Heber, A. (2013, January 22). Top 10 mining trends . Retrieved from australianmining.com.au: https://australianmining.com.au/features/top-10-mining-trends-for-2013/
Jamasmie, C. (2011, Nov 28 ). Mining industry affected by escalating social, economic and political issues: Deloitte. Retrieved from www.MINING.com: http://www.mining.com/mining-industry-affected-by-escalating-social-economic-and-political-issues-deloitte/
Ramiah, U. (2012, February 27). Income, race and working population trends: a perfect storm for Connecticut? Retrieved from http://ctmirror.org/: http://ctmirror.org/2012/02/27/income-race-and-working-population-trends-perfect-storm-connecticut/
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BHP Billiton. (2016). About Us. Retrieved from http://www.bhpbilliton.com/

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http://www.abs.gov.au/ausstats/abs@.nsf/mf/4655.0