Abstract
Careful management of problems in any company is very important. Success or failure of a company is pegged on the way these problems are handled when they arise. This is considerably critical if the company is operating at a global level. BHP Billiton is a successful global mining company located in Australia. The company got itself in a fix after making a decision to postpone the expansion of its major projects. This paper will analyse the problems that arose after the delay of expanding the projects. The paper will also look at how the company tackled these problems, how successful it was in solving them, the best practices it should have adopted, and the lessons learnt.
Introduction
BHP Billiton is one of the largest companies in terms of natural resources. The company boasts of a wide variety of natural resources that include aluminium, copper, coal, iron ore, manganese, silver, nickel, titanium and uranium. This makes the company amongst the largest world producers of these major commodities. In addition, the company has substantial interests in the mining of oil and gas. BHP Billiton is a global company with offices based in over 100 countries throughout the world (Dick, 2007). The workforce of the company is made up of about 100,000 employees and contractors. The company’s main objective focuses on creating a long term shareholder value of the natural resources globally through discoveries, acquisition, development, and marketing. For several years now, the company has a proven record on delivering large shareholder returns by investing highly in mining projects. This has been attributed to the company’s ability to maintain its ownership and operating strategies in the long term and low cost basis. This has further been boosted through expansion and diversification of the company’s assets including commodity, geography and market. This has enabled the company to meet the varying demands of their customers. Apart from meeting the demands of its customers and emerging economies, the company is committed to safeguard the communities where it operates and the environment at large (Thompson and Macklin 2009).
A recent decision by the company to delay its expansion plans in some of its major projects has landed it into great economic problems. This has hampered the overwhelming growth that the company has had for nearly a decade. This paper will analyse this challenge that has been facing the BHP Billiton Company and the ways in which the company has been coping with the challenge.
First and foremost, the problem emerged after the company decided to join its competitors in delaying of the expansion plans due to the global financial crisis. This forced the company to hold back billions of money that were meant to expand its three major projects. These projects include the Olympic Dam, Port Hedland harbour, and the Canadian potash. In regards to the Olympic Dam project, AU$20 billion were withheld. In addition, the allocations for the other projects were AU$19 billion for Port Hedland and AU$8 billion for the Canadian potash project. The company’s board rejected to approve the projects until the market stabilized. The Olympic Dam is the largest mine in Australia whereas Port Hedland is the largest port in Australia in terms capacity. The port is crucial in shipment of mining products including iron ore for BHP Billiton, Firtescue, and Atlas Iron companies. There was an urgent need to expand the port in order to ease the congestion and competition from other companies. This would increase the shipment of the company’s exports to its destination in China and South Korea. In regards to the Canadian potash, this is the world largest fertiliser producer. The BHP Billiton acquisition of these companies was a big achievement. This helped the company in diversifying its commodities and hence become more competitive. Therefore, expansion of the above three projects was of much significance to the growth of BHP Billiton (Oleynik 2005).
The indefinite delay of these projects had a severe impact on the economy especially in regard to the Olympic Dam. Olympic Dam mine is located in the southern part of Australia. The mine consists of large deposits of natural resources including iron, copper, gold, uranium and silver. By 2005, the annual mine production rate was 9.1 tonnes making it the largest mine in Australia. Its copper deposits are ranked fourth globally whereas its uranium deposits are the largest single deposits known worldwide (OECD Nuclear Energy Agency & International Atomic Energy Agency 2008). However, the uranium deposits are not fully exploited hence contributes a minimum share of the overall mining revenue. The expansion of the Olympic Dam project was meant to boost the economy of South Australia, state government, and even the local businesses. This would be achieved by improving the ailing construction sector and enhance expansion of other sectors such as the manufacturing, engineering and service sectors.
Conversely, this was dealt a big blow after the indefinite postponement of the expansion process. The low trends of investment in the project led to unemployment crises and cost pressures (Colhoun 2012). It was proposed that the expansion of the Olympic Dam project would have opened significant job opportunities in the region of 10,000 by the end of the first phase of the expansion. As of 2008, the expansion process has already finished the pre-feasibility step awaiting the first phase of expansion to start. BHP Billiton Company decided to delay the expansion process because of the rough times the market was facing by that time. This move was anticipated to create room for investigating an alternative expansion design that would be cost effective. In respect to cost pressures, the move to delay the project triggered a negative influence in the currency and wage pressures within the South Australian economy (BHP Billiton and Arup Group Ltd 2011).
The company’s shares dropped to a large extent compared to its major competitors, Rio Tinto and Fortescue. Within a span of six months, the company’s shares fell by 15 per cent compared to that of its competitors. Rio Tinto’s shares fell by 10.7 per cent whereas Fortescue’s fell by 14.8 per cent within the same period. This was followed by the fall of the commodity prices together with the carbon tax. As a result, the company reported a 35 per cent decrease in annual profits, which was the first to be experienced in a span of three years. This contributed to the investors losing confidence with the company’s leadership particularly with Marius Kloppers’ five year reign in the company. It is claimed that this period was characterized by failed takeovers coupled with delayed projects. This triggers worries in the shareholders who are hoping the problems will ease when the company presents its 2012 financial report. By further delaying the expansion of the projects, the company marked the end of the global mining boom that it had experienced for years. The fall in commodity prices did not affect the Australian economy alone. China was amongst those countries that were affected. China is one of the leading consumers of these commodities. This caused a slowdown in its economic growth, which was the worst ever to be experienced for over a decade. Furthermore, delay in expanding Port Hedland harbour is contributing to a small output of exports to its destinations. As of 2011, the iron exports through Port Hedland reduced by 16 per cent. Shipments to China decreased by 9.37 per cent while those to South Korea by 5.67 per cent (Ker 2012).
In trying to cope with the problem, the company formulated plans to re-establish the projects back again. The expansion processes are not going as planned, but the company proceeded in a different direction. First, the company targeted control of commodities prices. This move would ensure other economies such as China’s resume their consumption growth for the commodities, which will trigger the development of these projects. The Olympic dam mine is still the main mine in South Australia employing more than 2500 people. However, this decision leads to some doubts on whether or not it will prevent the decline in the economy of South Australia. This is attributed to the fact that South Australia is not regarded as a mining state. This is because most of its natural resources are not fully exploited. Unlike other Australia’s states, South Australia is deemed to have experienced a boom in exploring minerals rather than mining. As far as creation of employment is concerned, majority of job opportunities in South Australia come from the service and manufacturing sectors. The mining sector provides little employment opportunities slightly above 1 per cent. The idea that South Australia is not vulnerable to the challenge facing Olympic Dam project is unrealistic. On the contrary, this decision can be of much benefit to South Australia and other economies. As mentioned earlier, expansion of the project would influence expansion of other sectors. In this case, it plays a major role in the creation of employment. The Olympic mine is the main generator of exports for South Australia. Therefore, there is a need to control the effect resulting from decline in minerals demand. In addition, the problem will not be solved by allowing the expansion process to proceed as planned but rather in which format the process proceeds. This will be dependent on the commodity prices, the effect of global financial crisis and the technological considerations (Tasker, 2011; Spoehr 2012).
Another approach used to overcome this challenge is cutting down the income expenditure and real wages. This would lead to the company becoming increasingly competitive locally and internationally, and thus experience a fast growth. In addition, considerable employment opportunities would be created to overcome the existing high rates of unemployment. For the income, the government has to incorporate less spending and lower taxes particularly business taxes. On the other hand, the BHP Billiton and other companies should lower their wage rates. This would ensure increased exportation and limited importation of commodities. Notably, this implies high demand for the commodities, which is followed by huge profits. Thereby, more investors and business partners both locally and internationally would be attracted to the company. Despite creating significant job opportunities, this approach would deprive the employees of an enhanced lifestyle. Nevertheless, this would be a huge boost to BHP Billiton in overcoming its challenges. High demand and increased exports would influence expansion of the projects (Blandy 2012).
The approaches used by BHP Billiton to solve the challenge were irrelevant. In controlling the commodity prices, the company opted to lower prices, and this further worsened the situation. Although the move was meant to attract its major importers, it would be insignificant. The move would benefit the economies of the importers rather than the company itself. On cutting down the real wages and expenditure, this would only be possible through devaluation of the currency. This would mean adopting another currency that has a low international value compared to the Australian Dollar. The arbitration system and other unions disagreed with the initiative arguing that it was unfair to the workers. Adoption of this policy in South Australia contributed to the region’s slowed growth rate compared to other regions of Australia. This was attributed to the reduction in the national population and the economic activity. Although the move was meant to increase employment opportunities, it ended up decreasing the existing ones. Most of the workers migrated to other Australian states where they would earn a better income and restore their parity with their Australian norms. Reduced economic activities in South Australia discouraged investors and business partners. On the contrary, these approaches are best suited in making the company competitive on the international front (Blandy 2012).
Despite the failure of the above approaches, the company can still recover from this major challenge. The company needs to restore the currency value in South Australia in order to make it competitive locally before traversing the global scene. Next, the company needs to embrace good leadership and management. As seen earlier, the complications in the company came as a result of poor decisions especially during the reign of Marius Kloppers. The management decided to postpone the expansion of the projects without prior evaluation of the benefits and the consequences involved. They feared losing huge amounts of cash through investment in the projects at a time when the global market was experiencing financial crisis. Consequently, the company lost much money through declining profits and shares, as opposed to its competitors. Further, the company needs to formulate a more advanced system of supply analysis than the one adopted in 2004. This system needs to be incorporated with the latest technology. Lack of such a system forced the company to postpone the projects for long while searching for the best alternative. As observed from the 2004 system, the company is concentrating on improving the global initiatives thus neglecting the local ones. This neglect and lack of seriousness in local initiatives dealt the company a major blow. For example, the company has come up with the plan to expand the first phase of the Canadian potash mine project to four million tonnes. As described by Nickel (2012), the expansion of this project would require technology advancement. This technology is expected to have a great impact in the growth of BHP Billiton. It is estimated that, by accomplishing the expansion to 8 million tonnes by 2015, the Canadian potash mine will be the largest potash mine in the world (Nickel 2012). To date, alternative plans for the local based plans, that is, the Olympic Dam and Port Hedland projects have not been reached.
From the above case of BHP Billiton, there are several lessons that many companies need to embrace. In the first place, a proper evaluation of all possible outcomes must be considered before making any decision regarding any investment. This is attributed to leadership and management of the company. BHP Billiton postponed the expansion plans for three of its major projects without evaluating the possible outcomes. The company was influenced by withdraw of its major competitors. For this reason, BHP Billiton found itself in a bigger problem of its own making. This shows that BHP Billiton lacked good leadership to enhance better decision. In addition, it is observed that the company further implemented poor policies in trying to solve the problem it had created. Next, each and every company need to be acquainted with the latest technology. Advanced technology may enable a company to overcome the arising challenges in a fast and easy way. Lack of a new cost effective method caused the company to postpone its major projects for long. Finally, it is important to balance between the internal and external forces in a company. BHP Billiton concentrated on the global front and paid little attention locally. The local initiatives instead of improving the situation further worsened it, as opposed to international ones.
BHP Billiton is a well renowned mining company. The company has achieved much success in its operations for years. However, postponing of the expansion projects in some of its acquired companies immersed the company into a great problem ever. This delay caused a major downfall of the company’s economic growth. The commodity prices, employment rates, and the currency value were all affected leading to a decline in the company’s profits and shares. The key to restoring the company’s economic growth lies in overcoming this challenge. BHP Billiton needs a proper mechanism to facilitate the expansion of these projects. As time goes by, overcoming this problem seems like a dream.
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