BHP Billiton Company Overview - Research Paper Example

Marketing Plan BHP Billiton Contents Sl No Description Page No 1. Introduction ……………………………………….……………………………… 3 2. Market Characteristics ……………………..……….………………….….…… 4 3. About BHP Billiton ……………………………..……….………………….…… 5 4. Business Environment Analysis ……………………..……….……….….…… 7 5. Marketing Plan ………………..………………..……….………………….…… 11 6. Conclusion ……………………..………………..……….………………….…… 17 7. Bibliography ……...……...……………………………...………………………. 18 Section-I Introduction The industries involved in the business of extraction of natural resources are often termed as Extractive Industries and include oil, gas, and mining industries. This report analyses the typical characteristics of this industry. The report identifies BHP Billiton, the leader in this industry as the subject of the case study. The background of the company and its business environment is analyzed to understand the relevance of its marketing plan. Finally, the marketing plan of the company is studied and in relation to its business environment. Section-II Market Characteristics Extractive industries have some particular market characteristics. Apart from some specific small scale mining especially in high value low volume minerals, extraction of mineral resources usually requires large scale, capital intensive investments, Most projects are technologically challenging and investments are characterized by high degree of uncertainty and long gestation periods. In most developing countries except China and India, extraction industry seems to be export focused with significant scope of revenue creation but limited scope of employment generation. Mineral extraction also involves considerable threat to an ecosystem, and could have adverse social implications. Finally, mineral resources are non-renewable and often of strategic, geo-political importance. As a result, governmental influence tends to be high, which can interfere with the business operations. Owing to the huge capital investments required for extraction, this market has seen emergence of state-owned enterprises, which can depend on the government for the huge capital investments that they incur. Not all developing and least developed countries can afford the high capital investment. Therefore, this market is also characterized by the presence of large multi national corporations (MNCs), which have the financial power to make huge financial commitments. Exploration activities for minerals can not only take up long gestation periods, but can also result in unsuccessful attempts. Even after successful exploration, the investor needs to face the technical risk (involved in extraction at sometimes difficult sites), and market risk (demand and supply risks), political risks (nationalization). Political risks can be higher if the host country has a weal constitutional framework. This is a risky business and the investor should have the expertise necessary to handle such risks. Once investment is committed, the cost of pullout is very high (United Nations Conference on Trade and Development, 2007). Section-III About BHP Billiton The largest extractive company, BHP Billiton was chosen as the subject of this case study. Its mission, marketing strategies are explored in the subsequent sections. The mission statement of BHP Billiton is “…to create long-term value through the discovery, development and conversion of natural resources, and the provision of innovative customer and market-focused solutions”. BHP Billiton is a global resources company in the extractive sector headquartered in Australia. It is a dual listed company and consists of BHP Billiton Limited Group in Australia, and BHP Billiton Plc group in the UK. IN addition, American Depository Receipts (ADRs) of both companies are listed Ney York Stock Exchange (NYSE). It was created in 2001 by the merger of Australia's Broken Hill Proprietary Company (BHP) and the UK's Billiton, which had a Dutch and South African background (Wikipedia, 2009). It is the world’s largest diversified natural resources company, and has significant businesses in alumina and aluminum, copper, energy (thermal) coal, iron ore, nickel, manganese, metallurgical coal, oil and gas and uranium, as well as gold, zinc, lead, silver and diamonds. It directly employs approximately 41,000 employees, and 61,000 contractors in more than 100 operations in over 25 countries. It is organized into nine Customer Service Groups (CSGs) as below. Petroleum Aluminum Base Metals Diamonds and Specialty Products Stainless Steel Materials Iron Ore Manganese Metallurgical Coal Energy Coal The company’s annual turnover is US$59.5 billion with an operating profit of US$24.1 billion. Its market capitalization stands at approximately US$225 billion (BHP Billiton, 2008). It is the process of acquisition of Rio Tinto, a competitor in the similar diversified natural resources business. When complete, the acquisition will probably catapult BHP Billiton into the top 10 in the Fortune list. Despite global slump, the company posted a healthy growth of 25% in its annual turnover and a growth of 18% in the post tax profits. BHP Billiton’s business philosophy is to develop long life, low cost assets diversified by geography and commodity that can be expanded, and are largely export oriented. It is a very focused company with high emphasis on safety, and has a goal of Zero Harm. It believes that future growth will come from the BRIC countries (Brazil, Russia, India, and China) and is structuring itself to meet the changing market. The performance of the company is directly linked to the general economic activity around the globe particularly commodities, and fuel. The recent market volatility and the commodity prices have had an adverse effect on BHP Billiton’s stocks thus reducing its market capitalization in the short term. BHP Billiton listed amongst Dow Jones Global Titans, and is ranked 21 in FT Global 500. The following section contains the marketing plan for BHP Billiton. Section-IV Business Environment Analysis The business environment in which BHP Billiton operates is analyzed in this section using different strategic techniques. Competitive Environment (Porter’s Five Forces) At the outset, the competitive environment of the company is mapped using Porter’s Five Forces Model. Bargaining power of suppliers: BHP Billiton extracts its raw materials, and does not need to depend on any single supplier for its raw material requirements. It needs to depend on suppliers of capital equipment, which consists of mainly mining equipment. Logistics forms a large part of its cost base, and it also needs to spend substantial amounts to secure mining rights across continents. Though BHP’s dependence on the logistics companies is high, there is intense competition amongst the logistics companies. Being in an envious position to decide over huge logistics contracts, BHP Billiton has substantial bargaining power regarding logistics contracts. BHP Billiton sources mining machinery and equipment from several suppliers all over the globe. These are specialized equipment and the choice of suppliers is somewhat limited. These suppliers have medium bargaining power. BHP Billiton also needs to secure mining rights usually from governments. Bargaining power of governments is expected to be high. Bargaining power of customers: BHP Billiton is a large conglomerate and has huge mining resources spread across all geographical areas and exercised control over diverse resources. Its customers need to depend on BHP Billiton for their sustainable requirement of raw materials. Though some of the customers are large multinationals themselves, they have little control over resource prices caused by demand-supply gaps. In some product groups (oil and gas, coal, etc.) the demand-supply gap is expected to remain high, while in others (e.g., iron ore, copper, etc.) it is cyclical in nature. The bargaining power of customers is medium. Threat of new entrants: This business requires huge capital investments, specialized operating knowledge, and high expertise in commodity pricing. All these factors work as entry barriers to this line of business. It could be possible for related players to build positions through acquisitions, but it is virtually impossible for new entrants to secure a foothold. The threat of new entrants is negligible. Threat of substitute products: BHP Billiton operates across a large variety of natural resources. Though none of the resources seem to have any viable complete substitute in the near future, demand related to some of the resources may reduce/ vary owing to substitutes developed for some applications. However, owing to its breadth of resource base, it is unlikely that BHP Billiton will be affected by reduction in demand of a particular product group. The threat of substitute products is low. Competitive Rivalry within the Industry: Owing to large size of business, there are limited numbers of companies in this business. Though there are strong individual players in each type of resource and in each geographical area, there are very few companies with the breadth of BHP Billiton in a global scale. The major competitors are Rio Tinto, Vale do Rio Doce, Alcoa, Anglo American, Impala Platinum, et al (Hoover’s, 2009). BHP has announced an offer to acquire Rio Tinto with certain pre-conditions. If the merger goes through, BHP Billiton will be the largest player in this segment overshadowing all its rivals. PESTLE Analysis A PESTLE analysis of BHP Billiton was also carried out, the results of which are tabulated in the matrix below. PESTLE Analysis Matrix Political Economic Allotment of new fields highly dependent upon political relationships. Adverse legislations could affect outside companies. Several countries legislate to favour domestic companies. There could be adverse pressure from “green” groups as mining has the potential to damage ecosystems. The company operates in several disturbed regions of the globe. Political instabilities in these countries could affect its business adversely. Inter-country relationships in some regions may not be supportive; presents some source of threat. Natural resource prices in some countries tend to be regulated. Could affect profitability. Variability in global commodity prices can affect the company’s performance. The company is vulnerable to business cycles. BHP Billiton’s business requires securing new resource fields or expanding its existing fields on a regular basis. Exploration, expansion and securing of new finds can be risky as there is always a probability associated. BHP Billiton sees Asia as the new growth area. However, slowing of the China demand could affect its business. However, the company is spread across all continents. As such, the company’s risks are somewhat diversified. BHP Billiton is diversified across various product groups, and this is expected to act as an overall profitability hedge. Seasonality/ weather issues do not appear important in this business. Tax rates vary between 17-40% in the countries where BHP Billiton operates (KPMG, 2006). Double taxation avoidance treaty existing amongst most countries. The company can choose to rationalize its tax structure by taking advantage of its MNC structure. This could be a small advantage over its competitors. BHP Billiton is exposed to interest and exchange rate movements as its operations span several continents. However, when carefully planned, the company can stand to gain from its multinational structure. BHP Billiton seems to have a robust internal cash flow situation. Social Technological Consumer attitudes/ opinions and media views are generally positive. BHP Billiton is included in the following. ASX All Australian 50 Dow Jones Global Titans Dow Jones STOXX 50 #21 in FT Global 500 Integration of its acquisitions would be a challenge for the company. Some of its fields are managed by joint ventures on which BHP Billiton has virtually no control. Such joint ventures could deviate from its standards and could work at cross purposes to the strategies of the overall corporation. Improving demographic factors in the developing countries is expected to stimulate demand and increase business. The company operates in a capital intensive business with strong focus on technology. Efficiency in operation is a function of the technological superiority. BHP needs to keep investing in capital expenditure and constantly modernize its fields in an effort to stay ahead of competition. Legal Environmental Changes in country laws can affect business. Litigation initiated by “green” groups is a potential threat. There could be intervention from governmental regulatory bodies. Recent merger with Rio Tinto could trigger anti-trust laws. Health, safety, and environmental factors and related regulations could affect BHP Billiton’s business. Climate change and greenhouse effects may adversely affect its business. Environmental/ ecological factors could pose problems in the company’s model of business. BHP Billiton is a global company with strong staff morale, and organization culture. It has a professional management style and positive staff engagement and attitude. SWOT Analysis On the basis of the competitive environment, and PESTLE analysis, a Strength-Weakness-Opportunity-Threat analysis is carried out results of which is summarized in the table below. Strength Weakness Large mines Long life, low-cost assets Diversified by geography and commodity Strong financial position and leadership position in the global industry Positive consumer attitudes. Professional management style and positive staff engagement and attitude. Multinational corporate structure creates a natural hedge towards exchange rates, interest rates, and tax rates. Well defined vision and strategies. Understanding of technology and market drivers Strong growth in revenue and operating profit even during adverse economic scenario. Low control over joint venture assets and operations Constant infusion of capital to maintain the quality of its assets Integration of its acquisitions would be a challenge for the company. Financial strain owing to acquisitions. Large company with higher overheads. Opportunity Threat Demand stimulated by high economic growth in developing countries. Political relationships could influence access to strategic fields. Capital intensive business requires high capital infusion. Creates entry barrier for new entrants. Medium bargaining power of suppliers. Employee safety under adverse working conditions. Climate change and greenhouse effects. Litigation initiated by “green” groups is a potential threat. Could be a victim of anti-trust laws. Adverse legislations and political instability possible in some regions. Possible price regulation of natural resources in some geographical regions by regulatory bodies or other types of business intervention. Variability in global commodity prices under weal economic scenario. Exploration of new resource fields is risky business. Low demand and cost increases. Medium bargaining power of customers. Strong competition. Section-V Marketing Plan Marketing Objectives The primary target market of BHP Billiton includes medium to large mineral processors spanning diverse fields, viz., refineries, non-ferrous smelters, iron and steel plants, power plants, and diamond merchants. A few of its customers (e.g., domestic gas distribution companies) do not process the product further and handles the retail business using BHP’s products. The customers are spread across several continents. While the traditional market has been the developed nations, the future trend seems to indicate rising demand from developing economies. The marketing objective is to expand its revenues and profitability by capturing new customers and expanding market share amongst existing customers in the target market while selling products at close to spot prices. Marketing Strategies Development of the marketing strategy involves optimizing the “mix” of Product, Distribution, Price, and Promotion for achieving the marketing objectives (Kotler & Armstrong, 1995). The marketing strategies of BHP Billiton have been developed in response to the prevailing business environment in the extractive industries sector keeping in mind the forecast market trends. Product: BHP Billiton’s products are used by its customers for further processing, and can therefore, be classified as industrial goods. Most of these goods can be further classified under Raw Materials group. Some of the partly processed goods like aluminum can be classified under Supplies. BHP Billiton has multiple sources for almost all the minerals that it extracts. As such, it has been able to provide its products with the attribute higher reliability. It is also expected that it provides better consistency in quality owing to its larger reserves. BHP Billiton often builds additional features into its products by processing them itself such climbing further up the value chain. For example, it sells bauxite, as well as alumina, and also finished aluminum. BHP Billiton has invested in brand equity. Its carefully crafted product attributes, and associated benefits helped create a strong manufacturer’s brand over a period of time. It has used brand extension to create two diamond brands, viz., CanadaMarkTM and AURIASTM. BHP Billiton has developed a diversified product portfolio to meet the raw material requirements of its target customers. BHP Billiton has organized itself into nine CSGs to focus on the requirements of each of its target markets. Often, a particular CSG will deal in various products to meet the complete raw material requirements of a particular customer within the CSG. For example, it sells both nickel and cobalt to the stainless steel manufacturers. Furthermore, structuring into such independent business groups facilitates independent decision making process. BHP Billiton’s mineral sourcing fields have the characteristics of long life and low cost, which enables it to offer strong reliability benefits to its customers. Often, BHP’s attempts to capture different parts of the value chain within the same CSG, and therefore, needs to handle different types of customers in that CSG, e.g., aluminum. In a volatile commodity market, this brings more stability in the CSG. Distribution: BHP Billiton uses primarily uses a direct-marketing channel to distribute its products; the size and value of the deals make this feasible. BHP usually enters into periodic contracts with its target customers directly. It distributes its product directly in the respective domestic markets by using pipelines, roadways, waterways, and railways. It also exports a large part of its products using the sea route. It operates a logistics business to assist in its distribution. Warehousing cost is minimized by shipping to buyers directly in response to specific job orders. The company attempts to minimize inventory costs by synchronizing the production, and deliveries. However, it needs to accumulate significant at its extraction site. Price: BHP Billiton has a lower cost structure owing to its low asset base fields. The competition in this industry seems to oligopolistic competition; the market consists of a few sellers who are highly sensitive to each others pricing and marketing strategies. The products are mostly uniform. In such markets, price cut does not yield and permanent results. Therefore, BHP Billiton prefers to follow a going-rate pricing, even though the market price is volatile. Even when it has long term contracts, they are usually linked to the market prices on a periodic basis. The frequency of such periods could be years, months, weeks, or even days. BHP Billiton seems to prefer the risk versus return associated with such going-rate pricing. Owing to its diverse product portfolio, BHP Billiton can follow a product-bundle pricing, thus creating a unique position for itself. It also probably follows several types of discount pricing, viz., cash discount for better payment terms, and quantity discounts for larger volumes. Owing to its one-to-one sales geographical spread it can also follow a discriminatory pricing, where the same product is sold to different customers at different prices. One important decision for the company is what price it should charge to its different customers spread across the globe separated by different shipping costs, and sometimes subject to various market prices. It appears that BHP Billiton adjusts its prices based on prevailing prices in various geographies while loosely following a zone pricing. Promotion: BP Billiton handles its promotional activities primarily from a central location, and is not CSG-specific. Apart from its diamond brand, BHP Billiton does not seem to have invested significantly in product-specific promotions. BHP Billiton uses direct marketing to reach its customers. It mostly uses event sponsorships in specific segments to reach its target customers. The company invests in promoting its brand; it was the official sponsor of the Beijing Olympics in 2008. The message of its promotions is a strong company with sound fundamentals capable of meeting its customers’ requirements reliably. It uses both personal and non-personal communication channels for conveying its message across. The company sponsors seminars, exhibitions, industrial fairs to communicate its message effectively without dissipation. Personal selling and public relations are the two common promotion tools commonly used by BHP Billiton. BHP is expected to need an optimum combination of both “pull” and “push” strategies to sell its products. Feedback is usually collected using different personal communication channel. However, the market breadth of BHP Billiton is diverse and difference strategies are required for each CSG. The strategies of the individual CSGs are discussed below. Petroleum: BHP Billiton produces oil and gas in six countries across six continents with exploration opportunities in a further six countries. The two major products are crude oil, and natural gas. The crude oil is sold to refiners around the world at market prices, while the natural gas is generally marketed under long-term domestic contracts to domestic consumers through pipeline. Natural gas also liquefied and exported in the form of LNG under long-term contracts. BHP Billiton extracts crude oil from its offshore fields near Australia, Mexico, and North Wales. It also extracts crude from its fields in Pakistan, Algeria, and Trinidad. The crude is distributed over the eastern coast of Australia directly to the refiners. The gas is piped to its processing facility in the mainland from where it is sold to local distributors who directly sell to the consumers. Almost three-quarters of our contracted LNG sales volumes are subject to contracts that are either within four years of expiry or contain provisions allowing prices to be reset. However, more than a quarter of our currently contracted volumes are subject to long-term fixed-price contracts, some of which were priced in a lower price environment. Aluminum: BHP Billiton operates in three parts of the aluminum value chain, viz., mining of bauxite, refining of bauxite into alumina, and smelting alumina into aluminum. It is world’s sixth-largest producer of aluminum. Approximately 55 per cent of our alumina production is used in its own aluminum smelters and the balance is sold to other smelters. The alumina sales are a mixture of long-term contract sales at LME-linked prices and spot sales at negotiated prices. Prices for aluminum sales are generally linked to prevailing LME prices. Base Metals: This portfolio of BHP Billiton includes copper, silver, lead, uranium, and zinc. BHP Billiton markets five primary products in this area, viz., copper concentrates copper cathodes uranium oxide lead concentrates zinc concentrates It sells most of its copper, lead and zinc concentrates to smelters under long-term volume contracts with prices based on the LME price for the contained metal three or four months after shipment, less treatment charges and refining charges (collectively referred to as ‘TCRCs’) that it negotiates with the smelters on an annual or bi-annual basis. Some of the ores it mines contain quantities of silver and gold, which remain in the base metal concentrates it sells. BHP Billiton receives payment credits for the silver and gold recovered by our customers in the smelting and refining process. BHP Billiton sells most of its copper cathode production to rod and brass mills and casting plants around the world under annual contracts with premiums to LME prices. BHP Billiton also sells uranium oxide to electricity generating utilities, principally in Western Europe, North America and North Asia. Traditionally, uranium sales are through long-term fixed price contracts. However, the sales under long-term price contracts are expected to reduce over time and going forward the company expects to see an increasing proportion of sales made with price linked to a spot index. Diamonds & Specialty Products: This product group primarily handles the diamond, titanium, and potash business of BHP Billiton. The most of the rough diamonds mined are sold to international diamond buyers through the company’s Antwerp sales office. It also sells a smaller portion of its diamond production to two Canadian manufacturers based in the Northwest Territories. The company also sells polished diamonds, manufactured through contract polishing arrangements using two brands, viz., CanadaMark™ and AURIAS™. The company is also actively exploring for diamonds in a number of areas, particularly in Angola where it holds substantial exploration acreage. BHP Billiton mines titanium minerals at Richards Bay Minerals (RBM) in South Africa and at Corridor Sands mineral sands project in Mozambique. The titanium dioxide slag produced is sold internationally under a variety of short, medium and long-term contracts. BHP Billiton owns substantial exploration acreage for potash in the province of Saskatchewan, Canada, and several other development alternatives are under evaluation. Stainless Steel Materials: BHP Billiton is world’s third largest producer of nickel and supplies to the stainless steel industry. It also supplies nickel and cobalt to other markets including the specialty alloy, foundry, chemicals, and refractory material industries. Nickel is sold under a mix of long-term, medium-term and spot contracts, with prices linked to the LME nickel price. Iron Ore: BHP Billiton extracts iron ore from its mines in Western Australia, and Brazil. Most of the sales take place under long-term volume contracts with steel producers in North Asia. Prices are generally set through annual negotiations. In the longer term, the company is promoting a shift away from annually negotiated prices to a system based on index prices. Manganese: BHP Billiton’s manganese operations produce a combination of ores, alloys and metal from sites in South Africa and Australia. It is the world’s largest producer of seaborne manganese ore and in the top three global producers of manganese alloy. The company produces high-grade ore, which is particularly valuable to alloy producers. It sells an optimal mix of ore and alloy. More then 90 per cent of the ore sales are priced quarterly or, occasionally, on a spot basis while the rest are priced annually. The company sells manganese metal and alloy principally to steelmakers, generally under long-term contracts that typically provide for quarterly price adjustments, either by negotiation or by reference to published market prices. Metallurgical Coal: BHP Billiton is the world’s largest supplier of seaborne metallurgical coal. Along with iron ore and manganese, metallurgical coal is a key input in the blast furnace production of steel, and, as a result, demand for metallurgical coal is exposed to the booming Chinese steel industry and the fast-growing Indian steel industry. It has production assets in two major resource basins in Australia. It plans to start development in Indonesia. The company exports metallurgical coal, under long-term or annual volume contracts with prices negotiated yearly. The customers are steel producers around the world, particularly in north Asia and India. Energy Coal: BHP Billiton markets export energy coal (also known as thermal or steaming coal) and is also a significant supplier to the electricity generation industry in Australia, South Africa and the United States. Its global portfolio of energy coal assets, insights into the broader energy market through sales of other fuels such as gas, uranium and oil, and control of options for bulk freight provide BHP Billiton’s business with key advantages. The domestic sales are made under long-term fixed-price contracts with power stations that are located in close proximity to the mine. It also makes export sales to power generators and some industrial users in Asia, Europe and the United States, usually under contracts for delivery of a fixed volume of coal. Pricing is either index-linked, or fixed, in which case financial instruments are used to swap the fixed-price exposure for exposure to the index. The product features and benefits are given in the table below. Table 5-1 Features & Benefits Features Benefits Large mines/ low cost Lower cost to customers Long life assets Reliability of supplies Expansion options Reliability of supplies Value added downstream Diversified risk/ opportunity Cost effective operations Lower cost to customers Spot/ Variable pricing Market price to customers Large portfolio of minerals One-stop solution Geographical diversification Global reach Section-VI Conclusion The typical market characteristics of extractive industries include high capital intensiveness. Players in this market need to learn to manage associated technological risks, market risks, political risks, and environment risks. Extractive industry needs to develop its strategies, especially marketing strategy and plan accordingly. BHP Billiton is the largest diversified mining company. It sells primarily to mineral processors, and manages these risks by exploring and acquiring long-life, low cost investments, which are diversified across products groups and geographies. It has packaged a product featuring strong reliability, quality, diversity, and bundling, which offers higher value to its customers. It has also invested in a strong brand. The company markets directly to its customers managing part of the distribution chain itself. It prefers to follow going-rate pricing, and manages price volatility by diversifying products spread all over its value chain. It probably adjusts its pricing based on geographies, and various types of discounts. BHP invests in developing a corporate brand and public relations is the primary promotion tool used by the company. Section-VII Bibliography Kotler, P., Armstrong, G., 1995. Principles of Marketing, Prentice-Hall Inc., 6th ed. Englewood Cliffs (NJ): Prentice-Hall Inc. BHP Billiton, 2008. Resourcing the Future, Annual Report, 2008, Australia: BHP Billiton. Hoover’s, 2009. BHP Billiton-Company Overview. [Online] (Updated April 21, 2009?) Available at: http://www.hoovers.com/bhp-billiton/--ID__41757--/free-co-factsheet.xhtml KPMG, 2006. KPMG’s Corporate Tax Rate Survey. [pdf] United Kingdom: KPMG. Available at: www.stern.nyu.edu/~adamodar/pdfiles/articles/KPMGtaxratesurvey.pdf [Accessed April 21, 2009]. Wikipedia, 2009. BHP Billiton. [Online] (Updated April 20, 2009) Available at: http://en.wikipedia.org/wiki/BHP_Billiton [Accessed April 21, 2009]. United Nations Conference on Trade and Development, 2007. World Investment Report 2007: Transition Corporations, Extractive Industries and Development. [pdf] Switzerland: United Nations Conference on Trade and Development. Available at: http://www.unctad.org/en/docs/wir2007_en.pdf [Accessed April 21, 2009]. Read More