Free Essay on the Business Environment of BHP Billiton

The metal and mining industry is one of the main building blocks for human development. Metal and minerals are critical components in all infrastructure and services in contemporary society including shelter, energy supply, construction, transportation, communication and other consumer goods and services. The need will continue to be strong, therefore, metal and mining companies have to come up with more efficient resource use and recycling systems so as to meet the increasing demand. One of the major companies in the metal and mining industry is BHP Billiton which has various operations in different regions of the world so as to meet the needs of consumers. This report discusses various issues affecting BHP Billiton and the key trends in the industry.

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Introduction to the General Business Environment

BHP Billiton group is a global leader in the metal and mining industry. The company was formed in 2001 from the merger of BHP Limited and Billiton PLC ("BHP Billiton | Our History," n.d.). Over the years, the company has been able to provide quality products and bring together low-cost resource assets that go together with a strong management team that has always been determined to operate the companys resources in an efficient manner. The primary focus areas of the company include aluminum, copper, nickel, manganese, iron ore, oil, gas, energy coal, and metallurgical coal. It also has additional exposures to lead, zinc, silver, uranium and diamonds ("BHP Billiton | Company Profile & Corporate Social Responsibility," n.d.). The companys corporate headquarters are in Melbourne Australia, and it has over 100 operations in 25 countries.

Customers

BHP Billitons customers vary depending on the segment to be considered. The company operates in seven segments which include aluminum, copper, nickel, manganese, iron ore, petroleum and potash, and coal (BHP Billiton, 2016). The main customers of aluminum are located in Asia and Western Europe. The demand for aluminum is driven by usage in construction, household items, packaging, and transportation. Another product of the company is copper. Copper is mainly sold in China and India. The company supplies nickel mostly to customers in Western Europe and Northern Asia in the stainless steel industry. It sells nickel products using a combination of spot volume, short-term and long-term contracts, with the prices being connected to the London Metal Exchange nickel price. The next product is manganese. About 80 percent of its production is purchased directly by customers in India, China, and South Korea. The products are increasingly being sold on spot or short-term contracts, with the prices connected to published indices. Iron ore is one of the primary product of BHP Billiton, and most of it is sold to China as it is the largest customer of iron ore. BHP Billiton is the worlds largest producer of seaborne. Finally, the main customers of metallurgical coal are India, China, Japan, and Europe. Most of the contracts are based on longer-term volumes.

Competitors

The main competitors of BHP Billiton are Rio Tinton and Companhia Vale do Rio Doce. Rio Tinto is headquartered in London, United Kingdom, and has operations in North America, Europe, Asia, Australia, and New Zealand ("About Rio Tinto," n.d.). Its product line includes aluminum, copper, diamonds, energy, coal, uranium, gold, and industrial minerals. On the other hand, Companhia Vale do Rio Doce is headquartered in Rio de Janeiro, Brazil and has operations in Africa, Australia, Asia and South America ("About Vale," n.d.). Its product line includes copper, nickel, non-ferrous materials, aluminum, steel, coal and energy. There is active competition among the companies in the metal and mining industry. The market share of the companies is as follows: BHP Billiton 35.46 percent, Rio Tinto 22.35 percent, and Companhia Vale do Rio Doce 8.10 percent with the other companies in the industry sharing the remaining 34.09 percent.

Market Structure

The market structure of the metal and mining industry is an oligopoly. This is because the companies offer identical products which encourage competition in the industry. The competition is usually by means of research and development and innovation to come up with new ways of exploration and mining activities. Another factor that makes the industry an oligopoly is that the major barrier that keeps companies from joining are in terms of government regulation, sustainability actions of the business, and access to technology. Finally, the industry is an oligopoly because interested parties need huge amounts of money to join the industry. Existing companies discourage new entrants as a result of having exclusive access to resources and cost advantages that come due to mass production.

Micro Business Environment

Factors of Production

The required factors of production in the metal and mining industry are land, labor, and capital. Land is an important factor of production for metal and mining companies. Mining requires huge tracts of land and usually, companies compete to find the best mining regions. Nowadays, an increasing number of mining companies are operating mines in the same area so as to take advantage of common infrastructure as well as processing facilities (MacMahon, Sosa, & Morrison, 2011). Since the mining industry competes with the agricultural sector for land in certain areas, there have been increasing calls for governments to plan how land will be used so as to prevent agricultural communities from losing their source of income. Clearly, land is an important resource not only for the agricultural sector but also to the mining industry. The second factor of production is labor. Attracting and maintaining skilled labor is one of the long-term challenges that metal and mining companies face. In Australia, the National Institute of Labor Studies estimated that by 2020, the mineral sector would require an additional 86,000 workers so as to maintain Australias market share of the global commodity mineral demand. Due to these challenges, companies have spent extra funds in training and development, union relations, and maintaining health and safety for their employees so as to attract new talent. In the metal and mining industry, labor conditions, especially safety, play a crucial role in attracting labor. Therefore, companies should have good safety records to attract new talent. Finally, capital is an essential factor of production in any business. Companies in the metal and mining industry require capital for funding various business operations such as exploration, mining, and discovery of energy assets.

Fixed and Variable Costs

There are two main factors that affect mining cash costs: actual input costs and the price of the underlying materials in the mine (Savant, 2012). The actual input costs include skilled labor, equipment, mining materials, structural steel, reagents and all the things that go towards running a mine. The price of the underlying materials in the mine influence input costs. Apart from the two, there are other factors that influence cash costs in the mining industry. First, reduced production results in an increase in the cash. Higher production assists in reducing the fixed cost components (Savant, 2012). Factors that can cause lower production include technical problems, safety-related stoppages, and lower grades. Nevertheless, most cash cost components represent variable costs. Therefore, the costs at which variable costs rise plays a crucial role in determining the overall cash costs (Savant, 2012). The largest cash cost components in the metal and mining sector are labor, fuel, utilities, supplies, and consumables.

Cost Structure Analysis

The production costs of companies in the metal and mining industries are significantly affected by commodity market prices when the companies are still in their early stages of operation (Statista, 2016). However, when the companies are well established, such as BHP Billiton, then production costs are relatively fixed and usually do not vary significantly with the commodity market prices. Since a rise in market prices of petroleum products and metal ores do not increase production costs for the established companies, the benefits go towards the bottom line net profits of the company.

Macro Business Environment

Political Factors

BHP Billitons businesses are spread among many continents. As a result, the company is susceptible to political risks and government involvement in the countries in which it operates. Political risk factors can have a significant impact on the license to operate, slated key drivers, project pipeline, world-class assets, and growth options (Busse & Hefeker, 2007). Operating in emerging markets further increases the business risks that the company may be subjected to therefore having the ability to affect profitability adversely. The company has set aside a lot of capital for exploration projects in countries such as Kazakhstan, Mongolia, Democratic Republic of Congo and Western Africa where there is a risk of political instability. Some of the political risks of operating in such environments include nationalization, terrorism, corruption and civil unrest.

Government involvement may also affect the business operations of the company. Governments may be having a lot of debts hence search for more avenues for revenue and funds. As a result, there may be certain government regulations such as import and export control, social approvals and adjustment of taxation rates. For instance, BHP operations in South Africa underwent adjustments to conform to the Mineral and Petroleum Resources Act of 2002 that were effected in 2002 (Swart, 2003). This implies that under the new act, the company had a mandate of reorganizing 26 percent of the ownership rights and offer the, to disadvantaged South Africans. Such regulations can limit the company expansion efforts as well as overall profitability for its operations.

Economic Factors

Economic factors such as inflation, unemployment, currency exchange rates, labor costs, and material costs have a significant effect on operations of BHP Billiton. BHP Billitons businesses are affected by various currencies as a result of their production and supply facilities being located in different geographical locations. Thus, fluctuations in currency exchange rates can have significant effects on the companys financial performance. For instance, in 2010, the dollar exchange rate declined against top world currencies hence affecting the demand and supply of oil, which is a major product of the company (Statista, 2016). Among the most important currencies for BHP Billiton are the Australian dollar, the US dollar, and the UK pound that influence the operating costs of the company.

Apart from currency exchange rates, the company is dependent on the strength in global commodity prices which in turn have a relation to the global economy. Any weakness in global economies may result in a decrease in demand for commodities and therefore cause increased supply with reduced prices. This negatively impacts the profitability of the company. One of the countries that BHP Billiton greatly depends on is China which accounts for about 16.8 percent of the companys revenue (Statista, 2016). Therefore, a change in various aspects of Chinas economy can have significant effects on the company.

Socio-Cultural Factors

Socio-cultural factors can also affect BHP Billitons operations as well as stakeholder relationships. Such factors may dictate that the company should support local communities as well as provide various resources needed for infrastructural developments of housing, roads, schools and other amenities (MacMahon et al., 2011). Also, new development project usually requires approval by the community which may...