Abstract
Careful management of challenges in any company is very important. Successor failure of a company is pegged on the way problems are handled when they arise. This is considered critical if the company is operating at a global level. BHP Billiton is a successful global mining company located in Australia. The company was in a fix after making a decision postponing the expansion of its major projects (Ker, 2012). This paper analyses the problems that arose after the delay in expanding the projects. The paper also looks at how the company tackled these problems, how successful it was in solving related problems, and 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 has a wide variety of natural resources that include: Aluminium, copper, coal, iron ore, manganese, silver, nickel, titanium and uranium. This makes the company be among 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 operates in six continents 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 mission focuses on establishing a lasting shareholder value of natural resources globally. For quite some time, the company has had a 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. In this case, the company has been able to address the various needs of its customers. Apart from meeting the demands of its customers and emerging economies, the company is committed to safeguarding 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 caused great economic problems. This has hampered the overwhelming growth that the company has had for nearly a decade. This paper analyses the challenge that has been facing the BHP Billiton Company and the manner in which it has been coping with the challenge.
The problem emerged after the company decided to join its competitors in delaying 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 major projects. These projects include the Colombian Correjon Coal mine, the Canadian potash and the Zamzama Gas Plant in Pakistan. The Company’s board failed to approve the projects until the market stabilized.
Relative to Correjon Coal mine, it is the largest producer of coal in Colombia. However, on the world’s ranking, it is in fourth place (Kline 2012). 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, became more competitive. Therefore, expansion of the above 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 Colombian Correjon Coal mine and Pakistan’s Zamzama Gas plant. On both of the projects, the delay is far much worsened by the inclusion of other problems. Since the acquisition of Correjon Coal mines, the BHP Billiton Company has faced major opposition from the inhabitants of the region. These communities have incurred massive displacement while making way for the expansion of the project.
In 2001, BHP Billiton displaced by force a Colombian community of African descent from their Tobacco farming land. This move triggered much opposition and campaigns from all over the world. Several negotiations took place to oversee compensation and relocation of the displaced communities (Zapach & University of Alberta 1997). The BHP Billiton failed to abide by the recommendation from the negotiations further worsening the situation. During the year 2007, a complaint was raised against the company.
Conversely, this was a big blow to the expansion process leading to lowered investment in the project. Notably, most of the money was channelled to compensate the displaced, repair home damaged by mine blasts and improve the infrastructure in the region. 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 Correjon Coal mine project would have opened significant job opportunities in the region 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. In addition, the unemployment crisis is increased by the withdrawal of my workers. This is attributed to poor, working conditions due to poor pay and exposure to hazardous coal dust. BHP Billiton Company decided to delay the expansion process because of the rough times it 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 BHP Billiton economic growth.
For the Zamzama Gas Plant, BHP Billiton experienced an expansion of the first development phase very swiftly. The company was committed to the second phase of expansion to further maximise the economic benefits for the company. As anticipated the second expansion phase, took longer to establish due to various challenges. The floods experienced in 2010 inundated several wells of Zamzama Gas plant and were the worst in the company’s history (The Nation Newspaper Pakistan 2012). As a result, the BHP Billiton management closed down the other remaining wells.
This sudden closure had a great impact on gas production leading to the immense decrease in production shares. Apart from a decrease in the shares, the plant produced toxic fumes, which put at risk people living near the plant to various diseases. The growth registered was the worst ever to be experienced for over a decade. Furthermore, delay in expanding the Canadian Potash project weakened the BHP Potash shares, resources prices and the decline in the demand of its commodities globally. This poses a greater risk on Canada’s over-reliance on extraction (Graham 2012).
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 dropped by 15 per cent compared to that of its competitors. It was noted that Rio Tinto’s shares dropped by 10.7 per cent. On the other hand, Fortescue’s dropped by 14.8 per cent within the same period. What followed was 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 worry in the shareholders who hoped that the problems will ease when the company presents its 2012 financial report. By further delaying the expansion of these 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 Company’s economy alone. China was amongst those countries that were affected. China provides a great market for BHP Billiton commodities. This caused a slowdown in its economy too.
In trying to cope with the problem, the company formulated plans to re-establish the projects back again. The expansion processes are not happening as planned, but the company proceeded in a different direction. First, the company targeted control of commodities prices. This move would ensure other economies of their investors resume their consumption growth for the commodities, which would trigger the development of these projects.
These BHP projects remain the major economic booster in the respective countries they operate. Therefore, they play a bigger role in providing employment. The current crisis from the delay in the expansion of these projects has contributed to this problem with the mining sector providing little employment opportunities slightly above 1 per cent. Solving all the challenges affecting Colombian Correjen Coal mine will change the company face in Colombia and the world at large. Since it is the biggest coal producer in the country, mine expansion would create many employment opportunities. In return, more production will be realised.
Likewise, the expansion of the Canadian Potash and Zamzama Gas plant would have the same effect. 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 the global financial crisis and the technological considerations (Organisation for Economic Co-operation and Development 2010).
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 internationally, and thus experience 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 a high demand for 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 the 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. Lowering the commodity prices go hand in hand with lowering of the real wages and expenditure. The arbitration system and other unions disagreed with the initiative arguing that it was unfair both to the workers and the company.
Adoption of this policy could lead to the slowed growth rate of the company as compared to its competitors. This was attributed to the reduction in workers 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 companies where they would earn a better income and restore their parity with their norms. Reduced economic activities in its projects 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 prices of its commodities in order to make them 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.
For example, the company has formulated the strategy 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 an enormous effect on 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 other projects, that is, the Correjon Coal mine and Zamzama Gas plant 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. In addition, 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 internal affairs and paid little attention locally. BHP ignored the welfare of local communities particularly in the Correjon Coal mine. The initiatives used further worsened the situation rather than improving it (Zapach & University of Alberta 1997).
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. 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 an elusive dream.
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