Business Economics Report: BHP Billiton Case Study

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Economics for Business
Group assignment
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Executive Summary
Business Economics focuses mainly upon the company and the factors that contribute
to influencing its decisions about the acquisition and transformation of productive
resources into goods and services to meet human needs and desires. It is about
manufacturing and consumption processes. In addition to the obvious concerns about
expenses, revenues and profitability, there is ample empirical evidence to suggest that
decisions about the market economy are shaped by a range of other influences
including the company's goals, the competitively of the market it operates in and the
opportunities and constraints of the broader framework in which it exists. The economist
is concerned about this influence on company decision-making.
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Table of Contents
Executive Summary......................................................................................................... 2
Introduction...................................................................................................................... 4
Introduction to the company.............................................................................................5
Industry background.........................................................................................................5
The market structure of the industry.................................................................................6
Factors that influence demand and supply for the company’s product............................7
Elasticity....................................................................................................................... 8
Impacts of an event on the industry/company..................................................................9
Conclusion..................................................................................................................... 10
List of References.......................................................................................................... 11
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Introduction
The business economy deals with manufacturing and usage procedures. These
procedures occur within a so-called economy geographical region. This is connected to
demand, supply, markets, and prices; company economy looks not only at how
companies communicate with their consumers or other companies, such as providers,
clients or rivals but also at the factors within an inner company setting. It is also
increasingly worrying that other elements of the connection between an enterprise and
its internal climates, such as the position of the state in guiding company activities, the
effect on natural environments of company operation, and the nature of the capital
industry like work, are described and analysed. The report is based on business
economics with the case study of BHP Billiton which is a mining company in Australia.
The report discusses the business strategies that help in shaping business economics.
The report covers the analysis of the market structure the industry determinants of
demand, supply, and demand elasticity.
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Introduction to the company
With around 100,000 staff in more than 25 nations, BHP Billiton is among the world's
biggest mining and resources businesses. The firm is located in the Australian
Securities Exchange (such as BHP Billiton Ltd.), the London stock exchange and the
Johannesburg stock exchange. The Group also operates on an Australian Securities
Exchange. BHP Billiton is one of the biggest aluminium, copper, manganese, iron oxide,
uranium, nickel and silver minerals produced worldwide. The enterprise has oil and
carbon resources as well (BHP Billiton, 2019).
Financial Summary
Market Capitalization: US$ 166 billion
Revenue: US$ 52.8 billion
Net Operating Cash Flow: US$ 17.9 billion
Its contribution to the economy
Economic contributions: Last year the worldwide financial contributory figure totaled
US$ 33.9 billion through supplier transfers, salaries, and advantages for employees,
dividends, taxes, and royalties.
Employment and careers: It employs a team of 62,000 people and entrepreneurs in 87
locations.
Supporting local businesses and suppliers: It paid 15.8 billion U.S. dollars to
suppliers last year. Its local purchasing plans have allowed external expenses to be
directed to local suppliers in the amount of US$ 3.8 billion (BHP Billiton, 2019).
Payments to governments: The total payment to governments last year amounted to
USD 7.8 billion, an effective 31.4 percent tax rate.
Social investments: In 2018, the BHP Foundation contributed the US $77.05 million to
personal investment.
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Industry background
The Australian mining industry dates back to the 1850s and is now one of the most
established sectors in the country. It contributes significantly to domestic GDP and
typically accounts for about 7% of the complete GDP. With minimal onsite treatment,
mining has been highly export-oriented and has accounted for between 50 percent and
60 percent of complete domestic production since 2007-2008. Australia is world's top 5
manufacturer of gold, iron oxide, plume, sulphur and nickel and the fourth biggest
source of black carbon worldwide. As the fourth biggest mining nation in the globe,
Australia will continue to supply high-tech machinery, offered possible possibilities for
American providers, according to China, the US and Russia (Anderson, et. al., 2016).
In 2016 there were more than 370 workplaces in Australia, approximately, according to
the research. The three biggest mining countries comprise a third of the countries in
Western Australia (WA), a quarter in Queensland (QLD) and a fifth in New South Wales
(NSW). Australia's two main mineral products by quantity are iron ore (29 mines) (97
percent of which are mined in WA) and charcoal (over 90 mines), mainly mined in the
East Coast, QLD and NSW countries. Unlike most worldwide manufacturing, Australia
produces the bulk (around 75 %) of black carbon from open mines. In the wider local
mining industry (i.e. non-coal), the 3:1 proportion of open / surface to subterranean
mines also refers (Brickley, et. al., 2015).
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The market structure of the industry
The mining sector has played an important role in the Australian economy since the mid
19th century. In fiscal 2017 Australia's economic development was added by the mining
sector to more than 125 billion Australian bucks. The mining industry's actual gross
value added accounts for approximately 7.4% of Australia's complete gross value added
and is Australia's biggest contributor after economic and insurance facilities, as well as
building. More than 126,000 workers in the Australian mining sector were hired in the
economic year 2017. Several mining booms have historically boosted investment in
mining and facilities, leading to greater revenues from mining and sophisticated
immigration to Australia. BHP contributes a major share of GDP in the economy of
Australia. In managing the company, the evaluation of market constructions is
important. It states how the market will be handled the issue and how a balance is
reached, according to the amount and size of the buyer or seller, the existence of
barriers to entry and exit, etc (Merigó, et. al., 2016).
Nature of the Mining Industry
 It required a large amount of capital and investment.
 In the present time, the new firm is not allowed to establish in the mining industry.
 While entering into oligopoly there are high barriers.
 Mining companies have operated over 100 years and are structured and founded
in a strong way.
Oligopoly Market
 In the Australian market, there are various competitors of BPH Billiton that are
Vale, Tinto, and Rio.
 All the products used by the BPH Billiton are having homogenous in nature and
can be easily substituted by the competitors.
 In the market, the BPH Billiton is having respectable power (Acs, et. al., 2018).
 For the small companies, there is a presence of high obstacles such as there is
specific knowledge about the product and services, lack of proper government
regulations, need for large investment and limited distribution of natural
resources.
Elimination of strategies
Perfect Competition: In Australia, there is no perfect competition in the market as a
small organisation has to face many issues while exploring or mining the product
whereas BHP has to face the low barrier.
Monopolistic competition: Mining in Australia does not have many small enterprises
or low entry barriers (Castillo-Vergara, et.al., 2018).
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Duopoly: Mining has more than two major companies and access obstacles are not as
hard.
Monopoly: The mining sector has several companies or severe entry obstacles.
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Factors that influence demand and supply for the company’s product
As part of the company of BHP Billiton, its oil company has a powerful economic basis
to invest, expand and maintain a long-term perspective. For a lengthy time, they spend
cash on big employment with several possibilities to maximize their profitability. They
spent almost USD2 billion in growth resources during the last five years in a row.
Global Financial State: Global oil prices are connected to worldwide supply and
resources. Motivated prices for motor petrol are linked to vital world petroleum prices.
Because of the latest global economic crisis and global inflation, vital petroleum prices
resulted in freeways to US$ 147 per barrel and US$ 33 per barrel in 2008. However, in
the worldwide industry and in particular the OECD countries, there were small financial
doubts about the supply for petroleum, so that rates were small. The petroleum rates
were recovered in the summer of 2009. When harsh economies were called upon to
surpass vital petroleum rates, they began moving up again in 2010. Motor petroleum
supply is now very much influenced by demand from India and China. Impact of hedge
funds and other economic equity funds also contributes to stock volatility speculators
and economic institutions (Albort-Morant and Ribeiro-Soriano, 2016).
Currency Exchange Rate Fluctuations: Due to the geographic position of their
petroleum manufacturing and distribution installations depending on multiple continents,
the motor fuel company of BHP Billiton is affected by a broad range of currencies. The
fluctuation of monetary exchange rates can affect their economic efficiency more
effectively. If the currency gets stronger, it could have quite good consequences but a
fragile dollar might ultimately have an adverse impact on its outcomes on demand and
supply. In the 2010 summer, the exchange frequency of cash decreases with almost the
entire capital of the globe. However, the fragile currency may result in higher oil and
higher global inflation, thus lowering demand for petroleum because of its affordability
and nations can seek petroleum options that will have a major effect on the economic
results of BHP Billiton (Salvatore, 2015).
Demand from India and China: As a worldwide customer for their individuals, India
and China have appeared for olive oil supply. India and China have become a major
source of worldwide olive petroleum demand. 16% of the complete world supply for
motor fuel from India and China was driven on by themselves in 12 months 2009.
Higher demand for gasoline has been driven by powerful financial growth and facilities
in India and China last year. With its other goods such as iron ores, copper, aluminum
and so on, the BHP Billiton is a significant trading partner for India and China. Its
integrated advertising centers have all the required tasks from growth through to the last
customers to regulate item advertising and flow.
World Political Occasions Including War: The petroleum company of BHP Billiton is
growing throughout many continents. The olive oil is mainly in areas where conflict is
more likely. Most nations which produce vital petroleum are confronting serious policy
and trade instability. BHP Billiton also operates in developing economies, with extra
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hazards that may have a negative effect on their operating profitability (Moore, et. al.,
2016).
Natural Disaster and Calamities: Most of the petroleum production plants are linked to
a dangerous risk. At many geographical places on-shore as well as offshore, BHP
Billiton has its own exploration, development, production and control processes.
Operational crashes such as door and transport, fire and explosion, energy loss, traffic
incidents, insufficient control, environmental pollution, and mechanical errors can be
affected by these operational tasks.
Health, Safeness, Environmental and Community Legislation: Because of its olive
petroleum company, BHP Billiton is a leading coal gas manufacturer. They operate
onshore as well as offshore petroleum. Health, safety procedures and legislation and
regulations govern the petroleum sector extremely. BHP Billiton can be subjected to
unpredictable and accelerated disputes, compliance expenses and unforeseen
environmental recovery charges as many legislative demands and security processes
are continually increasing. Potential health, safety, the environment, and the
environment, including airplane situation, light-carrying occurrences, accidents or vital
petroleum fires, portable gear accidents, pollutants get out of the environment,
community disturbances or civil disturbances, may have any material effect on your
business activities (Blair and Sokol, 2015).
Alternative Energy Source: The growing demand for olive oil resulted in an
improvement in crude petroleum growth. In the latest years, this fact has resulted in a
rapid depletion of current resources. Because the profits and income from BHP Billiton
olive oil are linked to the growth of olive oil, the outcomes of their exploration and
acquisition attempts and the possibilities for replacement of current stocks are
consequently immediately linked to the achievement of these.
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Elasticity
The demand for petrol and oil comes from the mining demand. This indicates that the
demand elasticity should be quite small. An assessment of the global supply elasticity
for petroleum and gasoline indicates that a 1% cost fall contributes to a demand rise of
only 0.24%. The poor demand Elasticity indicates that the market will mainly be
adjusted through supply modifications, whereby low-cost manufacturers and revenues
will displace high-cost providers. This adaptation is in fact already underway. For
instance, China is now importing more than 80% of petroleum and gas, compared with
70% two years earlier. In the first half of 2015, Chinese gasoline and petroleum
production reduced by 9 %. Smaller miners in Australia and elsewhere in the globe also
experience the effect. In addition, the income effect is as forecast. Australia's gas and
petroleum sales to China grew 18% annually, while its revenues for imports of gasoline
and petroleum decreased by 31% owing to price drops. Simply put, while bigger miners
gain business to share, they do so at the expense of high-cost miners, and this affects
profits (Anderson, et. al., 2016).
Factors affecting the Elasticity of BHP are as follows:
Availability of substitutes: Demand for a product with many substitutes will be more
elastic. The reason is that the customers are forced to take their replacements by a tiny
increase in their rates. An increase in petroleum and gas prices, for instance, promotes
BHP's mining activities. The accessibility of near replacements, therefore, leaves
demand susceptible to price changes. On the contrary, the price elasticity of demand in
commodities is having few or no substitutes, such as petrol and oil.
Level of price: Price level also influences supply cost elasticity. Precious products such
as petroleum and petroleum have high demand because their supply is extremely
susceptible to price change. Demand for cheap products such as mining equipment is,
however, inelastic, as price changes of such products do not significantly affect their
request (Brickley, et.a l., 2015).
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Impacts of an event on the industry/company
BHP Billiton has been continually at the forefront of operations recognized to have
caused serious environmental damage. The biggest events of these kinds affect BHP.
In what is called the worst economic catastrophe in Brazil’s history, the BHP performed
a major position on 5 November 2015. The fall of a dam belonging to the BHP Billiton
Iron Ore Mine destroyed a whole city by releasing a torrent of poisonous mining waste
that contaminated the water supply of more than 200 cities. For two centuries, the
environment of its Ok Tedi mine in Papua New Guinea was reported to be progressively
being damaged by BHP Billiton. Their mining operations led to damaged rivers and
thousands of lives. The firm is renowned in Australia for its advocacy for coal pricing
(Albort-Morant and Ribeiro-Soriano, 2016).
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