Oligopoly brief: BHP Billiton
BHP Billiton, the #1 mining company in the world, is a structural anomaly. The result of the 2001 acquisition of Australian mining company Billiton by UK-based resources company BHP Ltd., it is a dually-listed company with two headquarters, one in Melbourne and the other in London.
The company, with $29 billion in revenue, owns mines and/or resources in six continents. It is one of the leaders in the consolidation of the worldwide mining/resources industry.
Unlike some of its rivals (Rio Tinto comes first to mind.) BHP Billiton has had relatively acquisitions in the last few years since the big 2001 deal. It has, however, grown steadily as it has exploited existing mines, add more gas and oil properties, and (most important) ridden high on the rising prices for a variety of its products.
It is, for example:
- The #1 supplier of iron ore
- The #2 coal exporter
- The #2 copper mining company
- The #3 nickel miner
- The #4 uranium miner
- The #6 aluminum ore miner (it also smelts aluminum)
The company also is a significant oil and gas producer, and mines zinc, silver, diamonds, titanium, chrome, manganese, and other resources.
BHP was started in 1995 mining silver, lead, and zinc in Australia. It steadily increased its mining presence moistly in Australia. In 1967 it went into oil and gas exploration and sales offshore from Australia.
Billiton goes back to 1860, when it was found to exploit a tin mine in the East Indies. It has over the next 145 years expanded operations to South America, Canada, Africa, and Australia.
In an recent Wall Street Journal article ("Rock On: Boom Times for Mining Giant Signal Deep Changes", 4/13/06), notes that a few years ago companies like BHP were hurting badly, as prices for metals went up and down. But increasing demand from China and other countries and a spike in prices have changes the industry. As the article notes, "BHP Billiton's turnaround reflects a broader reversal in the world's beleaguered mining sector, which struggled for years to right itself after decades of declining commodity prices."
But much of the credit goes to a changed strategy from the leading mining companies. "In past booms, mining companies quickly adopted a gold-rush mentality, rushing to dig up more rocks whenever prices stirred -- even if it yielded too much supply. This time, they're trying to manage the upswing to last."
Mining companies are sustaining the commodity boom with more discipline than in the past. The companies are spending their money not on more exploration but on stock buybacks and dividends. In addition, the oligopolies are ever more able to set prices. As the article says: "Roughly three-quarters of the world's seaborne iron-ore trade is now controlled by three giants, including BHP Billiton. These producers have a strong advantage in current negotiations with steel makers, who already absorbed a 72% price rise last year."
When it does spend money on new projects, BHP Billiton has spent on oil and gas exploration and buying up leases. The article notes, while "the company's core copper, iron ore and other mines are still struggling to keep up with demand."
Concentration is a major factor in all kinds of mining. "A generation ago, there were 10 major copper miners in the U.S. Today, there are just two. A similar phenomenon swept across other materials sectors, leaving a handful of bigger and stronger global conglomerates that have interests in a wider array of commodities, giving them more diverse portfolios to help weather commodity-price volatility."
At one point, companies like BHP Billiton were run by miners and engineers. Now they are run by financial professionals, who realized that the way to make money is by producing less, not more.
