BHP: From the Big Australian to ‘nominally Australian’?

Powerful position: BHP chief executive Marius Kloppers unveils a record half yearly profit. Source: AAP.

When BHP chief Marius Kloppers returned Australia’s largest half-yearly profit for 2010, news reports described him as being ‘among the top 20 most powerful people in business worldwide.’

This tag is due to political muscle as well as financial heft. That Kloppers moves in influential global circles is beyond doubt, with his messages appearing in WikiLeaks. It is also undeniable that he has access to and influence with Australian politicians, playing an important role in over-turning the Rudd government’s super mining tax proposal and setting the agenda for the Gillard government’s current carbon pricing scheme. The man leading this colossus describes himself as ‘nominally Australian’.

What do we make of this display of corporate wealth and power? Has BHP Billiton passed a threshold not previously reached by any Australian firm? Are we at the point where the government is in thrall to a mining giant? Is a non-Australian CEO likely to be less of a ‘citizen’?

The company had long been criticised as being too powerful and a monopoly to boot.

I would argue that the form of social contract between BHP Billiton and Australia has shifted decisively as the company repositioned itself from a domestic steel producer to a global resources company.

Corporate interests

BHP has always put its interests beyond those of the country, that’s what business does. What has changed is how the company negotiates to promote its interests.

Incorporated in 1885, BHP has been among the largest non-financial companies in Australia in terms of assets for the past 100 years, and the largest from the 1930s until today.

Since WWII until the closure of the steel works in the early 2000s, BHP was the largest private sector employer. It had a deep and wide footprint across Australia, operating in most states and territories. The nature of its business, mining and manufacturing brought it into close contact with governments, local, state and territories and federal.

The company contributed to the public purse through the payment of rates, mining royalties and income tax. The steel works supported regional cities. Later mining ventures boosted towns in northern Australia. However, the company was also a supplicant.

The transition made around 1912 from mining company working the silver, lead, zinc lode at Broken Hill to an iron and steel manufacturer on the coast was underwritten by government support. Over the long haul, the viability of the steel industry in a small domestic market depended heavily on the continuation of protection from imports.

This shift from mining to steel production during WWI changed BHP and its relationship with Australia. From 1885 the Broken Hill mine returned fantastic profits from exporting and paid high dividends to its shareholders, three-quarters of whom were residents of the United Kingdom. Relations with its workforce at the Barrier were less cordial.

The development of a ferrous metals industry coincided with the ‘national interest’. The fates conspired to give BHP a dream run in terms of public perception.

Jobs

Australians saw themselves as custodians of an empty continent waiting to be filled by ‘Britishers’. However, rural industries could not offer enough jobs for new immigrants.

Cities and their expanding manufacturing industries snug behind the tariff walls were to be where these newcomers would find jobs. BHP and its cluster of downstream metal using firms could not only generate jobs, primarily in regional cities, but also provide products Australia needed for its development and defense.

If Australia was to escape the fate of people who remained ‘hewers of wood and drawers of water’ it needed modern industries. WWI had thrown the country’s lack of munitions capacity into sharp relief.

Growing international instability, especially in the 1930s and the threat of Japanese expansion, made having a viable heavy industry which could be diverted to defense needs a source of comfort. Essington Lewis, BHP’s formidable chief, was a leading advocate of increased defense preparedness during the 1930s.

It was to Lewis that the government turned in 1940 to head the Department of Munitions and later Aircraft Production. His powers were so great that he was referred to as an ‘industrial dictator’.

WWII was the high point of the symbiotic relationship between the company and country: a virtuous amalgam of private enterprise serving a higher public purpose. Post-war development was symbolized by the production of an Australian made car, the Holden.

Steel was the backbone of the economy whose manufacturing sector grew rapidly under the twin impetus of high protection and mass immigration. BHP’s fortunes were tied to those of fortress Australia. However, a small and high cost economy was not fertile ground for an internationally competitive steel industry with rising challengers from Japan and Korea.

The company was not particularly profitable in the 1950s, and low dividends disappointed shareholders. Moreover, smelting capacity struggled to keep up with the demand of local customers.

From the 1960s BHP undertook a series of initiatives which collectively led to a reversal of fortune and a dramatic re-orientation. The company began to seek export markets for its steel, and became an exporter of iron ore, manganese and coal.

A relaxation of the pre-war ban imposed on the export of iron ore to Japan precipitated a resources boom rushing to supply the expanding economies of north-east Asia. The company’s production base was broadened when it developed, in partnership with Esso, gas and oil fields in Bass Strait. A series of acquisitions and mergers transformed BHP from an Australian-based exporter to a global resource company.

An acquisition of John Lysaght’s steel business in 1979 delivered milling assets in Asia; acquisition of Utah International in 1984, which had coal mines in Queensland, brought iron ore, coal and copper mines outside Australia; the acquisition of several overseas oil and gas companies in the mid-1980s strengthened that division; and finally, in 2001, BHP merged with the South African mining giant, Billiton.

Present day

The transformation to global resources company was completed when BHP spun off its domestic steel operations in the early 2000s.

In making this strategic shift, BHP Billiton has a different footprint in Australia than its predecessor. From the mid-1960s until the mid-1980s, BHP was the country’s largest manufacturing employer with around 60,000 staff. The 2010 Annual Report reveals that less than 15,000 people now work for BHP in Australia.

Before the acquisition of Utah International 99% of its assets were held in Australia, now it is 55%. More than 90% of the revenues are generated overseas.

There is less direct link between the fortunes of the firm and Australia through job creation and employees votes now than before. In earlier times the company and trade union movement would join forces to remind the government of the link between protection and employment.

So why can Marius Kloppers exert so much influence despite having shed most of BHP’s local workforce?

The answer is that while the old steel producer made promises about what it would deliver: jobs, national development, and defence security - BHP Billiton can threaten to take things away.

The company is now a ‘footloose’ multinational who can shift between markets based on its perception of risk and reward. Faced with a proposal by the federal government to increase the tax on mining profits, BHP Billiton together with a willing coalition of other miners forced a swift retreat by arguing that the government had introduced ‘uncertainity’ into capital budgeting decisions, and so increased sovereign risk which would divert further investment.

Other stakeholders linked to the expansion of mineral projects and profits, such as treasurers of states and territories depending on revenue from mining operations, mining unions, suppliers and local communities, joined the chorus of disapproval and outrage.

Moreover, BHP Billiton’s size and success brought additional allies to its cause: shareholders and or members of superannuation funds. Everyone in Australia, it seemed had something to lose. The company is registered on both the ASX and the London Stock Exchange. In Australia there were 474,000 individuals holding shares and 122,000 corporate shareholders who held 69% of shares on issue.

Many more Australians had a stake through the investments made by their superannuation funds which were swollen by compulsory contributions by nearly all workers and their employers. BHP was the most important stock listed on the ASX and the materials sector, of which was part made up of nearly a quarter of the ASX index.

If BHP Billiton caught a cold, private wealth holdings would suffer. Household wealth had been badly affected by the GFC, equity prices needed to go up, not down.

The long transition away from steel to resources had cut the umbilical cord between the company and Australia. Entering new product markets made BHP an exporter. It looked to world markets and opened mines, refineries and rolling mills abroad. Moving into these new ventures brought it into contact with foreign joint venture partners who though globally rather than locally. The transition was speeded up by acquisitions and mergers. The standouts were Utah International in 1984 and Billiton in 2001.

The company struggled on a number of fronts in the 1980s and 1990s, it was subject to a hostile take-over bid, the ‘Steel Plan’ delayed the cut in steel tariffs, and there were serious problems arising from the acquisition of Magna Copper Company and operations at the Ok Tedi mine. The board looked to men from the new partners to take charge.

‘Nominally Australian’

From 1998 BHP’s CEOs have been foreign born, Americans, Paul Anderson and Chip Goodyear, and South Africans, Brian Gilbertson and Marius Kloppers. I suspect that all would have privately thought of themselves as ‘nominally Australian.’

BHP Billiton is big, wealthy and powerful because it is very good at what it does: it operates a portfolio of resources businesses supplying willing buyers, nearly all of whom are located overseas, especially in China.

Unlike its steel producing predecessor the company does not now have a monopoly position in the local market nor does it have such an adversarial relationship, from time to time, with its workforce. What is interesting about the recent events is the manner in which BHP Billiton conducted its negotiations with the government.

While the older generation of BHP senior management would have met face to face and behind closed doors, quietly working towards a compromise solution, Kloppers and his allies attacked on number of fronts. The campaign to overturn the excess profits tax used advertising to put the miners’ case to the public. Those interests opposing the tax quickly turned the public mood.

Large companies, particularly global resource companies, are well resourced and well informed. They have been negotiating with host governments around the world over the terms and conditions of mining royalties for decades.

Global experience put BHP Billiton and its advisers in the box seat against opponent unprepared for the coordinated response from the mining industry and an onslaught through the media.