Arnoud Balhuizen, CCO speaks at the Melbourne Mining Club on understanding commercial value in our connected world.
Arnoud Balhuizen, Chief Commercial Officer
Melbourne Mining Club, Melbourne, Australia, 1 June 2017
Good afternoon everyone.
I acknowledge the traditional owners of the land on which we stand, the Wurundjeri people of the Kulin nation, and pay my respects to their Elders, past and present.
Thank you to the Melbourne Mining Club for inviting me. It is an honour to be among so many who are passionate about our industry and have done so much to progress it.
I acknowledge all special guests, in particular, the Club’s patron, Sir Arvi Parbo.
Much of my talk today reflects his career. From Estonia to Australia, via Germany, he took his company from a small gold miner into bauxite, and nickel – elevating it onto the world stage.
I am reliably told – that in the early 70s when the industry was doing it tough, Sir Arvi stared down the critics from his company, the banks, investors and the media to expand his exploration team saying publicly.
“When you are exploring today you are thinking about conditions in 10 years’ time”.
Soon after, this team, discovered the Olympic Dam deposit.
Forty years later we still haven’t scratched surface on the potential of Olympic Dam – it will deliver for Australia for generations to come.
I honour Sir Arvi’s determination and dedication – from which we are lucky enough to be still reaping the benefits of today.
It’s great to be back in Melbourne.
Melbourne is the traditional home of mining in Australia.
And Melbourne, I know, is the multicultural capital of Australia – a melting pot of arts, entertainment and sport.
This is something I can relate to.
While I am Dutch, I was born in Venezuela, I have lived in the Middle East, the Netherlands, Texas, and Singapore.
Having spent time at BHP for 15 years, I think I’m entitled to call myself half Australian as well!
In this day and age though, no matter where you live, everything is connected.
Just look at BHP.
From our humble beginnings of one mine in one town, we now have people in multiple locations around the globe:
From Shanghai to London, Tokyo to Santiago, and from Texas back here to Melbourne.
Yet we’re all connected.
It’s this connectivity I’d like to explore today:
- How BHP’s strategy connects to our long-term vision;
- How the connectivity within our commercial teams enhances our strategy; and
- How our connectivity with the world allows us to see and act upon emerging trends.
We have been around since 1885.
As a Company with a long history and operations that have a productive life that can be measured in decades, we think in generations.
One of the advantages of long-term thinking is perspective.
We’re prepared to withstand short-term volatility because we know change is a constant.
We know technologies, economies and the environment will evolve at a rapid rate.
However, we have a long-term strategy. A strategy that’s remained unchanged for nearly two decades.
BHP, true to this strategy, has a simple, yet diversified portfolio of just 12 core-operated assets – and those assets are well located, with low-costs and attractive future growth options.
We’ve built on this strategy with a discipline to focus on what matters most. Safety, Culture and Productivity.
In February, we announced over 11 billion dollars in annualised productivity gains since 2012.
And that is just the beginning.
From this foundation we have a strong plan for growth. There are significant gains to come.
- As Andrew outlined recently in Barcelona, from where we stand today and at consensus commodity prices, we have the potential to grow the base value of BHP by more than 50 per cent through six key drivers:
- Latent capacity;
- US Shale optimisation;
- Growth projects;
- Targeted exploration; and
- Technology advancement.
The outlook for BHP is strong and we have a unique set of opportunities that will see us prosper, and grow value-per-share throughout the cycle.
That’s the foundation:
- Our strategy,
- Our three key priorities of safety, culture and productivity, and,
- Our plan to grow the value of our Company.
So what part do I play in this? How does my team contribute to BHP’s success through our Marketing and Supply functions?
As Chief Commercial Officer, my team looks at all our key value drivers through a commercial lens.
In simple terms, my team’s role is to maximise the value of every dollar that comes in – and every dollar that goes out.
I believe that the effectiveness of our commercial function is based on two central attributes:
Firstly. How we are structured gives us an advantage.
By combining our marketing and supply teams we have a single strategic view of our entire value chain.
We operate on both sides of the commercial coin.
Let me give you a specific example of how Marketing and Supply – together– can add commercial value:
In US Shale, additional investment creates the opportunity to generate shareholder returns.
But to guarantee the return on investment, we can lock in the revenue line and the cost line.
So, our marketing team deployed a hedging strategy and our supply team fixed over 95 per cent of the costs.
This has secured a 30 per cent rate of return on incremental investments in gas development in the Haynesville.
The second way we maximise the value of our Commercial function is by taking advantage of both our global and local footprint.
The centralisation of our commercial operations in Singapore gives us proximity to our key Asian customers – such as Korea, China, Japan and India.
Asia is our most important market and we need to be at the heart of its demand.
Last financial year almost 70 per cent of our sales went to Asia.
Our relationships have deepened over time because of our proximity to our customers.
But on the other hand, our local footprint at our Assets around the world connects us to our local communities and local vendors.
We invest with local businesses through our Local Buying Program.
Based on the program’s success in Queensland, and more recently in New South Wales, we are looking at expanding the program in West Australia beyond our current commitments.
The Queensland program reached an important milestone last December, when we passed more than 100 million dollars in approved local supplier spend through the Program since it was established in 2012.
These kinds of programs are vital to our licence to operate.
We have in place special payment terms for small, local and indigenous business.
We used the experience of these local relationships to help shape the Australian Supplier Payment Code, which as of this week we became one of the first voluntary signatories to – and we welcome its introduction.
Our Cluster Program in Chile which is all about building and developing 60 local suppliers by 2035, is another local connection to our global supply chain.
This is important because we want local businesses to grow as we grow.
Marketing and Supply together create effective business partnerships at a local and global level.
This approach works for BHP. It means we are connected. And it is this connectivity that is our greatest opportunity.
It gives us insight and perspective.
It helps us understand how our markets might evolve – and allows us to adapt the strategy and take action that anticipates a changing market.
Our teams – with their global and local perspective – study emerging trends from the bottom up and the top down.
This informs our view on demand centres like India – where we are confident that the living standards of its 1.3 billion people will rise to the next level.
There are clear signposts we follow – from trade barrier reductions to the rising urbanisation rate.
If we just look at the initiatives proposed by the Modi government:
- 100% electrification by 2020; and
- “Housing for All” by 2022;
These policies are expected to have a material impact on demand for coal, iron ore, copper and petroleum.
We also study food consumption patterns and how that will play into demand for fertiliser and in our case: Potash.
Our analysis suggests that between now and 2050 we expect:
- The world’s population to grow 30 per cent; and
- Crop demand to grow 50 per cent.
That food demand won’t be met without more potash.
Potash demand is expected to grow at 2-3% per annum to 2030.
We continue to look closely at what China is doing with policy and infrastructure investment.
Recreating the old Silk Road is central to China’s next phase of development.
Dubbed the modern ‘Marshall Plan’, the Belt and Road Initiative is far more ambitious than its predecessor.
It aims to be a truly global initiative spanning continents and decades.
68 countries or regions over a vast area of Eurasia and parts of Africa and Oceania, are directly involved.
This region takes in half the world’s population and 30% of the global economy!
It will support significant infrastructure investment and promote trade, which is the life blood of the global economy.
And now I’d like to show you a clip of One Belt One Road from our Prospects blog.
Prospects is designed to share our analyses, insights and views of the world – and I encourage you to visit the blog and sign up!
The reason One Belt One Road is especially significant is the opportunity it presents for Australia.
We should all be pursuing ways to ensure the Belt and Road extends to Melbourne, Sydney, Brisbane, Adelaide and Perth – there’s no reason we can’t all benefit.
BHP can be a vital link to connect Australia to this opportunity.
One Belt One Road is expected to trigger huge demand for resources, services and technology.
Australia is well positioned to satisfy these needs.
It has an unbeatable resource base – that is clear.
But to fully harness the opportunities that lie ahead, Australia must remain competitive.
Australia must remain connected.
The opportunity for Australia lies with every local business. Your services, skills and products are well placed to take advantage of the opportunities in Asia.
At BHP, we know what local Australian suppliers can offer through productivity and innovation.
We must all work together to demonstrate this unique offering on the world stage.
The opportunity to access continued Asian economic growth is within reach – it’s on our doorstep.
We have to think big!
Our long-term commitment and relationships within Asia mean that today we are in a prime position to seize the opportunities.
BHP is a stronger, simpler company than we were a few years ago.
We are well-positioned for future economic conditions.
And we are confident we have the right assets and strategy in place to increase returns and significantly grow shareholder value.
Asia is critical for us as a global company, BHP is part of what connects Australia to even greater growth in Asia.
We all must think and plan in decades and generations.
The Belt and Road Initiative is an opportunity like no other, and if we’re not prepared, we will lose our competitive advantage.
As individual companies, as an industry, as a nation.
BHP has been around for more than 130 years – and we plan to keep evolving and adapting to ensure we are around for another 130 years.
Change is a constant.
Connectivity is critical.