BP BILLITON CASE STUDY ON INTERNATIONAL FINANCE
MULTINATIONAL FINANCIAL MANAGEMENT
BP Billiton is a global leader in the natural resources sector formed from a merger in 2001 between two complementary companies – BP (Broken Hill Proprietary Company), an Australian company, and Billiton, a British firm. The organization is headquartered in Melbourne, Australia, with significant corporate management presence in London, as well as corporate centers in Johannesburg, South Africa and Houston, USA. The company provides a range of products: aluminum, base metals, carbon and stainless steel-making raw materials, diamonds, energy coal and petroleum. The firm has a total workforce of over 100,000 people from their areas of operation.
According to the 2006 Annual report, BP Billiton’s primary business goal is to create long-term value through the discovery, development and conversion of natural resources, and the provision of innovative customer and market-focused solutions.
Exporting. Primarily, they export mining products to their countries of operation. For instance, they sell lump ore and fines from Australia and Samar co sells pellets from Brazil to steel producers, which are principally exported to China, other countries in Asia, Africa and the Middle East, Europe and the United States. Further, most of their export sales are made under short and medium-term contracts in Europe, Asia and the US.
Importing. They import but this is only one of their support activities, as they sometimes have to purchase equipment and acquire of services from outside Australia.
International Joint Ventures. They have various international joint ventures with other companies. They hold a 38.5% working interest in the Samara project, a 33.76% working interest in the West Cameron 76 joint venture, a 30.95% working interest in the Star lifter (West Cameron 77), a 43.66% working interest in the Mustang (West Cameron 77) joint venture, a 45% working interest in the Angostura development joint venture, a 46.1% working interest in the joint venture of the Liverpool Bay asset, a 16% interest in the Bruce field, an effective 45% working interest in the Hornet joint venture, a 45% interest in the joint venture contracted under the 401a/402a PS, among many others. They are likewise a participant in the North West Shelf (NWS) Project, an unincorporated joint venture. Also, they hold a 90% share of Minerva development in a joint venture agreement.
Foreign Subsidiaries. In addition to the joint ventures, they also have subsidiaries which help them operate internationally. For example, Ingwe Collieries Limited, a wholly-owned subsidiary, they are able to operate six coal mines in the Wit bank region of Mpumalanga province of South Africa. Jersey Limited is likewise a wholly-owned subsidiary of BP Billiton Plc. Additionally they have the Billiton Investment 3 BV, Billiton Investment 3BV and Billiton Investment 8 BV (BP Billiton Shareholders) subsidiaries.
Due to the immensity of the scope of their operations, the major problems lie in the a great demand for everything the world’s biggest mining company pulls out of the ground, especially iron ore and coal (the two elements that produce steel), but with too few workers for their size. Also, because of the nature of their business, they touch on the very delicate issue of environmental protection in the course of their business operations. Further, since they operate in several countries where ownership of land is uncertain and where disputes may arise in relation to ownership, there is a risk that this may cause disruption to some of their mining projects and prevent the development of new projects. Additionally, the business could be adversely affected by new government regulation such as controls on imports, exports and prices, new forms or rates of taxation and royalties.
BP Billiton’s current chairman, Don Argus, stated that his organization believes that they have unique opportunities and challenges as a result of the new industry environment, most importantly the potential for a multi-decade of high demand growth driven by China, India, Russia and the developing South American economies. The integration of W.M Resources’ assets into the BP businesses and the sale of its fertilizer business were successfully completed during the year with the result of significantly boosting nickel and copper production during a year of strong prices, adding uranium to BP’s product range and providing growth options for the future while continuing to optimize the business portfolio. Their global exploration activities continued to increase as they search for the next set of options for growth, many of which will be in regions that will create their own set of challenges, as they focus more intently on opportunities in sub-Saharan Africa.
INTERNATIONAL FLOW OF FUNDS
BP Billiton has operations in the major resources provinces of Africa, Australia and Latin America, as well as a presence in the markets of North America, Europe and Asia.
Diversified across products, markets and regions, our asset base provides relatively stable cash flows regardless of variations and risks in areas such as commodity prices, currency exchange rates and geopolitical conditions. This was shown in their consolidated cash flow statement, where the entry for the effect of foreign currency exchange rate changes on cash and cash equivalents is a positive USM, as compared to last year’s negative USM. Their export activities was affected in that foreign exchange rate movements resulted to the rise to a wider range of deferred tax assets and liabilities and an increase in the volatility of deferred tax balances.
INTERNATIONAL FINANCIAL MARKETS
The foreign exchange market is used by BP as the medium in where it facilitates trading with other multinational corporations. Also, since they seek for foreign exchange to purchase the materials and acquire the services that they need, the foreign exchange market is the playing field of such activities.
Since BP makes bank deposits in the various countries that they operate in, it makes use of the Eurocurrency because the latter are the deposits residing in banks that are located outside the borders of the country that issues the currency the deposit is denominated in. For instance, an African bank where they put in their money has a deposit denominated in Australian dollars; the deposit is called Eurocurrency deposit.
The Eurobond market, together with the Eurocurrency, is utilized by the MNC under study as they avoid domestic interest rate regulations, reserve requirements and other barriers to the free flow of capital (Butler 2004). BP uses it because they most of the times need to issue Australian currency to be traded outside of Australia and in a different monetary system, like South African rand.
BP Billiton has a primary listing on the Australian Stock Exchange, and secondary listings in Germany (Frankfurt) and Switzerland (Zurich). In addition, American Depositary Shares (each representing two ordinary BP Billiton Limited shares) evidenced by American Depositary Receipts (Adds), trade on the New York Stock Exchange. Further, they are also listed in the Johannesburg Stock exchange and the London Stock Exchange.
EXCHANGE RATE DETERMINATION
The currencies in which the BP uses to conduct its businesses are: Australian dollars, Pounds Sterling, US dollars, South African rand, Euro, Chinese Yuan, Brazilian real, the Chilean peso and Colombian peso, among dozen others.
The US dollar is the main currency used by BP to conduct most of its businesses. The said foreign currency has witnessed some notable swings versus major currencies in recent times. For instance, over most of 2005, it expanded 13% against the Euro and nearly 18% vs. the yen, while between March and May 2006, it sharply decreased in value against the mentioned currencies, losing almost 10% of its value. Also, the UK Pounds Sterling saw a 12.05% and a 15.11% positive movement as against the US dollars and Japanese yen, respectively, during the last year.
CURRENCY DERIVATIVES
For the multinational company, expert knowledge and skills are essential in managing the vast and complex global array of financial markets, financial institutions and financial instruments. BP Billiton trades in the financial futures and options exchange market to protect or hedge the firm against future financial risks such as adverse interest rate movements by using interest rate futures contracts.
GOVERNMENT INFLUENCE ON EXCHANGE RATES
Aside from the US dollar, one other foreign currency used by BP is the UK Pound Sterling (GAP). As against the dollar, it has the following changes on the daily basis, starting last week:
02/09/2007
1.96620
02/10/2007
1.95380
02/11/2007
1.94980
02/12/2007
1.94970
02/13/2007
1.950
02/14/2007
1.94640
02/15/2007
1.95230
Further, the Loanda site showed the following data, which is additional evidence that the GAP changes on a daily basis as against the US dollar:
Currency
Pair
Current
Rate
Previous Day
Last Week
Last Month
Last Year
EURO/USED
1.3072
0.60 %
1.02 %
1.10 %
9.84 %
INTERNATIONAL ARBITRAGE AND INTEREST RATE PARITY
The 3 month yield comparison of the US treasuries and the UK government bonds show that the foreign interest rate of the latter is higher at 5.35 as against the former’s 5.14. Given this information, the GAP is at a forward premium, meaning the USED is at a discount. For the MNC under study, a working assumption is that interest rate parity holds for the inter-bank rates in this information, and therefore there is no profit in trying to get a better deal by borrowing in GAP and hedging or by borrowing in USED.
Credit:ivythesis.typepad.com
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