RISK MANAGEMENT STRATEGY : CASE OF BHP LIMITED

Summary

BHP Billiton is the Australian Mining and Petroleum company and the
headquarter of this company is in the Melbourne. From the survey of 2013, it is
determined as the largest mining company of the world.This company is
considered as the largest resource group, which has diversified market and the
organization have global portfolio regarding the quality asset.This case study
mainly concerned with the strategic management of the organization. In order to
sustain the growth in the global competitive market, it is necessary for the
management of the organization to adopt and implement strategies. Before
implementing strategies for the organization, the management of the organization
has to understand the internal and externals factors of the organization. After
understanding the demand of the service users, the management of the
organization has to implement strategies. There is no specific definition of
strategies, as the strategy of the organization depends on the organizational
structure. Strategies should be adopted on the basis of several risk like interest
rate risk, commodity risk, and foreign change risk of the organization. With the
increasing demand of the customers and rapid changes in the market growth, the
mangers and leaders of the organization have to undertake several strategies. To
retain the growth of the company in the competitive market, it is mandatory that
strategies should be innovative.
Case analysis

BHP Billiton is a leading global resources corporation to the world, which creates
client long term sustainable value through acquisition, developing and marketing
of natural resources. The main business commodities of BHP contain petroleum
and potash, copper iron ore coal aluminium, manganese, nickel, and group’s
diamond business. The fundamental of BHP strategy is operational capability
through achieving advanced business results by expanding company’s
capabilities and simplicity which means that focussing efforts on business
activities. BHP operates under advanced business model, which contains mainly
four parts exploration and evaluation, extraction and transportation, development,
marketing and logistics. This model will allow BHP to operate more efficiently
with multi-commodity nature of its organization. The strategy of BHP is to
operate long term, low cost,upstream assets diversified by its geography,
commodities and market through evaluating and extracting resources
,distributing supply chain, managing financial risks associated with revenue
around the world ,BHP prefer to aim and deliver long term value rather than
focussing on short term returns, this may incur amount that face the corporation.
According tp the annual report 2014 BHP is mainly exposed to four risks: external
risk, business risk, operational risk, and sustainable risk and used some
appropriate derivatives to hedge them

BHP exposed to the price movement of crude oil,iron ore and

copper. Thus the price change of crude oil may have a significant effect on
company’s profit. BHP should hedge its exposure to these fluctuations on crude
oil in order to avoid this kind of loss in business operation. BHP could apply two
types of derivatives to hedge the commodity price risk: long commodities future
contracts and long commodities call options. BHP’s assets, cash flows and
revenues are influenced by amount of different currencies due to its global
business. This may result in significant impact on BHP’s financial results when
foreign exchange rates fluctuate. According to the BHP annual report; US dollar
is the major currency in which denominates BHP’s global business. However,
some other currencies may influence the business. There exist a situation that
sales will decrease at the end of trading with floating exchange rate and BHP
could still hedge the risk through shorting AUS dollar futures in order to avoid
the low cost. Also the company used natural hedge to reduce exchange rate risk
in business operation. Another risk involved the company is change of interest
rate which may have an impact on fair value of fixed rate instruments and cash
flows, currently BHP is exposed to interest rate risk on its business operation such
as investment and borrowing fields. Company is used to future agreement to lock
its future interest rate, because it could assist BHP to determine whether to borrow
or payback. Since the interest will be paid a certainty amount, BHP could reduce
the risk more efficiently.

Hedge strategy could benefit the company in its business operation.

Trading on future contracts and options can be used to reduce the loss of company
and the charge for trading futures is relatively low compared to others. Options
are less risky compared to other trading instruments.BHP is involved in some
uncertain risks when it operates global business around world. The strategies
were adopted in order to eliminate risks ,but it’s not possible to fully eliminate
the risk because of the external and uncertain factors and hedges have certain
disadvantages .but these are some of the recommendations that BHP can apply
when its exposure to business risks.