Inside BHP Billiton’s Singapore marketing hub
by Amanda Saunders & Matthew Stevens
From 10 Marina Boulevard, you can see a line of container ships snaking into Singapore’s harbour that makes Newcastle Port look like a milk bar.
The view is good but the tax rate here is even better. And no matter what BHP says, it is unquestionably a big part of why the Global Australian is here.
Singapore could edge ahead of Collins Street in Melbourne to become BHP’s biggest corporate office, with the latter in the midst of a deep round of job cuts. Both hubs have about 400 staff, although they are some way short of the headcount at its operations centre in Perth.
Singapore’s government provided a sweetheart deal on tax a decade ago to make sure BHP’s marketing hub stayed put. The Australian government couldn’t, or wouldn’t, match it.
But BHP is at pains to make it clear that Singapore is not just a brass plate.
It is here, across five floors in the banking district of the Asian city state, that marketing president Arnoud Balhuizen and his team formulate the closely guarded market intelligence that directs cargoes to their highest-value customers, informs capital allocation and shapes BHP’s long portfolio strategies. It was in Singapore, for example, that BHP drove the reformation of the global seaborne bulk commodities market by forcing the embrace of index pricing for iron ore.
Take, for example, BHP’s view of the Chinese steel market and its outlook. It is sensitive enough that BHP felt the need to announce recently it had stepped back from its long-standing view that the Middle Kingdom’s steel production would plateau at 1 billon tonnes a year. Balhuizen’s people reckon that steel will peak at 935-985 million tonnes but that its plateau will last longer than previous imagined.
This downshift was informed by a complex of forces. All have been identified and assessed through a prism BHP calls the “seven levels of steel”. This sees evidence gathered and assessed at every level of iron ore’s transformation into steel and then finished products.
Today they will be poring over China’s new five-year plan and assessing the long-run effects of Thursday’s end to the one-child policy.
More routinely though, the data-crunching starts with people gathering in scrapyards to count and date dumped machinery, and includes conversations with local architects in China to measure the depth of basements being placed in homes. The deeper the basement, the higher the building and the more steel will be used in its manufacture.
The data is then assembled and assessed in Singapore, where everything the Global Australian extracts is sold and where everything it uses is bought and distributed.
When asked about Singapore’s tax appeal, Balhuizen doesn’t shy away from the miner’s great deal.
“Of course in any operation, we look at cost efficiency, we will look at putting things in place in the most effective way.
“I think everybody would expect us to do that. Operational costs, access to financial structures, tax structures, are part of the total balance.”
When asked if there could be a lesson there for the Australian government – that governments have to compete for business, in much the same way that businesses have to compete for custom – Balhuizen says: “The Australian community could have done one or two things maybe a bit better.
“But the place where we have built our hub, and the things we have done on market transformation, would not have been possible in any other place than Singapore.”
BHP this year unwittingly confirmed itself as a public enemy number one in Australia’s debate about tax minimisation, because of the way it uses its Swiss-registered, Singapore-based marketing business to trade its suite of mining and energy production, including Pilbara iron ore and Bowen Basin coal.
The tax hub basically works this way. Say the price of iron ore is $100 a tonne. BHP marketing would acquire that tonne from the miner’s iron ore business for about $US97 a tonne. This generates the taxable income of the iron ore business in Australia. The $US3 difference is the marketing fee BHP charges itself to sell it to customers, who are mostly Chinese, from Singapore. The profits from this fee flow are not taxed in Singapore. But it is subject to tax on being returned to Australia and BHP’s other ownership constituency, the UK.
The ATO feels that this Singapore Sling means that Australia earns less tax than it should. The taxman apparently accepts that the miner should earn a marketing margin and is comfortable with the way profits are then distributed from Singapore to BHP’s dual-listed arms. But there is dispute over the quantum of the marketing discount. BHP will not confirm the size of that discount, but informed speculation puts it pretty close to the flat 3 per cent fee that fellow dual-listed iron ore giant, Rio Tinto, charges itself for marketing services that are also based in Singapore.
BHP’s Singapore hub earned $US5.7 billion ($7.9 billion) in profits over eight years to 2014, across its whole portfolio, and Singapore has earned almost zero tax income on those profits.
BHP is in mediation with the ATO over a claim that it owes $522 million in back tax on those profits; one suspects other claims might be triggered if settlement is made or court challenges are lost.
Since being appointed chief executive just on two and a half years ago, Andrew Mackenzie has consistently said the market needs to track him, not trust him.
Opening the bonnet on BHP’s Singapore operations to AFR Weekend aligns with that commitment, and shows an awareness of the risks of allowing the Singapore issue to fester.
BHP’s marketing team of about 410 across 10 offices, including 215 people in Singapore, are the only ones in the business who really know what herbs and spices go into the demand, economic and commodity price forecasts. And omission is just as important as inclusion. Houston, Texas, is BHP’s smaller marketing hub, with 65 staff.
Stacie Wu, BHP’s vice-president of market analysis and economics, says it all starts with the macro. They look at everything from headline numbers in a country, down to industrial production and electricity generation. China is the main focus, followed by India.
But on commodities, a bottom-up approach is taken, from the number of of air conditioners and washing machines to average kilometres driven.
“We will actually go out and meet with some of the big retail companies, for example, in China,” Wu says. “We will interview them, which is quite interesting for BHP.”
MARKETING DRIVES INSIGHTS
Balhuizen points to the importance of monitoring the growth of e-commerce in China and how it impacts on transportation and steel construction. As it grows, it will change city planning, the number of commercial buildings, and transportation. While that might mean less steel, it is a positive for BHP’s energy division.
In drilling down for detail, the miner looks at steel intensity by measuring, for example, the depth of the basements in different Chinese cities.
“Looking at basements, we will talk to local architects for example, to get a sense of what the trends are,” Wu says. “They look at floor space per capita – which is driven by population and GDP growth.”
Marketing is responsible for demand forecasts, while supply is the domain of the commodity businesses. But the price forecasts that stem from both supply and demand are up to marketing too.
They update their forecasts one or two times a year.
And of course, marketing dictates allocation of capital, and which mines to open or not to open, and which to shutter.
The insights that inspired BHP to pull back on iron ore investment in 2012 were driven from marketing. The early identification of a structural shift in patterns of Chinese demand resulted in the canning of a $US20 billion iron ore port development in the Pilbara and, the following year, of plans for a $5 billion coal terminal at Abbot Point in Queensland.
But Balhuizen is quick to qualify that “there’s also things we did wrong, so let’s not sit here and say that we got everything right”. Splashing $US20 billion to acquire a blend of gas and oil-rich shale provinces in the United States is an example of where “the price has disappointed and where marketing takes accountability”.
The gas price hasn’t done what was expected, Balhuizen says, but they are still good, tier one assets.
Balhuizen is a Billiton boy. The Dutchman joined the company two decades ago to work in its Netherlands marketing and trading business.
BHP Billiton’s marketing model was born when BHP and Billiton merged in 2001, and two hubs were created, one in The Hague and one in Singapore. The bigger hub was in the Hague, but as the revenue base shifted from Europe to Asia with the China boom, Singapore became the main game. The Hague hub was closed in 2012.
Half the global marketing team is female – and across both genders there are 34 different nationalities.
“If there is one team in BHP Billiton which can bring this diversity, it’s marketing,” Balhuizen says. “I see it as one of my legacies.”
As well as Singapore and Houston, BHP has marketing offices in Shanghai, Delhi and Tokyo, as well as London, Santiago, Brisbane, Adelaide and Perth.
Its analysts, economists and technical teams can include chemists, or engineers specialising in blast furnaces, mining or deep ocean work. Some have degrees in finance, humanities, law, business or economics.
They also enlist market research houses such as IHS and Wood Mackenzie, and international mining associations. Wu, who joined BHP in 2008, is a former strategy consultant herself.
In Singapore sit the vice-presidents of marketing for three of BHP’s four commodity “pillars”. There is Vicky Binns in copper, Alan Chirgwin in iron ore and Shaun Verner in coal. Petroleum is Houston’s domain.
Marketing feeds economic and price forecasts into other arms of BHP for “cashflow analysis, cashflow decisions, capital decisions and portfolio decisions”, Wu says.
It feeds data back to the coalface, so quick changes can be made to production or mine planning, to decrease costs. For example, they could advise iron ore to start mining a different type of product earlier, to meet new demand from a customer willing to pay a premium for it.
In September, BHP revised its “peak steel” forecast for production in China by 2025 to 935 to 985 million tonnes, from 1 billion tonnes.
But Wu is clear: “We don’t want to be changing our view on sentiment. We have to be able to explain why, and credibly. We can’t just wake and say, ‘You know what, we think it’s lower today’.”
The revision was inspired in part by a study the marketing crew ran on building demolitions, which showed that a lot of them were being done on urban planning sites.
“You had the wrong type of building in the wrong part of the city, and all that has actually been flushed out now [through demolitions]. Effectively that [urban] planning is more advanced now. So we believe those life cycles are extending … and that drove down our long-term outlook on steel.” That delays the availability of scrap material.
But they need to decipher, from the “gigantic” volume of information, what is actually material.
For China, the fundamental view is that Chinese growth will slow gradually over the next 15 to 20 years, but off a very large base.
China and India have a much more immediate impact on the business, so they account for most of the analysts’ time. But BHP keeps “scanning” for up and coming countries like Vietnam and Indonesia, “which could drive significant demand in the longer term … we’re talking 15 plus years”.
On a macro level, BHP will look at an economy’s population, demography and education. From there they look at property prices, retail sales, industrial production, electricity generation.
Wu says they did an education study in India, “which often surprises people, but we’re trying to understand the potential for those economies to develop”. They also assess a country’s ability and capacity to enact reform.
“That allows us to form a view on how those economies are going to evolve, and specifically things like how quickly might they grow, what’s the role of manufacturing versus agriculture versus services … that then dictates commodity demand over time.”
They also assess a country’s ability and capacity to enact reform. In India – which BHP is positive about – they are tracking stalled land acquisition and GST reforms.
From there they drill down again to a sector like steel across manufacturing, construction, infrastructure and consumer durables. And then they look at sub-sectors of those, for instance, residential compared to industrial construction.
BHP is getting more comfortable with the transparency on data in China.
“We feel that the data today is as reliable, if not more, than back when, you know, the growth rate was 10 per cent, so we don’t think there has been any degradation,” Wu says.
BENEFITS TO AUSTRALIA
BHP argues that wins from marketing in Singapore – like achieving a benchmarked system for iron ore up – have poured and continue to pour billions back into the Australian economy. The transparency of the system has seen Australian product get a greater quality premium, and realised a freight advantage against Brazil.
Balhuizen maintains that no other miner could have achieved the benchmarking because “they don’t have the cross-power commodity” to do it.
“Because it’s now in place, people tend to forget … how expensive it was to have it not in place. And those successes we are now replicating in the other commodities. It’s all about being in one place, being a hub, being truly central and replicating it and having a global team who can look at those things. Being connected to the rest of the world is very, very important.”
But inevitably the public conversation about the slightly different offshore trading hubs that are used by BHP and competitor Rio Tinto are being shaped by the dark politics of tax and mining companies. An incompetent attempt to extract a bigger share of the miner’s boomtime profits through a super profits tax cost one prime minister his job and left a former Treasurer permanently scarred.
The miners won that fight courtesy of an effective campaign that announced the substance of the industry’s tax and royalty payments. But one victory has not ended the long war. There remains a hangover from that – and doubt in the public mind about whether miners pay an appropriate level of resources rent to the nation.
Singapore will remain a key front in what shapes as a long battle.
Amanda and Matt travelled to Singapore as guests of BHP Billiton.