Export Expansion of BHP in Indian Market 

Introduction 

Fossil fuel had always been the major source of producing energy required for our world’s population daily needs either commercial or domestic uses. The significant increase in population across the globe has enhanced the energy requirements ultimately raising the demand for more fossil fuel to be consumed for producing energy. Countries having huge reserves of oil, gas and coal besides utilizing their reserves for domestic production of energy, are also exporting a good percentage of their extracted fuel to the global regions either no or least reserves of fossil fuels.  

The rise in population, their growing demands, modern living standards, enhanced competition among the businesses, establishment and expansion of industries, advancements among means of transportation are some major causes leading to the enhanced demands of the extracted fuel. The same increase in demand and continuous extraction of fossil fuel, has declined the levels of many fuel reserves to considerable levels in many regions across the globe. The same significant decline of natural fuel reserves has raised concerns among the governments and concerned authorities, highlighting the importance of adopting measures to prolong the viability of coal, oil, gas and other minerals reserves. 

Natural fuel and other minerals present under the earth’s surface are not only utilized as energy sources but are also used for the making of many other products that are now mandatory to maintain our current living standards like cement, steel, iron, construction materials, and vehicles. The significant drop in natural fuel levels, and growing demands, has compelled the global countries to focus on renewable energy sources as the alternate of the natural fuel reserves. Electricity being the main product of the fossil fuel, many developed and developing countries are now employing renewable energy sources to nourish their need for electricity. However, still many developing nations are reluctant to employ renewable energy sources owing to its cost or unavailability of technical assistance, and are dependent of fossil fuel for producing electricity. 

Australia, after USA, Russia and China is blessed with huge reserves of fossil fuels. Its diverse natural resources include extensive reserves of coal, iron ore, copper, gold, uranium and natural gas (Hunter, 2013). Australia like many other developed nations, is utilizing its natural sources domestically and exporting the same as well. For most of the past decade, coal has been Australia’s second largest resource export, after iron ore, and since 2015 has averaged around one-quarter of annual resource export values and 14 per cent of total export values (Cunningham, Uffelen, Chambers, 2019). 

China being the leading importer of Australian coal, owing to certain changes in its government’s policies would limit its coal import from Australia. As such Australia have to search for new markets for its coal. India, Asia’s largest and fastest growing economy, after China and Japan is the largest consumer of coal and coke. Due to the local coal reserves not producing the required quality of coal, and unfavorable infrastructure, India is now the fourth largest buyer of coal. the third largest coal producer in the world, with about 580 million tons in 2012, is also continuously short of power and coal (Roncoroni, Fusai, Cummins, 2015). Thus, as Chinese market for Australian coal might not be as productive as in the past, by developing competent strategies, India could be a prospective market for Australian coal.    

Why Coal? 

Coal is the most widely used and found more in abundance compared to other fossil fuels. A simple black rock had been in use since hundreds of years for heating homes, as a fuel for transports and in the making of steel and cement. The use of coal came to prominence during the industrial revolution, when steam engines were developed and were powered through burning of coal. Later on, coal the long-time burning quality of coal highlighted its effectiveness to be used for producing electricity, since then even in the present advanced world, coal is extensively being used for producing steam to move turbines generating electricity in power houses in many global regions. Coal accounts for 26% of the world’s primary energy consumption and 37% of the energy consumed worldwide for electricity generation (Demirbas, 2010).   

Coke, a refined form of coal that burns hotter (Green, 2013), is used in the making of steel. Thus, another significant use of coal is the making of steel, that is largely used among all industries and is part of our daily life in different shapes and uses. As coal is mainly composed of carbon, besides the advantages it is also a major cause of environmental pollution, either for generating electricity or steel making coal is burnt, whereas when coal is burnt it omits greenhouse gases, like sulfur dioxide, nitrogen oxides, carbon dioxide, hard metals and VOCs (Rosenfeld & Feng, 2011).   

Owing to the omission of greenhouse gases by burning coal, and the decline in local coal reserves many developed countries are now opting for renewable energy sources like wind, solar or water in place of conventional power plants burning coal or oil for generating electricity. But in many developing countries coal is still the cheapest source for producing electricity. The use of coal is assumed to grow faster than petroleum and other liquid fuel until 2030, primarily because of its growing demand in the developing countries (Kumar, 2015). Acknowledging the use of coal for generating electricity, and high demand of electricity in future it can be predicted that countries with huge coal reserves can reap the benefits until the same reserves remains fertile.  

Australian Coal 

Australia is well endowed with an abundance of both fossil and renewable fuels, where Coal is the largest commodity export with annual thermal and metallurgical coal exports worth more than $40 billion, mainly to Japan, India, European Union, Republic of Korea and Taiwan (Australian Government, Geoscience Australia, 2020). Australia’s coal mining industry is located almost entirely in the states of New South Wales (NSW) and Queensland, with close to three-quarters of production coming from open-cast mines (OECD, 2012). The country’s biggest coal mines are Carmichael coal mine in the north of the Galilee Basin in Central Queensland (one of the world’s largest untapped coal reserves), Peak Downs coal mine in the Bowen Basin of central Queensland, Mount Arthur (Mt Arthur) coal mine in the Hunter Valley region of New South Wales (one of the oldest mine of Australia), Goonyella Riverside open-pit coal mine, and Saraji open-pit coal mine also located in the Bowen Basin (Murray, 2020). 

 

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Hence, the country enjoys the leverage of its coal reserves, for the progress of its economy, through export of good percentage of the entire output and retaining some for domestic energy production. In 2018 Australia produced 483Mt of the coal (7.7% of the world total), and around 70% of the total output that is 382Mt, exported to other countries in the same year (Mining Technology, 2020). Thus, coal reserves of Australia are not only highly valued for the support of the country’s economy but for the energy production locally as well.   

Coal is not only a major ingredient for power production but it is also an important component for producing many other necessities of the developed world. Cement, steel, aluminum are the main products that are made up of coal along with other materials. As such, considering the developments in progress across the globe, among the construction sector and use of steel or aluminum for varied purposes demand of coal has shown a significant rise since last few decades. Countries with inadequate coal reserves are dependent on countries like Australia having copious reserves for its supply of coal and other natural minerals. 

BHP Industries – Australia 

BHP is the leading mining industry of Australia, owning and managing huge reserves of oil, gas and coal spread over in varied locations in Australia, America, Japan and China. Owing to its huge mining operations and export of mining outputs, the company is also a major source of revenue generation and a leading contributor of Australian economy.  

The vast mining experience of BHP has loaded the company with ample knowledge, skills and expertise to compete with any other mining company globally. BHP is now the world’s largest mining company measured by total revenues and the world’s third largest in terms of market capitalization (Poitras, 2013). Equipped with latest technologies and well-trained workforce, the company have sufficient capabilities to extract and supply its main commodities to the global countries.  

Coal is among the main product of BHP that is high in demand among many developed and developing regions. In fiscal year ended June 30 2019, the company produced around 27.5 million metric tons of energy coal (Garside, 2019). As such, considering the output from coal reserves under BHP management, and high demand of coal, the company should be entering new markets for expanding its coal exports.   

India Quite potential for Australian Coal 

India is the second most populated country with a population of 1.3 billion (Ninan, 2020). Its population is continuously growing and so are the needs for a better infrastructure and energy requirements. Population projections for India anticipate that the country’s population will reach 1.5 million to 1.8 million by 2050 (Dasgupta, 2012). Thus, India would be requiring more resources to fuel its power generation plants and industries involved in the making of products essential for the building of infrastructure.  

Most of the India’s population is based in rural areas, whereas, at present India being a fast developing country is still unable to provide basic amenities specifically electricity to many of its rural areas. Main reason for such deprivation is not the government’s interest, but it is the growing energy demands of urban areas and the expansion of the country’s industrial sector. Though, development of rural areas is a major concern for the Indian government, but its top priority is to develop its urban infrastructure and the uninterrupted supply of electricity to urban and industrial locations.  

India at present is the world’s fifth largest global energy consumer and is likely to become the third one by 2030 (Laruelle & Peyrouse, 2011). According to Gupta (2012) the total demand for electricity in India is expected to cross 950,000 MW by 2030, government in future, plans to accomplish its energy demands 35% from renewable energy and 50% of the projected energy requirements from smart and efficient generation, distribution and use of energy. Hence, India to produce enough electricity that could cater the needs of urban and rural areas, also for its industrial sector, would need enormous supplies of fossil fuel like oil, gas or coal. However, India has limited domestic natural resources, so it cannot meet its energy needs without huge imports (Blazev, 2016).      

Coal is among the most widely consumed fossil fuel for generating electricity. The electricity sector in India relies primarily on thermal power and in particular on coal based plants for its electricity generation (Toman, Chakravorty, Gupta, 2010). As stated by Reddy (2014) that in India, 54% of the projected growth in coal consumption is mostly in the electric power and industrial sectors (Reddy, 2014), and according to Tunga (2014) that the coal India produces is not sufficient to run the country’s thermal power plants, India has to rely on import of high grade coal from Western countries.  

Though, India is already importing coal from Australia, Indonesia and Russia, but considering its growing demands the same already established markets can be enhanced if competent strategy are developed to coup up with the sufficient supply and need of India’s power plants.    

Why BHP should promote coal for Indian market? 

Though, coal is regarded as the main cause of greenhouse gases, but it is still the largest source of fuel for generation of electricity throughout the world (Ambedkar, 2012). Owing to the cheap cost of coal, it is mostly preferred by the developing countries for generating electricity and production of steel. Moreover, due to the raised concerns over the increase in harmful gases omitted through the burning of coal or other fossil fuel, global companies are now switching to renewable energy sources. However, as their majority of power plants in operation are still consuming coal, and the installed renewable sources are not enough to furnish the total energy requirement, the demand of coal has undoubtedly declined but it will be consumed for another couple of decades.  

After China, India is the biggest consumer of coal for power generation. As stated by Hetieta (2019) that currently India has around 57 percent of installed coal fired capacity in its electricity mix, and considering the growing population and industries, India would need for many upcoming years a seamless supply of coal for its existing power plants and establishment of planned future plants. Secondly, as Chinese coal import from Australia would definitely decrease in the upcoming years, BHP should focus on enhancing its coal export to India.  

With growing population and the industrialization of the developing world, more energy is required to satisfy basic needs and to attain improved standards of human welfare (Alberdi 2011, cited in Hossain & Pota, 2014). India is also a fast-developing country, its population and industries are growing at a rapid pace, thus, there would be continuous requirement of energy sources like coal.  

Electricity is a major factor that aids or restricts development of any country. At present the existing power plants in India are not producing enough electricity that could cope up with the requirements of its entire industry along with the population’s need. According to Rong & Zhu (2018) in India there has been a gap of 12-15% between power supply and demand i.e., electricity shortage accounts 12-15%. As India attempts to keep pace with its development goals, it is trying to boost its energy production massively by investing in numerous power projects (Miklian & Kolas, 2014). Thus, it will be one more aspect which makes it feasible for BHP to expand its export of coal to India. 

Moreover, though Indian coal is abundant, but its quality and accessibility are very problematic, generally being high in ash content, low in calorific value and full of mineral sediments (Reddy, 2014). As such, India will continue to import coal from different global regions. Based on the evidences of increased consumption of coal in Indian market and enhanced potential of imports is indication of the fact that India is highly favorable market for expansion of exports. This indication of increased potential of coal demand in Indian market shows that enhanced productivity is expected for BHP in the Indian market. Additionally, the emerging and growing economy of India is also showing that increased level of revenue can be expected for BHP from exports in Indian market, showing that this market will be favorable for export expansion and productivity prospects are positive for BHP.  

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Australia expanding its coal exports might not be simple  

Heavy consumption of fossil fuel, specifically oil and coal are the major cause of rise in global temperature, resulting in significant climatic changes. Rise in sea level is a considerable outcome of the climatic change, it can make many coastal areas and low-lying islands become inhabitable (Westra, Gray, D’Aloia, 2016). Many coastal cities across the globe are already facing the threat of subsiding and are slowly being swallowed by the sea (Yuen, Kumssa, 2011).  

Global leaders acknowledging the adverse impact of climatic changes caused by the use of fossil fuel have jointly developed multiple policies to minimize the extraction and consumption of fossil fuel. Particularly, the Pacific Island countries that are extremely vulnerable to the impact of rising sea level, secured ‘Paris Agreement’ and ‘Suva Declaration’, emphasizing the countries involved in mining operations to adopt measures to minimize the impact of climatic changes and persuading global countries to limit the use and sale of fossil fuel. Australia was also addressed through the same ‘Suva Declaration’, for minimizing its oil and coal exports, and not to operate its new coal mines. 

To export more coal to India, BHP would have to open its untapped coal reserves, which might expose the company for more criticism from the environment concerns and members of the ‘Suva Declaration’. By operating new coal mines or further deepening its existing mines, BHP would be leading Australia for the violation of ‘Paris Agreement’. Such action would affect the entire export sector of Australia. Moreover, owing to the influence of Pacific Island countries in support of ‘Paris Agreement’, the global environment authorities might impose some restrictions or ban on Australian coal mining and export.  

Secondly, India irrespective of its huge domestic coal reserves, due to the high ash contend of its coal and high cost of its transportation (Gupta, 2017) is compelled to import coal from other countries. However, in consideration of environmental hazards of fossil fuel, cost of producing energy, and dependency on coal or oil, now India is determined to consume domestic coal by opening of its untapped coal reserves, improving transportation system, and employing renewable energy sources to limit its dependence on coal for power generation. According to Singh (2019) India’s coal ministry is preparing a plan to cut imports of the fuel by at least a third over the next five years, counting on an increase in domestic production and a jump in renewable output. India plans to achieve 175 GW of renewable energy by 2022 through 100 GW of solar, 60 GW of wind, 5 GW of small hydro, and 10 GW of biomass-based power (Jaiswal, 2019). As such, India will not be a prospective market in the long run.   

Strategies of BHP to expand its Export to India 

Additionally, the consideration to logistics aspects is crucial for expansion of exports in India. The shipping of coal to India will mainly be carried out through marine transportations, however, it is expected that cost of transportation will be much high. BHP needs to assure that it continually mines coal to meet the high demand of imports from India. It is highly important for BHP to make reliance on appropriate production strategy, with an aim of assuring that supply is not restricted. In this regard, the Adani Carmichael coal mining project in Queensland’s Galilee Basin, which got government’s approval last June 2019, will also influence BHP’s coal export to India. As Carmichael coal mines are planned to be the largest coal mines in Australia, expected to produce 60 million tonnes of coal every year (Dhir & Sushil, 2019), solely owned and managed by India’s Adani Group which also owns power production plants in India, it will not only supply coal to its own power production plants but will also attract other Indian coal consumers. Thus, affecting the existing Australian coal export to India. The additional supply of coal from Carmichael coal mines will also influence the coal prices globally, particularly the Australian competitors would have to re-consider their cost and selling prices to be in a competitive position with Adani Carmichael mine project. In addition to this, another important coal mine which meets the domestic and international demand for coal, is the coal mine in Hunters Valley region of New South Wales (BHP Annual Report, 2019). The strategy of optimizing product quality has been used by mine in Hunters Valley and thus high quality coal is extracted from this mine (BHP Annual Report, 2019). Although, BHP also own a coal asset in collaboration with Mitsubishi, recognized as BMA. However, it will not be used for exportation to India, as the combined production of Adani Carmichael coal mining project and coal mine in Hunters Valley region of New South Wales will serve the purpose of meeting the demands of Indian market in long run.  

The consideration of coal reserves is also important prior to making decision of expanding into Indian market, as long run fulfillment of Indian market demand needs assurance of sufficiency of coal reserves of BHP. As highlighted in Annual report of BHP, company has around 14 reserves of coal with substantial capacity to produce coal. Some of these reserves include; Goonyella Riverside, Broadmeadow, Peak Downs, Caval Ridge, Saraji, Norwich Park and Blackwater among others (BHP Annual Report, 2019). The presence of these reserves assure that company is in position to deal with any increase in demand of coal from Indian market.  

Evaluation of Financial Risk for Export Expansion 

The evaluation of any major investments can be carried out through capital budgeting process, whereby different quantitative techniques are applied to assess the prospective cash flows of specific investment projects over the period of time (Su et al., 2018). The venturing into Indian market through export strategy is considered as high scale capital investment and assessment of financial feasibility of the investment is crucial prior to implementing the strategy. Among different methods of capital budgeting, net present value can be utilized to assess the potential of loss for venturing into export market of India.  Net Present Value helps in assessing the difference between the present value of cash inflows and present value of cash outflows, for specified period of time. This method helps in assessing the profitability of specific project and thus any risk of potential of loss can be assessed in effective manner (Nawaiseh et al., 2017). If the value of Net Present Value will be positive then it will indicate that forecasted earnings generated from the expansion of exports in Indian market will be greater than the expected loss from the export expansion (Chadha & Sharma, 2019). On the other hand, in case of negative Net Present Value, it will be maintained that cost of exporting in the Indian market will be higher than any expected cash flows (Chadha & Sharma, 2019). In this case, the negative value will be considered as an indication of loss of venturing into export market of India for coal exportation. Therefore, the positive Net Present Value will indicate that export expansion in Indian market will be favorable and there will be minimum possibility of loss associated with the expansion in export market.  

Use of Quantitative method to Forecast Export Demand  

In order to avoid any risk regarding the long run productivity from export operations, the forecasting of export demand for coal in Indian market could have been conducted. There are multiple quantitative methods available for forecasting the export demand of coal, which help to use historical data for assessing the future demand of product (Ivanov, Tsipoulanidis & Schönberger, 2019). The moving average is considered as the most appropriate method which helps to differentiate between the market noise and actual trend of market. For instance, the data about past consumption of coal in Indian market can serve as the way to identify initial data point, while shifting forward to assess the future demand of the same. Additionally, the most accurate forecasting of export product could have been done by using volatility adjusted moving average. This method allows to adjust the forecast demand while avoiding any possible crossover of price and moving average (Hong, 2020). The most accurate forecast of product demand could have been carried out by using this method and thus any risk related to demand of coal in Indian market could be avoided (Ivanov, Tsipoulanidis & Schönberger, 2019). Prior to making entrance in Indian market through export strategy, the forecasting of coal demand in Indian market should be carried out to assure that any risk is dealt in advance.  

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