Broken Hill Proprietary Company Ltd.

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Broken Hill Proprietary Company Ltd.

BHP House
140 William Street
Melbourne, Victoria 3000
Australia
(03) 609-3333
Fax: (03) 609-3015

Public Company Incorporated: 1885 Employees: 50,887
Sales: A$10.00 million (US$7.72 million)
Stock Exchanges: Australia London Frankfurt Tokyo New Zealand Basel Geneva Zurich New York

Broken Hill Proprietary Company (BHP) is Australia’s largest commercial organization and by world standards a significant multinational operation. Its size and influence have led some to refer to it as Australia’s eighth state. Currently BHP’s business is based on three core activities: steel making, mineral exploration, and mineral production—principally iron ore, coal, copper, and manganese—and petroleum exploration and refining.

BHP owes its foundation to Charles Rasp, a boundary rider working in the early 1880s on the Mt. Gipps station near Silverton in New South Wales. As a boundary rider, Rasp patrolled the property, repairing fences and generally checking the property. The station was managed by George McCulloch. Rasp believed that a low broken-backed ridge on the property—the Broken Hill—contained argentiferous ores. He persuaded McCulloch and five others to form a syndicate for the purpose of testing the ridge. The first shaft sunk proved disappointing and some of the original syndicate members sold their shares, but the core members decided to raise the capital necessary for further investigation by floating a public company; they issued a prospectus in 1885 in the name of the Broken Hill Proprietary Company. Almost simultaneously, news arrived of a significant silver strike. BHP shares rose sharply in value once it was announced that the company’s first consignment of 48 tons of ore had realized 35,605 ounces of silver, worth nearly £7,500.

None of the directors of the new company had been trained as mining engineers. BHP therefore imported the talents of two U.S. engineers, William Patton and Hermann Schlapp, whose technical work rescued the company’s collapsing Big Mine at Broken Hill.

Easily accessible high grade ores, low labor and equipment costs, and high silver and lead prices made the 15-year period to the end of the 19th century extremely profitable for BHP. The establishment of a head office in Melbourne and a lead refinery at Port Pirie were evidence of the company’s increasing contribution to and investment in the states of Victoria and South Australia but in New South Wales (NSW), around Broken Hill itself, the laissez-faire attitude of both BHP and the state government led to the growth of a primitive shanty town. The dangerous conditions in which the miners themselves had to work and the squalid circumstances in which their families had to live brought the Amalgamated Miners’ Association (AMA) and other unions into conflict with BHP in 1889 and 1890. As a result of the 1892 slump in world silver and lead prices, BHP decided to scrap a work-practice agreement with the AMA and to prompt a showdown with a union movement it openly regarded with contempt. BHP led the other mining companies established at Broken Hill in the bitter and violent strike which ensued, declaring its intention of breaking free from union-imposed wage agreements by offering freedom of contract instead as the basis for future employment. After four months, with their leaders imprisoned, the unions capitulated and the work force returned to the mines, with the exception of known strike leaders whom BHP refused to re-employ. A legacy of bitterness had been created between labor and management, which was to surface repeatedly to poison BHP’s relations both with its own employees and with the Australian labor movement in general. The ambivalent attitude towards their country’s largest company that many Australians still retain arose from the 1892 strike and the many others which succeeded it.

In the first decade of the 20th century, BHP faced a decline in silver prices coupled with the mining-out of the accessible top-side ores which had been cheap to mine. Henceforth it had to work the deeper-lying sulfide ores, a more costly operation compounded by the greater difficulty of extracting silver from this type of ore.

Guillaume Delprat, a Dutch engineer and chemist whom BHP had brought to Australia from Europe, provided the solution to the problem of treating sulfide ores with his invention in 1902 of the flotation process. This method and later variants enabled BHP and other Broken Hill companies to extract silver, lead, and especially zinc from sulfide tailings, which had until then been deemed almost worthless. Delprat had become BHP’s general manager in 1899 and under his careful but imaginative stewardship BHP’s productivity rose steadily.

Delprat and BHP’s directors insisted that an important factor in the company’s success was the flexibility that the free contract system of employment allowed amid fluctuating and uncertain world metals markets. They were staunch believers in loyalty to the company, hard work, and self-help, and held that these virtues rather than socialism or unionism were the real allies of the Australian worker. The union movement disagreed with this analysis and in 1905 militants urged the NSW government not to renew BHP’s leases at the Big Mine. Two years later BHP announced that it could no longer honor the remainder of its existing wage agreements on the grounds that plunging metals prices made these unworkable.

Early in 1909 the AMA launched a new strike. This time BHP stood alone, its intransigence and stubborn refusal to deal with the union having alienated it from the other Broken Hill companies. The strike was marked throughout by exceptional violence and intimidation of scab labor brought in by BHP to work the mine. When Australia’s Arbitration Court ruled against the company, the latter appealed to the High Court, unsuccessfully. BHP’s response was to delay the opening of the mine and then reduce the number of workers employed.

Delprat and his fellow directors had already perceived that the Big Mine’s days of economic productivity were numbered. Rather than buying new leases and opening new mines they decided that BHP’s future lay in steel manufacture. At that time Australia possessed no steel industry and there was considerable skepticism both in Australia and abroad as to whether such an industry could be established successfully in a country far removed from the world’s traditional steel markets and with no appreciable industrial base.

Delprat, however, was certain that a local steel producer could quickly capture a growing local market still dependent on costly imports from the United Kingdom and pointed to the advantages which Australia and BHP possessed—cheap energy in the form of large and accessible coal fields in NSW, and the company’s own sizeable and high quality iron ore deposits at Iron Knob in South Australia. On the advice of a U.S. steel expert, David Baker, BHP chose Newcastle on the NSW coast as the site of its first steel works due to the proximity of the coalfields and the presence of both labor and manufacturing industry in the area. Newcastle was also connected by rail to Sydney, Australia’s largest city and manufacturing center.

BHP acted swiftly to forestall the setting up of a proposed state-owned steel works. Baker designed the new plant along the latest U.S. lines, the whole project being financed out of an increase in share capital, two debenture issues, and the sale in 1915 of BHP’s Port Pirie lead smelter to the Broken Hill Associated Smelters Company for £300,000. Steel production commenced in April 1915.

Wartime demand for armaments and sheet steel ensured production at full capacity and guaranteed the steel mill’s early years. At Broken Hill, however, inflation during World War I worsened conditions, producing strikes in 1915, 1917, and 1919, the last of which was settled in the unions’ favor, resulting in a new 35-hour work week and a rise in wage rates. By this time, however, BHP’s energies were focused on its expanding steel business and the Big Mine played a progressively smaller role in the company’s calculations, closing altogether in 1939 and thereby ending BHP’s association with Broken Hill.

In 1921 Delprat was succeeded by Essington Lewis, a mining engineer who had joined BHP in the first decade of the century and risen swiftly in the corporate hierarchy. Lewis continued the policy of supporting the establishment of secondary manufacturers who would use BHP steel in their products, thus creating new customers for the company and new industries for Australia.

The short-lived postwar steel boom was followed by a scramble for shrinking world markets. BHP suffered several handicaps in the race. The most serious of these was its having to serve a small home market with a diverse range of products, thereby failing to obtain the economies of scale achieved by its foreign competitors. In addition freight costs for export had soared due to the postwar shortage of shipping, and rises in the price of coal were reducing BHP’s margins.

Lewis campaigned for protection, and the William M. Hughes government eventually imposed import duties on imported steel. The 1920 seamen’s strike convinced BHP that it had to control its own shipping. This belief led to the foundation of BHP’s fleet of dedicated ore carriers.

Despite import duties, foreign steel was still managing to undersell the local product. BHP announced it would have to shut down capacity unless the steel unions—chiefly the Federated Ironworkers Association (FLA)—were willing to accept wage reductions. This acceptance was not forthcoming and in May 1922 temporary closure of the Newcastle mill for a month was followed by a total shutdown lasting nine months until a ruling of the Arbitration Court compelled BHP to reopen it. Terrible hardship had been caused in the Newcastle area, and union leaders and elements in the Labour Party began to call for BHP’s nationalization.

After this difficult start Lewis launched a program concentrating on improving the efficiency, safety, and cleanliness of the steel plant, all concepts closely linked in Lewis’s mind and to which he attached the greatest importance. He placed particular emphasis on the replacement of old machinery, with the result that by the end of the 1920s BHP was operating one of the cleanest, safest, and most cost-effective steel plants in the world. Thus the Depression which began in 1929 and so devastated other Australian industries left the steel industry comparatively unscathed.

Just as control of shipping was essential to reduce freight costs, so Lewis reasoned that ownership of coal would make BHP independent of the demands of the mine owners. BHP therefore began to buy up coal mines, a foretaste of the great expansion of its coal interests in the 1970s and 1980s.

Although BHP entered the Depression with an unusually small debt burden—Lewis disliked paying for new machinery with borrowed money—and an efficient steel operation, it was not immune from the effects. A collapse of world prices in steel, silver, and lead forced BHP to reduce production levels and lay off large numbers of mill workers. The Big Mine was shut down until a rise in metals prices made reopening worthwhile, and from 1930 until 1932 BHP did not pay dividends to its shareholders. The company viewed with distrust the economic policies of Scullin’s Labour government, which it regarded as populist and short-sighted. This attitude was mollified when the government sought to stimulate local industry by imposing a new round of duties on imports, and devalued the Australian currency to encourage Australian exporters. These measures, in tandem with BHP’s underlying financial strength and Lewis’s policy of low-cost selling, ensured the company’s survival.

In 1935 BHP’s only competitor in Australia, the struggling Australian Iron & Steel Company (AIS), sought a merger with its larger rival. BHP was quick to agree and at a stroke acquired AIS’s valuable steelworks at Port Kembla, NSW, and its iron ore deposits at Yampi Sound in Western Australia. BHP’s opponents attacked the merger as monopolistic and called for an official enquiry. The issue became intensely political with two future Australian prime ministers, John Curtin and Robert Menzies, respectively attacking and defending the merger.

Two years later the South Australian government asked BHP to construct a steel plant in the state. BHP, anxious to see its leases at Iron Knob extended, agreed to build a furnace and port at Whyalla on the Spencer Gulf. This and other investments in the years immediately prior to World War II were paid for by four major restructurings in the company’s capital base.

In 1938 BHP became embroiled in another political battle when union labor refused to handle cargoes of iron ore destined for Japan, at that time engaged in a brutal and aggressive war in China. BHP’s insistence on carrying through its contractual obligations aroused strong emotions in Australia and Attorney General Robert Menzies’s defense of BHP’s action earned him the unflattering sobriquet of ’pig-iron Bob’.

In 1940 Menzies appointed Lewis Director General of Munitions with the responsibility of harnessing the nations’ entire manufacturing industry to the war effort. Lewis applied to this demanding job all the energy and concentration which enabled BHP to achieve the new targets set by his wartime planning. New blast and open-hearth furnaces were built at Port Kembla and a shipyard established at Whyalla. Comparatively far removed from the area of battle, BHP’s mills suffered no physical damage during the war, but were subjected to brief and ineffectual shelling of Newcastle by a Japanese submarine. However, the company lost two of its ore carriers to enemy torpedoes. Japan’s frighteningly rapid advance into Southeast Asia up to Australia’s not-so-distant neighbor, New Guinea, in 1942, served to quell union antagonism towards BHP. As this threat receded, the unions renewed their attacks, culminating in a protracted strike in late 1945, which began at Port Kembla and then drew in coal miners and seamen, rapidly assuming the proportions of a national crisis. Although the militant far Left in the unions failed to achieve its objective of BHP’s nationalization and lost its influence during the strike, this episode had the effect of dampening BHP’s plans for renewed investment in its steel business. Not until the end of the 1940s did this situation change, when a rising demand for steel encouraged increased production and investment.

In 1950 Lewis became chairman of BHP. Two years later he relinquished his position to Colin Syme, a lawyer who had joined BHP’s Board in 1937.

During the early 1950s Japan’s resuscitated steel industry began to demonstrate its capacity for large scale low-cost production, which in the 1960s helped underwrite Japan’s extraordinary economic growth. Once again the Japanese renewed their search abroad for low-cost iron ore reserves. The Australian government’s lifting in 1960 of its pre-war restrictions on the export of iron ore encouraged BHP to enter the field once again as a prospector. This entry led to the identification of large iron ore deposits, notably at Koolanyobbing, Western Australia, and Koolan Island, Western Australia. Quarries were commissioned at these two sites, but the centerpiece of BHP’s iron ore business became the Mt. Newman ore body in the Pilbara region of Western Australia. In association with AMAX (American Metal Climax, Inc.) and CSR, the company established a joint venture operation to develop and operate the world’s largest open-pit iron ore mine. BHP initially held a 30% interest but in 1985 bought out the remaining AMAX and CSR shareholdings.

During the early 1960s BHP transformed the nature of its business by deciding to enter the oil exploration and production industry. Australia’s geology had tended to discourage oil prospecting but in 1960, true to its tradition of seeking expertise outside Australia, BHP asked the U.S. petroleum expert L.G. Weekes to examine some of its leases. Weekes advised BHP to drill offshore in the Bass Strait area. Despite the considerable technical difficulties involved, but encouraged by the subsidies of an Australian government keen to see the country’s costly dependence on imported oil reduced, BHP went into a 50/50 partnership with Standard Oil’s Australian subsidiary, Esso Standard. In 1964 the first well was commissioned in the Gippsland Basin area off the coast of Victoria. The extensive gas fields found as a corollary were developed for domestic use and export to Japan.

At about the same time, BHP began the development of a manganese mine at Groote Eylandte in the Gulf of Carpentaria. As at Mt. Newman this enterprise comprised not only the commissioning of the mine itself but also the building of a whole township, transport links, and a port area.

A booming minerals and steel market enabled BHP to double its net profit between 1960 and 1970. Such rapid growth began to out-distance a management structure that had remained essentially unaltered since Essington Lewis’s day. On the advice of a firm of U.S. management consultants, BHP adopted the concept of independent profit centers, each responsible for its own performance.

Such moves did not prevent BHP’s critics from claiming that the company was still too large, too secretive, and above all too unaccountable to the Australian public for its decisions. Antimonopolists held that BHP’s stranglehold on sales outlets prevented any rival steelmaker from setting up operations in Australia, while environmentalists questioned the company’s record on industrial pollution. The unions attacked it for its strict adherence to the “minimum wage policy” laid down by the Arbitration Court, justified by BHP as a necessary measure in the light of competition from producers with lower labor costs, such as Japan and Taiwan.

The Labour Government elected in 1972 took several actions against BHP. Rex Connor, Minister for Minerals and Energy, attacked BHP for profiteering and proceeded to remove the subsidies BHP had been given for its oil exploration work. Tax concessions were cancelled. Particularly irritating for the company were the decisions and comments of the Government’s Prices Justification Tribunal before which BHP was required to defend its pricing policies.

In the middle of the decade BHP announced its decision to enter into a partnership with Shell to exploit the natural gas deposits found off the northern coast of Western Australia. Known as the North West Shelf Natural Gas Project, the justification for the huge investment needed lay in the interest shown by foreign energy consumers, especially the Japanese. Construction work began in 1981 and by 1984 the domestic gas phase of the project had been commissioned, followed by the launch of the export phase in 1989. Further offshore oil discoveries in the Timor Sea at Jabiru in the early 1980s launched another production program.

In the core business of steel production, however, the 1970s and 1980s were marked by rising production costs and falling world steel prices as overcapacity in world production drove down the world market. In 1976 BHP Steel announced losses of some A$50 million, and in 1979 it had to abandon plans for a steel mill in western Australia. The collapse in steel prices in 1983 forced BHP to rationalize its business, and in that year nearly a third of the Steel Division’s employees were made redundant. In an effort to safeguard the steel industry’s future, the Labour Government of the day announced a five-year Steel Industry Plan under which the steel unions promised to refrain from industrial action in return for guarantees from BHP relating to security of employment for their members. Under the new dispensation BHP managed to boost its productivity from only 150 tons per worker per annum in 1982 to some 250 tons in 1984. The five-year plan was widely regarded as a milestone in Australian industrial relations. With A$2 billion worth of new plant commissioned since the mid-1980s, BHP Steel has substantially restructured its business to achieve international competitiveness. Its three integrated steelworks in Australia have a steelmaking capacity of almost seven million tons per year. It also operates a range of downstream processing facilities in Australia, and steel forming and building products facilities in Asia and the west coast of the United States. The steel group aims to maintain exports at about 25 % of production on a continuing basis and increase the amount of value-added steel in the export product mix.

Besides Australia’s vast iron ore deposits, foreign industries looked towards the country’s coal fields as a source of energy not subject to the vagaries of Middle Eastern power politics and price instability. The sharp rises in oil prices in 1973 and 1979 began to renew BHP’s interest in coal and coal mining for export purposes. In 1976-1977, BHP acquired Peabody Coal’s Australian assets, thereby gaining a 60% interest in the Moura and Kianga coal mines in Queensland. In 1979 the huge Gregory mine was opened, followed a year later by the Saxonvale mine in NSW. In 1985 BHP increased its holding in Thiess Dampier Mitsui, operator of the Moura and Kianga mines, to more than 80%.

The largest and the most important acquisition BHP has ever made occurred a year earlier when it bought the U.S. mining and construction company Utah Mines Ltd. from General Electric. This move extended BHP’s interests abroad into the United States, Canada, and South America and greatly enlarged BHP’s interests in coal, iron ore, and copper mining. The Escondida copper mine in Chile, which commenced production in December 1990, is the third largest in the world. BHP manages the mine and has a 57.5% interest. This mine’s low production costs and large reserves base mean it is competitively positioned. Another significant acquisition for BHP was a 30% interest in the OK Tedi gold and copper mine in Papua New Guinea, which began producing in 1984. In Australia during the 1980s BHP commissioned gold mines at Ora Banda and Boddington and a new lead and zinc mine at Cadjebut. BHP added to its iron ore interests in the Pilbara region of Australia through the purchase in 1990 of the remaining 70% of Mt. Goldsworthy Mining Associates it did not already own. It has since sold a minority interest in Mt. Goldsworthy and a new iron ore mine named Yandi to its Japanese partners in the Mt. Newman joint venture. BHP Gold Mines Ltd. merged with Newmont Australia Ltd. in 1990. The merger created a major Australian gold company renamed Newcrest Mining Ltd. in which BHP has the largest single shareholding, 23%. The major acquisitions of Hamilton Oil in 1987 and of Pacific Resources Inc. in 1989 further increased BHP’s strength in the fields of oil exploration and refining in the North Sea and Pacific Ocean. BHP was in the early 1990s in the process of acquiring full ownership of Hamilton Oil Corporation.

In 1987 BHP reorganized into three core business groups, steel, petroleum, and minerals, which operate worldwide. BHP is also engaged in transport, engineering, and research activities to support its main businesses and invests in promising new industries that build on its skills and competitive position.

BHP shows little likelihood of relinquishing its position as Australia’s industrial and resources flagship in the near future. Twice in its history BHP’s management has shown remarkable vision and courage in moving the company into entirely new fields of enterprise at the right moment and in the right manner. It is this unusual flexibility as much as its size that has for long made its shares valuable property both in Australia and abroad and provided Australia with its steel and oil industries, two cornerstones of its economy. In whatever industries BHP chooses to make its investment in the future, the impact on Australia and increasingly in other parts of the world will be considerable.

Principal Subsidiaries

Australian Iron & Steel Pty Ltd.; AWI Holdings Pty Ltd.; BHP Finance Ltd.; BHP Gold Mines Ltd. (55.7%); BHP Investment Holdings Ltd. (U.K.); BHP Minerals Holdings Pty Ltd.; BHP Minerals Ltd.; Mt. Newman Iron Ore Company Ltd. (85%); Pilbara Iron Ltd.; BHP Petroleum International; BHP Petroleum (North West Shelf) Pty Ltd.; BHP Petroleum (Americas) Inc. (U.S.A.); BHP-Utah International Inc. (U.S.A.); Hamilton Oil Corporation (U.S.A., 50.6%); BHP Transport Ltd.; Groote Eylandt Mining Company Pty Ltd.; BHP-Utah Coal Ltd.; John Lysaght (Australia) Ltd.