Page 24 - Annual Report 2020

1.5 Our operating environment

1.5.1 Market factors and trends

We produce raw materials that are essential to modern life. Key trends
Our success is tied to the sustainable growth of emerging and The global economy has been dramatically impacted by the
developed economies. The commodities we produce are integral COVID-19 pandemic. Our operating environment is complex
to driving that growth. with demand volatility and price uncertainty expected. While the
As a result, our performance is influenced by a wide range of outlook remains uncertain, within the scenarios that we consider,
factors that drive a complex relationship between supply and our base case has the world economy rebounding in CY2021. There
demand. Our diverse portfolio of long-life, low-cost assets allows will, however, be considerable variation at the national level. Even
us to adapt to the changing needs of our customers and bring with this rebound, our base case is for the world economy to be
people and resources together to build a better world. 6 per cent smaller than it would have otherwise been in CY2021.

Society Demand Uneven Policy Growth in Electrification
in flux volatlity recovery uncertainty population, of transport
wealth
Short Medium Long
term term term

Price Opportunity Sustainable Climate Decarbonisation Biosphere
uncertainty and risk productivity action of power stewardship

There remains a significant degree of uncertainty in terms of how China has moved from intensive viral suppression to solid
the COVID-19 pandemic will progress and its longer-term effects. indications of economic recovery. As of August, much of the
For the time being, we expect this uncertainty will constrain risk developing world was unfortunately still in the escalation phase
appetite of households and businesses. Even before the pandemic, of their initial COVID-19 outbreaks.
action on climate change was expected to grow; new policies There remains a significant degree of uncertainty in terms of how
to ‘build back better’ could accelerate this trend in some regions. the COVID-19 pandemic will progress, and its longer term effects.
Our long-term view of our markets remains positive. Population We believe that China and the OECD are likely to return to their
growth and rising living standards are expected to drive demand pre COVID-19 trend growth rates from around 2023. Developing
for energy, metals and fertilisers for decades to come. New economies outside East Asia may take longer. In our range analysis,
demand centres for our commodities will emerge where the twin we also factor in the negative impact on China from the downturn
levers of industrialisation and urbanisation are still immature today. in the rest of the world.
Technology continues to advance with electrification of transport
creating risks (both threats and opportunities) for our portfolio. Exchange rates
Demand for non-ferrous metals has potential upside, but oil We are exposed to exchange rate transaction risk on foreign
demand could face headwinds. The decarbonisation of power currency sales and purchases. Operating costs and costs of
is another major long-term trend. The move towards a low locally sourced equipment are influenced by fluctuations in local
carbon economy has the potential to drive significant change. currencies, primarily the Australian dollar and Chilean peso.
Environmental concerns will drive increasing diversification of The majority of our sales are denominated in US dollars and we
national energy sources. Biosphere stewardship will be a key borrow and hold surplus cash predominately in US dollars. Those
vehicle for creating social value as unsustainable land and water transactions and balances provide no foreign exchange exposure
use and biodiversity loss are a danger to long-run living standards. relative to the US dollar presentation currency of the Group.
Against a backdrop of near-term uncertainty, with long-term The US dollar broadly increased in value during FY2020 against
strategic themes intact and accelerating, the value of optionality our main local currencies, although volatility has been pronounced.
is clear. We are confident we have the right assets in the right We are also exposed to exchange rate translation risk in relation
commodities with demand diversified by end-use sector and to our foreign currency denominated financial assets and liabilities,
geography. Our exploration and acquisition efforts are critical to including certain debt and other long-term liabilities.
maintaining that advantage, as they create a pipeline of products
to meet future demand (see section 1.5.3). Exploration is inherently Interest rates
risky (see section 1.5.4) as the geoscience used for locating and We are exposed to interest rate risk on our outstanding borrowings
accessing resources is complex and uncertain. Exploration and and investments. Our policy on interest rate exposure is to pay
acquisition are also subject to political, infrastructure and other on a US dollar floating interest rate basis.
risks that can impact the accessibility of resources. Our earnings are sensitive to changes in interest rates on the
Key geographies floating component of BHP’s borrowings. Our main exposure is
Our customers are geographically diverse. We have structured our to the three-month US LIBOR benchmark, which decreased from
business to meet changing demands as global market dynamics 2.32 per cent at 30 June 2019 to 0.30 per cent at 30 June 2020.
shift. Developments in a particular country can affect the demand LIBOR and other benchmark interest rates are expected to be
for our products directly. It also indirectly affects us through replaced by alternative risk-free rates by the end of CY2021 as
countries that supply goods for import to that country. part of inter-bank offer rate (IBOR) reform. We have established
Many major economies are expected to contract in CY2020, a project to assess the implications of IBOR reform across the
including the United States, Europe, Japan and India. In contrast, Group, and to manage and execute the transition from current
to alternative benchmark rates where applicable.

22 BHP Annual Report 2020