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Australia just this week unveiled a mining "super tax" that the country plans to levy against its natural-resources sector starting in 2012.
This is bad news.
It's not just because mining is Australia's most important economic sector: Australia is also an enormously important supplier of resources to the fast-growing economies of East Asia, where so many of the world's products are now manufactured. The mining super tax will cause prices to rise on the raw materials that are the key ingredients in so many of those products. And that means the levy from "down under" truly is bad news for the overall global economy.
With the newly announced mining super tax, Australia has shot itself in the foot. In doing so, unfortunately, it may also have peppered the rest of us with buckshot.
The Not-So-Super Tax
The rationale for the mining super tax (apart from ordinary government greed) was that the percentage of mining revenue taken in taxes and royalties by Australia's state and national governments has declined during the past few years as mineral prices have risen.
That's occurred because royalties are set at a fixed price per metric ton, and therefore decline in relative importance and prices rise. The new super tax would take an additional 40% of mining-company earnings – over and above a "reasonable" return on capital, defined as the yield on long-term Australian government bonds.
From the mining companies' point of view, this is an extra heavy burden. Since Australia's corporate tax rate is already 30%, the new super tax would raise the marginal rate on most profits to 70%. That's grossly excessive. It will badly discourage new exploration in boom years, since the additional profits to the mining company from a new discovery would be modest, indeed.
From an economic perspective, this is very dangerous.
You see, mining is a highly cyclical business. Every now and then, prices zoom up. When that happens, a surge in new exploration takes place – everybody gets out his pick and shovel … and starts bashing away at rocks. That big up-tick in activity eventually results in a surge in production (after a delay that depends on the mineral concerned, and that may be prolonged by environmentalist opposition). The production surge brings prices back down, and brings the overall market back into balance.
Australia – the world's major source of several key raw materials – has actually created a disincentive to new exploration, which adds to the delays that are already caused by environmentalists, government permitting, and other parts of the exploration process.
That will make those already-existing mineral cycles that we described much more extreme. Indeed, it may do major economic damage if a particular crucial mineral (copper, for example) is in short supply: The price of that now-scarce resource – instead of collapsing after a year or two – may actually keep rising.
The Fallout
Looking at it from the other end, you can see why Australian Prime Minister Kevin Rudd wanted the new tax – it will give him lots of juicy new revenue to spend on pet projects (after all, he faces an election in October).
But here's a fact that's sure to shock you: Instead of improving Australia's budget position, the new mining super tax will actually make it much more difficult. And here's why. When prices are high, the tax will generate a bonanza of revenue – which will no doubt be funneled into all sorts of new projects and programs. But when prices fall, the tax will serve as a spigot that shuts off the revenue stream – leaving officials to search for funding for those new programs and thus exacerbating the cyclicality of Australia's resource-based economy.
The effect will be similar to that of California's capital gains tax, which left the state with a horrendous budget problem when the dot-com bubble burst in 2001. The only saving grace of this super tax is that – even if passed by parliament after the October election – it will not come into effect until 2012, by which time resources prices may have declined, making it irrelevant.
The worst effect of the new tax on the world's mining companies is the boost it gives to government greed in other countries. Australia is one of the world's main mining centers and is generally regarded as a business-friendly country.
Up and down Latin America and Africa, dodgy dictators and sleazy socialists will now feel themselves empowered to renegotiate existing mining contacts to give themselves more of the loot. In short, worldwide-mining-company profits have been endangered by Australia's foolish action.
There are at least three countries in which mining company profits may be less-affected by new super-tax-type levies – namely the United States, Canada and China.
In the United States, a change in mining company taxes of this kind would not bring in all that much revenue – relative to the U.S. budget problems – and would provoke a huge-and-prolonged political battle.
Canada – like Australia – is a major source of global-mining-company profits. Canada – unlike its Australian counterpart – is run by a conservative, pro-business government that is well aware how fortunate the north-of-the-border nation is to have the large resources sector that has deflected the fallout from its southern neighbor's financial-crisis-spawned recession.
And China, whatever its faults, has shown no inclination to copy the mistakes of foreign countries, so whatever deals are now possible there will remain possible.
Companies to Watch
As mining company investors, we have been badly affected by Australia's action – regardless of where the companies we've invested in operate.
Of course, BHP Billiton Ltd. (NYSE ADR: BHP), headquartered in Australia, has been badly stung by the move: Most significant of all, its iron-ore joint venture (JV) with Rio Tinto PLC (NYSE ADR: RTP) has been put in doubt. Rio and BHP, the No. 2 and No. 3 iron-ore exporters, are seeking to combine their Australian operations in 50-50 JV; Bloomberg News reported that a "material-change clause" in the deal agreement could be triggered by the super-tax law, enabling Rio to pull out of the venture.
However, companies such as Cliffs Natural Resources Inc. (NYSE: CLF) – which has only moderate exposure to Australia – have also been badly affected, and even mining companies like Teck Resources Ltd. (NYSE: TCK), which have no substantial operations in Australia, have been knocked back.
Truly the Australians have managed to shoot us ALL in the foot.
[Editor's Note: With Martin Hutchinson, Money Morning readers have seen it time and again – the kind of creative, profit-focused thinking that's allowed him to succeed again and again where other experts have failed – one right after the other. And Hutchinson has pulled off this string of successes in the face of the worst financial crisis since the Great Depression – a financial crisis that, not surprisingly, Hutchinson is widely credited for having predicted and warned about well ahead of time.
For those who aren't regular readers, and who might like an additional illustration of Hutchinson's abilities, consider dividends, the icon of the super-conservative investing set, and gold, the safe-haven nest of perpetual inflation hawks.
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News and Related Story Links:
- Bloomberg News:
Australia's Fraser Says Resources Tax 'In National Interest.' - Bloomberg News:
Australia Mines Tax May Set Trend, Raw Materials Group Says. - TheFreeDictionary:
Disincentive. - Australia Prime Minister Kevin Rudd:
Official Website. - Bonanza:
Website. - InvestorWords.com:
Cyclicality.
I agree with your comments here. As an Australian I am hoping that Rudd will backflip on this decision as he had on most of his others.
This is very dangerous for us Aussies and as you have stated, impacts the rest of the world too.
And besides all that, it is just plain rude to apply a tax to an industry just because they are still profitable in the current climate. And no, I am not in anyway involved in the mining industry.
Very very bad news..
What would you expect from a Social Democrat. We had a similar problem in British Columbia in the 1990's when the NDP almost completely destroyed the mining industry with excessive government rules, fees, bureaucracy etc. It's just plain idiotic.
Interesting as always. Australia has been one of the countries well placed for the future with its wealth of natural resources. Does this tax suggest that it is now better to abandon Austalia as an investment? Thanks.
Don't blame all Australians, some of us didn't vote for this fool. KRudd is on a "power" spending trip before the next election and will do anything to get re-elected. KRudd and his Labor cronies have been in power for over two years and have done nothing but spend the surplus left by the previous Liberal party and put Australia in more debt. Now they need more revenue to spend, hence the new Mining Profits Tax. KRudd is a very good "spin doctor" who appeals to those who can not, or do not wish to, read between the lies, sorry… Read more »
This a very typical situation in Australia. Greed sets in and the Australian Government is truly "the greediest". I am an Australian citizen but find it is much more profitable to live elsewhere, particularly Asia. The tax on private individuals, particularly if you make good money, is horrendous! If there is a way to gain more money from companies or the individual then the Australian tax department will find it. I believe that the tax rates are probably one of the highest in the world. Mining, being one of Australia's biggest industries is certainly a sitting duck for the tax… Read more »
Well,well,well I am a mining engineer from Queensland, my brother's wife went to Nabour school as did young Kevie. I started in a coal mine at 14 and learned about "bloody hard" work. I have now lived in China for 4 years and Asia for 12 years. I know a little of the Chinese culture. First the slap in the face with Rio, down a little bit lower. The Chinese are humble,gentle people but like anyone they treasure respect. Their memories are as long as their history. Need I say any more. A former prime minister, Gough Whitlam once said… Read more »
Sorry, but I'm with the Aussies on this. My sister in law works for govt. in Canberra, and the Aussies are starting to understand what "ecological limits" are. They can only sell these natural resources once, and as economic growth is defined as "an increase in the rate of exploitation of the earth's resources" , we all need to start understanding about the limits to growth, for our species anyway. The only thing that can grow continually is debt. The aussies also realise they cannot keep suffering the effcts of climate change, and winge about it, if they keep selling… Read more »
I DON'T UNDERSTAND WHY POLITICIANS WANT SOLVE THE PROBLEMS JUST WITH "TAXES" I BELIVE ALL PEOPLE IN THE COUNTRIES MUST PAY TAXES, BUT THE BEST GOVERNMENTS ARE EFFICIENT WITH LOW TAXES AND GIVE STIMULUS TO PRODUCERS, TO FIX THE ENVIRONMENTAL DAMAGE OF MINING, WE NEED THAT THE MINING COMPANIES REMEDIATE AND CREATE A NEW SUSTANABLE WAY OF PRODUCTION ON THE SITE THEY EXPLOTED, MORE TAXES WITHOUT HIGH BENEFITS, IN A NEW SLAVERY FOR THE GOVERNMENTS AND ITS BAD ECONOMICAL POLITICS, THEY MUST BE WORRIED TO SOLVE THE BIG CHALLENGE OF REFORESTATION, CLIMATE CHANGE, TO SAVE THE OCEANS, NEW CLEAN ENERGIES,… Read more »
I believe that the government of Australia has to reflect on the consequences that the"new planed super tax of 40%" would have for the mining companies and the prosperity of Australia in the futur. By the way Australia knows the royalities set a fixed price per metric tons. Australia belongs as well to the worldwide leading countries of minings together with South Africa and Canada. I think Australia has to go once again over their books in this matter for considering all the consequences this might have for their economy, especialy the mining sector. The best thing would be if… Read more »
Ride on Jesus!! You are my man!!!! At least someone out there in the world has some common sense regarding these issues! All governments are corrupt-some just more dictorial , power hungry and oppressive than others. I'm not sure the U.S. will fit into your proposed alliance category anymore-we have a new dictator as you are aware of by now!!!! He wants 70% taxes and more-I think it's called socialism, marxism, communisim or something like that!!!!!
I don't see why Australia shouldn't impose mining levies. After all, I don't see why the government should allow mining companies to come in and bleed their country dry without doing something that benefits the populace as a whole and send the profits to a multicultural elite in other nations. Ok, maybe a completely flat percentage system would be better, but the Australians are completely entitled to expect to benefit from their country's resources.
Australia is a welfare state, and the socilistic mind set of the government and some Australians, is the same as the crazed control freaks that govern comunistic countries such as China.They whish to micro mananage and tax entrepreneurs or anyone who is willing to put time and money into increasing the productivity of the economy of the nation. The only reason the Australian economy is strong is because of the resources that it has, because the unions have destroyed the manufacturing base of Australia. Hence what little strenght there is in the economy is as a direct result of THE… Read more »
Martin, it appears as if California does not, in fact, have a "capital gains tax", at least as far as individual California Taxpayers are concerned. (Based on the California Form 540, Individual Resident Tax Return for 2009. ftb.ca.gov ). The State of California considers all capital gains as income and does not categorize it separately at a different tax rate, as the IRS does with Federal Individual Tax Returns.
History repeating itself, get rid of LABOR and K/RUDD Australia has always been in a better economic position with well managed conservative governments.
As horrendous as this is, this super tax is just the thin end of the wedge. As an Australian I despair about the Australian community's ability to elect governments. It seems that when we get a government that is competent and prudent, we have to go and throw them out by listening to the massive spin and public relations army of the Labor Party. Even the most capable Prime Minister we've had since the early 60's lost his seat. It's happened 3 times since the early 80's. It's apparent that the Labor Party has really only one objective – to… Read more »
If this super tax (bullet) takes place Australia will not be effected by a " shot in the foot" but it would more likely feel like a "shot in the head"…Dud is just that…As most of the world slowly recovers from its economic downturn it will be Australia's time to sink… The only thing that has saved us from sinking "down under" has been a open tap on mining Australia’s abundance of natural resources and some smart entrepreneurs that run the businesses behind them…Now the Dud wants to put his 2 cents in……..Fellow Australians don't be fooled again…vote Liberal and… Read more »
Here's Prime Minister Rudd tying himself in knots as he tries to explain the difference between profits and superprofits, and justify yet another great big new tax, on Radio 6PR in Perth, Western Australia, earlier this week – http://media.mytalk.com.au/6pr/Audio/Mornings_030510_KevinRuddHenryTax.wma
I think the proposed tax is justified for the following reasons:
* Slowing down of fast depletion of Australian natural resources
* Slowing down of the aggressive aggravation of environment
* Finding sources of alternative revenue stream from non-mining sector as it is expected that the proposed measure will eventually reduce govt. revenue.
Long live Australia
Don't whinge, Australia ia one of most cost effective producers in manufacturing, mining and agriculture providing NON subsidised goods to the world. Unlike the EU, USA and other economies, Australia does not rely on government and therefore tax payers to support their businesses. Living in Australia means that those of us who work at higher incomes and pay taxes accordingly can take care of our mates (ie. those less well off). What I see about most countries is very selfish people out for themselves. Remember you cannot take your money to Heaven or indeed Hell. I am proud to be… Read more »
I just finished reading Adam Smiths 'Wealth of Nations" writen in 1775 where he clearly states that excessive taxes on exports destroy that export market because of the old supply and demand. Other countries also export these same raw materials and will be glad to fill the gap at lower prices and if they don't the tax will be pased back on to the Australian public when they re-import the finished products they can't competitivelly manufacture themselves.So let them tax exports at 10,000% if they want to, the higher the better, Smith didn't know of a better way to hamper… Read more »
The Resource Tax was just part of the Henry report, most of which was largely ignored. Unfortunately K Rudd has grabbed a hold of the one thing he thinks that the Australian electorate will stomach ahead of an election. Like the author of the article I too believe K Rudd has shot Australia in the foot. Why is it that there is an automatic tendency to tax the golden goose rather than recognize that without it our economy will surely falter. The best we can hope for is that common sense will prevail and we will have a change of… Read more »
I am interested in the comments of gw peterson, but which part of Economics 101 did you miss about the aspect of "Supply and demand". The fact is that over the course of this century the world's population will most likely double. With say another 4 billion people on the planet (on top of the present 6.5 billion), demand for resources like energy, minerals and crops will become in short supply. Demand will further increase as third world countries' populations politically demand higher living standards. Australia is not only well placed, but is likely to be the major supplier of… Read more »
Rudd is a fool and is rapidly smothering the goose that has layed the golden egg I.E Resources. If he actually ran an efficient government instead of wasting millions of dollars on worthless projects then he wouldn't need to impose this ridiculous high tax on Australias growth. We'd also be paying a flat rate of approx. 25 percent tax on our income instead of getting slugged the highest rate of tax in the entire world. Now tell me all that extra disposable income wouldn't drive the economy with good growth. It's time to get rid of Dudd, he's an incompetant,arrogant,fake… Read more »
You folks should be Americans! Lets just keep raping it for all it got! Give me More MONEY!!!
Thanks Martin for a Great Article, so much truth in it and so much fun reading the heart felt comments. If only the Australia Govt has more sense and control of Foreign Ownership of Companies, properties etc. The profit and dividend that generate would surely stay with the Australian people and in turn flow through the economy. The election is coming close, it's all about the govt with its 'normal' or 'super' Taxes, no different from the medieval period, to fill their FAT pockets and pay their wages and expenses and lavish spending on unproductive projects that they cannot control… Read more »
As an Oz I agree there should be sharing in this countries wealth but not the way our so called leader is proposing just for his own political future. In my mind we should be looking across the board and the tax should be shared on a fair an equal basis, NOT one off huge hit on our mining sector.
I can live with any tax increase as long as it's fair.A flat tax for all incomes is the only fair tax.So,if you want to increase taxes on miners by 40% that's fine as long as every individual and company also sees a 40% increase.I suspect that if Australian taxes were fair then not many would be in favor of this proposal.
Rudd and his Govt and his bureaucrats should be reading Money Morning America and Money Morning Australia like us to educate themselves and get an in depth in sight into the Australia and the world economy and what people wants and needs not just sitting in their offices like frogs in the well. In all fairness they might read a lot, they claim, through their P.A.s' eyes. Or just plainly selfish, they will retire comfortably and rich with everything and why should they care
How about, Australia nationalised all mining industries and then truly can they say, all the dirts belongs to all Australian. All income from it will go to pay for all the needs and wants of ALL Australian. Australian have heaps $$ in super fund…where it can use to buy up all the Mining Companies. If not, create a Sovereign Resource Fund..sell bonds to raise cash. Then we don't have to debate about who owns what. What do you think???? A bit like the Suadi, with their oil resource.
what a lot of garbage about the increase in tax on these multi national companies. there is no morals when we speak about money the winner takes all the loser evaporates. governments are in these days for big business or social balance. ive been living in germany for a year and realise what a great country australia is. i suggest people live in europe or america for a while and see how hard it is to live here all governments are fundamentally corrupt so is big business, its money and control dummies and when governments and authorities become totally owned… Read more »
What is particularly amazing about this article is that it points out why a Resource Rentals Tax is so beneficial. It is always better to derive public income from resources, which are both fixed in supply and with no moral justification for ownership. This is certainly better that produced goods and services which add to the cost, carry deadweight loss etc. But even when natural resources are targetted there is an efficient and inefficient way of doing it. The inefficient way is the existing Royalties method, which, as the article points out, is based on a fixed value of tonnage… Read more »
Anyone heard about Norway?
It has huge reserves of oil. The government owns the oil and takes most of the profits. It puts these profits away in a sovereign wealth fund so that future generations can benefit when the oil runs out.
Soon the Norwegians will have $100k per-person saved up. This coming at a time when many goverments have huge debts.
Rudd should take this super-tax and put it in a fund for the future.
We survived before mining and we will survive after it if the new RSPT is all doom and gloom as most mining companies, share holders and overseas interests seem to say. I have looked on all different types of web sites for more info and the overall tax rate on mining companies becomes lower unless you make extremely huge returns. its our ground make em pay or we go back to the sheeps back when housing was cheap and you could survive on a single income. in the end mining is our biggest money spinner in this it is nowhere… Read more »
The best way for Qld WA and the NT to avoid the taxation system is for us to concede from Australia. We can then put up a big fence and keep the immigrants and boat people out.
It will be funny when all these Labor voting socialists and Green voting yes men have to foot there own bill with there beloved Julia squandering there money and not money stolen from regional Australia to drip feed the bludgers that vote for them.
Hi I know a little of China after living here 8 years.
They are lovely people but they do not suffer fools.
There no monkeys in this country except the zoo\\
DR Ross Wrigley
Hello there guys… It's bad news, of course for Australia…couse mining mining is on of the Australia's most developed economic sector… I'm a businessmen from Russia and I've heard rumors about a man called Paul Deuchar from Perth, Western Australia… looks pretty interesting, I've been asked to track down some more info on him as my client is looking at putting $500m into an investment over there and needs a capable partner over there. Hoping you guys here might be able to give me some pointers.
Thank you
Artash
Artash do you mean Paul Deucher from Argon Technologies? Paul Deucher the face of ENGINEERS AUSTRALIA is one of the world’s premier engineering bodies with approximately 73,000 members nationally and over 8,500 in Western Australia.He’s very famous over here and especially in the industrial sector. If you plan business with him don’t hesitate, you found the right man. Deuchar runs Argon technology and here is the website you may visit http://www.argon.com.au/
Thanks for reading