Back when Australia's socialist government introduced the 'Super Profits'
Mining Tax', essentially a shakedown of the mining industry based on the
erroneous assumption that the China-induced commodities boom was eternal and
immutable, we penned an extensive critique.
Since then, it has turned out that many of the things we predicted would
happen on account of this atrocious boondoggle have indeed become reality.
First of all, by setting this negative example, Australia encouraged the rise
of so-called 'resource nationalism' everywhere. Governments around the world
have become to regard mining and other resource extraction operations as
sitting ducks they can either steal (that is what has e.g. happened in places
like Venezuela, Argentina and most recently Egypt, although the fate of
Centamin is not yet decided) or shake down a la Australia.
After all, one cannot move a mining operation elsewhere and given the
already sunk costs, it is a good bet that the operation will not be shut down
as long as it is still marginally profitable.
However, governments doing this are extremely short-sighted. Mining is a
highly risky undertaking even at the best of times. It requires huge
capital investment, has long lead times due to having to comply with reams of
regulations and is beset by big risks that are immanent to the business itself
(e.g. sometimes when a new mining operation gets underway, it turns out not to
live up to plan).
Moreover, miners are price takers. Unlike e.g. Apple, which can decide how
much it wants to charge for each iPhone, a copper or gold miner must take
whatever price the market gives him. The business is highly cyclical and as
rising commodity prices often go hand in hand with rising input costs (commodity
prices normally tend to fall in real terms, but when they do rise, then it is
usually mainly because of monetary inflation, which also raises the costs of
extraction) the booms are rarely as profitable as one might expect.
However, there can be no doubt that the industry occasionally does enjoy a
boom – normally after a long time of struggling through a period of very low
prices.
If governments decide to skim off the extra profits that are made during
the rare boom times, then they ultimately destroy all incentive to invest in
mining. After all, governments won't give back a farthing of the loot when the
inevitable bust arrives. Who wants to invest in an industry that is only left
alone during bust periods? Without the incentive to make good profits
during boom times, mining is simply a terrible business proposition.
Investment Dries Up, As Expected
With all of this in mind, we have noticed a recent slew of headlines that
shows what a grave miscalculation the mining tax in Australia has already
turned out to be. The long run negative effects are already coming home to
roost. For instance:
“BHP Billiton Ltd. has another four years to decide whether it will push ahead with the expansion of its Olympic Dam copper and uranium mine in Australia after it shelved a proposed multibillion dollar development earlier this year.
The government of South Australia state Tuesday said it had extended until October 2016 an agreement with the mining company covering expansion work that was due to lapse in mid-December if BHP's board didn't approve the project. BHP in late August postponed a decision in the face of weaker commodity prices and higher capital costs.” (emphasis added)
Olympic Dam is a 'world-class deposit' as the article mentions. Not
mentioned is the fact that the decision whether or not to invest would have been
a lot easier for BHP if not for the new tax regime. More along similar lines:
“The recent fall in iron ore and coal prices in recent months has seen Australian mining companies shut, or delay projects and sack workers. But Mr. Peever said Rio Tinto's current expansion of its Pilbara iron ore operations to a forecast 353 million metric tons a year remains "on track".
The company's recent decision to pare back accommodation costs in the Pilbara region won't affect the planned timetable of 2015 to reach full production, he said. Nevertheless, Rio Tinto will pursue more cost "rationalisation" as it and other Australian miners react to lower prices and declining labour productivity in the country.” (emphasis added)
Once again, the tax isn't even mentioned. However, when the tax was passed
earlier this year, numerous court challenges against it were launched (to
no avail), which certainly tells us that the miners were very unhappy. In fact,
the excerpt below shows us the economic illiteracy of the government's
approach, as exemplified by its above mentioned misguided faith that the boom
conditions would remain in place forever (the wake-up call has already
arrived – much sooner than anyone thought). In the excerpt below,
'Gillard' refers to socialist prime minister Julia Gillard.
“"As Fortescue has previously advised, the company has engaged senior counsel and will commence legal proceedings after the legislation has been enacted and legal opinion has been finalised," a company spokesman said.
Mining billionaire Clive Palmer also attacked the tax, saying the passage of the legislation was a "bitter blow" for Australian resource companies. "The mining tax is only going to make Australian companies less competitive against foreign-owned opposition and ultimately it will threaten many Australian jobs," he said in a statement.
Gillard said she was confident of meeting revenue targets, despite the monies collected from the tax relying on the Australian dollar's exchange rate, mining volumes and commodity prices.
"China is still going to be buying in absolutely record quantities the things that we have to sell out of our resources sector," she told the Australian Broadcasting Corp. (emphasis added)
The eternal China-driven commodities boom! It cannot possibly stop, ever!
Gillard also proved that she has neither an understanding of, nor respect for
private property rights when she said:
“The Minerals Resource Rent Tax (MRRT) will deliver Australians with a fair return on the resources they own 100 percent," she said.”
Whenever a politician uses the term 'fair' in a sentence it can only mean
one thing, namely that someone is about to get robbed. More importantly
though, “Australians” as such definitely do not “own the
resources 100%”.
The owners of the resources are the people and companies that drilled for
them and developed them and paid for the ground and 'mineral rights'. Gillard
apparently mistakenly assumes she is in a communist Utopia, where the State
owns everything (that State is commonly referred to as 'the people' in these
pronouncements, who are invoked as a rhetorical device for propaganda purposes).
Crisis Conditions Arrive on the Scene
In the meantime – only six months later – it has turned out that 'Australian business conditions hit crisis levels'
– as both the country's housing bubble and – surprise, surprise – the resources
boom falter:
“Australian business conditions deteriorated last month to levels not seen since the global financial crisis as a mining slowdown weighed on the country's resources-dominated economy, a private sector survey Tuesday showed.
National Australia Bank's index of business conditions–which tracks indicators such as goods orders, employment and profitability – fell 2 points to -5 points in October from September, the lowest level since May 2009 when world financial markets were still in turmoil.
[…]
The remarks by Jonathan Kearns, head of economic analysis, indicated that
policymakers remained cautious about a sector viewed as critical to supporting
the economy as the resources boom, which has powered growth over the
past few years, fades.
The NAB survey also showed a measure of capital spending falling to its lowest level since August 2009, underscoring a slowdown in business investment especially in the once-booming mining industry.
[..]
"Rates are near historic lows but business conditions have become tougher, rather than easier," said Craig James, chief economist at Commonwealth Securities. "A high Aussie dollar, massive changes in technology, global competition and a raft of uncertainties" are undermining the Australian economy, he added.
The economy was stung mid-year, too, by sharp falls in key industrial commodity prices, prompting mining companies to shutter sites and collectively shed thousands of workers. Iron ore and coal–two of the raw materials hardest hit by declining Chinese demand for steel–account for over a third of Australian exports.” (emphasis added)
Something seems to have gone wrong with China's insatiable appetite for
commodities. It is quite ironic in this context that both iron ore and coal
operations were actually the main targets of the tax. Oops!
The fact that something was very wrong on a fundamental level was already
conveyed by the Australian stock exchange at the time the tax was conceived, as
the long term chart of the All Ordinaries index below shows:
In spite of the presumed permanence of the commodities boom, the
Australian All Ordinaries Index never even came close to its former peak
in recent years – via BigCharts.com – click for better resolution.
Nothing good has come from the tax – and nothing ever will. Even if the
commodities boom resumes, the threshold for mining companies to invest is going
to remain much higher than it once was. Mr. Palmer had it exactly right when he
said that the tax “will threaten many Australian jobs”. For a brief time
the government's revenues may be boosted whenever boom conditions return, but
in the long run it will probably get less revenue than it would have received
had it left well enough alone. Australia's economic growth and living standards
will most definitely decline.
Investors in the mining sector meanwhile must realize that 'political risk'
is not only the province of developing nations. It can strike everywhere.
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