Australia’s new Prime Minister Julia Gillard struck a compromise with the mining industry today, agreeing on a new tax regime far less severe than the ‘super profits’ tax changes previously backed by ex-Prime Minister Kevin Rudd.
The new ‘Mineral Resource Rent Tax’ has the backing of both industry and government, assuaging investor concerns about the country’s business environment. Starting in July 2012, it includes:
- A 30% Mineral Resources Rent Tax for iron ore and coal.
- An extension of Australia’s Petroleum Resource Rent Tax of 40% to include all onshore and offshore projects involving both oil and gas production. This changes the tax system to treat all projects equally.
Yet the most important difference between the new tax regime and the previous super profits tax plan is that, according to Annette Beacher at TD Securities, the government has narrowed the scope of new taxation to only include bulk commodities such as iron ore, coal, oil and gas:
This new regime taxes ‘super’ profits arising from the extraction of bulk commodities of iron ore and coal (accounting for nearly 30% of Australia’s total export base) as well as those from all oil and gas projects. The gold sector is excluded, as well as the more marginal commodity sectors such as nickel, copper etc. This reduces the number of affected companies from 2 500 to around 320.
The system has also been designed to moderately adjust with market conditions, easing industry concerns about their long-term risk:
A clear and simple compromise was raising the threshold definition of ‘risk free’ profits, now defined as the government bond rate + 7%. This smooths over concerns that mining is anything but a ‘risk free’ venture. Leaving the bond rate in this calculation allows for some cyclicality in the ‘super profit’ definition, rather than an inflexible and arbitrary double-digit target. The current 10 year government bond yield is 5.12%.
This is just an overview, there are many details including more generous depreciation allotments for companies in order to promote future investment. You can find the Australian government’s official announcement here.
Now, the compromise is surely good news for Australia’s mining industry given what they faced previously, and Australian major mining shares are outperforming their market today. It’s also good news for Australia since it appears the comprise regime won’t stifle industry expansion to the extent that the old super profits tax system might have.
Thing is, the prospect of reduced long-term Australian mining investment was actually appealing to iron ore and coal producers outside of Australia, or anyone else with a long-term interest in higher commodity prices. That’s because any long-term reduction in supply growth from your largest competitor, or at the very least an increase in your largest competitor’s cost curve, is positive for your future commodity prices. That’s because coal and iron ore have a global market.
While near-term demand growth of China may be in question, there’s clearly a lot of long-term growth to come from the commodity-devourer. Thus each less ton of supply growth for Australian iron ore is a ton that needs to come from somewhere else, such as Brazil. The same goes for coal, another commodity where Australia is a key global supplier.
So while Australians, Australian investors, and the Australian government should be cheering the mining tax resolution, producers watching from a far have to be a disappointed. For these foreign producers, it would have been great news to see their largest competitor shoot itself in the foot. In the end, only their unwitting champion, ex-PM Kevin Rudd, ended up doing so.
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.