Monday, May 31, 2010

"The person who will dig out our last iron ore has probably already been born"

The truly shocking table is from Budget Statement 4:

Here's Shane Wright in today's West Australian:

"The person who will dig out the last shovel load of iron ore from WA has probably already been born. Based on the best available research, and relying on current levels of production, there is estimated to be 70 years worth of iron ore in the ground across the country.

It’s better than gold — about 30 years — and copper — about a decade — but short of the 90 years worth of black coal or the 130 years of zinc thought to be hiding in the soil.

Of course, technology and price rises should mean we will find more iron ore, but on the other side of the equation demand will also increase.

You can’t start an iron ore or coal farm and grow more of the stuff. Once it’s gone, it’s gone for ever.

That is what sets mining apart from every other industry and one of the reasons why resources rent taxes are much better than the system of royalty payments...

As the Minerals Council of Australia recognises, taxing a resource at a flat rate is one of the worst ways to tax these commodities.

That’s because the royalty hits before you even start production, which encourages the development of high-value minerals at the expense of others and hits hard those mines at the tail end of their existence. Royalties don’t care if iron ore prices are at $20 a tonne or $120 a tonne, and therein lies the problem with them.

The Henry review, in a comparison of all types of taxes, found royalties were the worst type of tax in the country.

For all Colin Barnett’s complaints about the resources super profits tax, his plans to increase royalty rates are also a substantial danger to the mining industry. Maybe not to a BHP or Rio Tinto, because of the huge revenue flows these two are generating, but to anyone else in the mining game.

Mr Barnett wants to push up royalties because he recognises that royalty rates have not kept pace with the accelerating demand for the commodities.

He has to look after the long-term finances of the State, and by signalling a royalty increase the Premier is effectively admitting WA has been giving away its non-renewable resources to private companies far too cheaply.

When the iron ore runs out, BHP, Rio, FMG and others will head off to other parts of the globe in search of resources.

The Premier is doing the right thing by the taxpayers of WA by seeking to increase the payments for commodities that can never be recovered. However, the royalties system is a terrible way to do it because of the wider economic damage it causes.

That’s the whole reason behind moving from royalties to a system that taxes profits, and grabs a constant share of those profits.

Unfortunately, the Rudd Government has seemingly stuffed up this whole issue from the very beginning.

Some of the Government’s arguments have been disingenuous to the point of outright lying.
Just the name of the tax — the resources super profits tax — is a piece of political spin and nothing else.

It’s all about tapping anger in urban parts of the country over the Government’s claims that miners don’t pay their fair share of tax.

Really, this is an onshore minerals rent tax and nothing more.

The Henry review suggested excluding certain low value minerals such as peat, talc, lime and sand, largely because any financial benefits would be outweighed by the administration costs and the fact these minerals don’t generate very large profits. Instead, the Government brought them under the super profits umbrella, with no explanation.

It has welched on a confrontation with the States over royalties.

Even with all the evidence that royalties are a bad way to tax non-renewable resources, the Government went with a second best option of leaving the States to collect royalties and then rebate them back to the companies involved.

In the selling of the whole change, Ken Henry was not rolled out until a fortnight after the report was made public. The person best placed to explain the tax was held in reserve, while other members of his panel were not asked to front the cameras to explain how the tax would work.

And attempts to explain how the rent tax would work made the plot lines TV’s Lost seem simple by comparison.

Mr Rudd failed to sell the ETS and his ham-fisted efforts at the RSPT have been no better.
Apart from Dr Henry and a few tax experts, no one seems to be able to explain, without a power point presentation why the tax kicks in at such a low level.

The fact this tax does not operate anywhere else in the world is also of little comfort.
As Ross Garnaut, one of the fathers of rent taxes in this country who is also the chairman of gold miner Lihir Gold, explained recently, making the theoretical case is one thing. He argued that unless every element of the theoretical argument could be borne out, then the best option would be the introduction of the petroleum resource rent tax to the onshore mineral sector and one other minor change.

I think he has it about right, and it’s an option that should be pursued by the Government.
The PRRT is understood, its arrangements have not changed since it was introduced more than 20 years ago. A key element of any tax system is that it should not change over time.

The fact oil and gas are still being taken from Bass Strait is a testament to the success of the PRRT. Under the previous system of excises, BHP and Esso, the two firms behind Bass Strait, would have wound up production almost two decades ago.

The main selling point of the RSPT over the petroleum tax — the Government taking 40 per cent of the risk in a project — is simply not valued by the companies. That is a major problem.

Of course, the Government is no orphan being disingenuous in their argument. Mining companies claim that royalties are a tax, but on their annual accounts they are accounted as a business cost and so are tax deductible. The royalty is a fee for digging up the dirt — without some sort of fee, the owners (us) would be giving away a non-renewable resource that is worth money for free.

The RSPT replaces the royalty to become the fee, and so rises and falls with the movement in price. That is what sets it apart from a royalty, and why it is a much better tax.

None of this, however, detracts from the main point — the RSPT will collect a lot more tax from a few key mining companies. Taking $10 billion or so a year from their bottom lines must have an impact on the operation of the sector right now.

Some projects seem likely to be delayed for many years to come, although eventually the value of WA’s commodities will demand their exploitation.

Maybe the person destined to be the last to dig iron ore out of WA has a little more time up their sleeve."

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