Energy & Resources

Not so ruddy awful

Chinese miners relieved as Australia backs down on resources tax

Not so ruddy awful

Gillard: a less taxing prime minister

Xi Jinping may never forget his recent trip to Australia, if only because of what it taught him about the vagaries of parliamentary democracy.

On June 21 he met with Kevin Rudd to discuss bilateral ties; two days later the Australian prime minister was ousted, and reduced to tears when he was replaced by his deputy, Julia Gillard.

It doesn’t happen that way in China. Xi is President Hu Jintao’s designated successor, and his succession to the presidency in 2012 was flagged as long ago as March 2008 when he was made vice-president. Rudd’s swift fall will have been a sobering reminder to the future leader of China of the downsides of democracy.

Then again, he won’t have been entirely upset by the outcome. That’s because one of the top items on his agenda during his summit with Rudd was the former PM’s controversial resources tax.

The planned tax – which ended up bringing Rudd down – was set to raise the rate paid by miners to 40%. Not surprisingly it had been vocally opposed by BHP Billiton, Rio Tinto and Xstrata – all of which pulled their investment plans in protest. But it wasn’t just the majors who were angered. China’s mining firms were up in arms too.

Firms like Minmetals, Valin Iron & Steel and Yanzhou Coal worried that the tax would damage their own acquisitions in Australia – decimating the profits they earned from mining metals and coal in the country.

The Economic Information Daily quoted the chairman of Baosteel, Xu Lejiang as saying the new tax would make his company “cautious” about investing in Australian iron ore mines. The newspaper noted the tax would be a “heavy blow” to Chinese companies – since many of the mining projects they’d invested in would come online just as the mining tax kicked in. In its editorial pages it described the Australian move as an example of “very strong economic nationalism” and said Chinese companies had assumed Australia was a stable investment environment. Unfortunately they had “underestimated the political risk”.

Confirming the new bleak mood, Chalco terminated an accord it had earlier signed to invest in a $2.5 billion bauxite project in Queensland. That would have been one of China’s largest investments in Australia.

The Chinese company was in fact only the latest to pull its plans. International mining firms had shelved more than $20 billion of new investments since Rudd announced the tax. It was this threat to jobs and economic growth that saw the Nambour-born politician’s approval ratings plummet and threaten his governing party with a loss in the pending national election.

That’s why his Labor Party ditched him, and likewise his unpopular tax. One of his successor Julia Gillard’s first acts was to sit down with the miners and revise the tax. In a move that pleased the industry, the rate was reduced to 30%, and the level at which it kicks-in was upped. Unlike before, it will only target iron ore and coal profits, meaning those that mine metals like copper will be unaffected.

When Xi met Rudd the China Daily reported that one of his aims was to persuade the prime minister to scale back the tax – lobbying on behalf of the many Chinese firms that had invested in the sector. Accordingly, he will be pleased by Gillard’s move, although China’s already beleauguered steelmakers won’t be entirely satisfied. That’s because they reckon any tax hike – even a smaller one than Rudd was hatching – will be passed on to them by BHP and Rio in the form of higher prices. With their own P&L already in a terrible state (see WiC56) that is something they can ill afford.

Nor is the uncertainty over for one of China’s biggest investors in the Australian mining sector: Sinosteel. The 21CN Business Herald reports that it has been in eleventh hour negotiations with Rio Tinto over the Channar iron ore mine in Western Australia.

The two firms have operated the mine as a joint-venture since 1987 under a long term contract. That is about to expire and, in negotiating the new contract, Rio wants better terms at Sinosteel’s expense.

The newspaper reports that Rio has “unilaterally proposed” that a condition for renewing is a rise in the resource fee and service charge it receives to $10 per tonne. Sinosteel had agreed to pay Rio $3-5 per tonne in 2006, but calculates the new rate will wipe out any profit it earns from the mine. It likewise worries that locking in this rate on a new 20 year deal could prove fatal if the currently tight supply situation of iron ore reverses, and prices start to fall in the coming five to 10 years.

21CN Business Herald quoted an insider who was privy to the negotiations as saying: “Rio Tinto intends to increase the price. For Sinosteel, it either accepts it or quits.”

Channar, with an output of 12.5 million tonnes a year, is an important source of profits for Fortune 500 company Sinosteel. It is also one of China’s earliest and most successful overseas resources projects. Sinosteel’s 40% stake has seen it earn about $100 million in annual profits in recent years – making it a cash cow for the company, and the most profitable part of the group.

But the newspaper is not optimistic that a deal will get done. If it proves correct, that will be another blow in China’s campaign to buy resources abroad. And yet again Rio may be portrayed as its nemesis: as reported in WiC55 (Talking Point) the company and China have experienced a strained relationship ever since Chinalco’s $19.5 billion investment in the Anglo-Australian miner was scuppered last June.

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