How the mining boom is shared (or not)

One of the more interesting, persistent, rancorous and important debates that transpires here at MB, is the degree to which the mining boom is shared with the broader economy. I actually set out to answer this question a couple of days ago and was some way into a post when I discovered a new piece of research on the topic called The Mining Industry: From bust to boom presented at a very recent RBA conference.

This research was overdue. The last attempt to define the extent to which the mining boom benefited Australians was in 2005. The RBA paper was called Commodity Prices and the Terms of Trade. It concluded that:

A substantial part of the increase in profits accrues to state and federal governments. Royalties, which are a pre-tax item, are payable to state governments on mineral and onshore petroleum production. These are mostly at ad-valorem rates, and although there is substantial variation in rates and definitions, they probably imply that around 5 per cent of additional revenues from higher commodity prices typically accrue to state governments. More significantly, based on the statutory corporate tax rate, up to 30 per cent of the increase in profits would be payable in corporate income tax to the Australian government.

… The remainder of the initial boost to revenues (roughly two-thirds of the total) accrues to shareholders of the companies. This occurs either in the form of higher dividends, or if earnings are retained, in the form of capital gains. Domestic shareholders include both households and institutional investors such as superannuation funds. However, to the extent that there is foreign ownership of the Australian resources sector, part of the addition to incomes will accrue to foreigners. Although there are no precise figures on aggregate foreign ownership, some ABS data for 2000/01 suggest that foreign ownership in the resources sector is around 50 per cent. This is probably somewhat higher than at the time of earlier resource booms.

So, the conclusion was that roughly two-thirds of the boom is retained by Australia, in one form or another.

The new research is more comprehensive and represents a significant downward shift down from this earlier conclusion:

Putting all this together, the increase in mining revenues in the 2000s made a significant direct contribution to economic activity and incomes of Australian residents. The main channels identified were through direct labour costs (around 10 per cent of total revenue), the mining industry‟s demand for domestically sourced intermediate inputs especially services (perhaps around 25 per cent of total revenue), tax and royalty payments (close to 15 per cent of total revenue in recent years), and the share of the after-tax profits owned by Australian residents (around 5–10 per cent of total revenue). While it is difficult to be exact, these estimates suggest that overall Australian residents accrued a little over half of the total receipts earned from current mining operations. In addition, perhaps half of the total costs of mining investment was spent acquiring domestically supplied labour and other inputs, which generated further activity in the Australian economy.

The biggest change has come in the RBA’s assessment of to what extent producing Australian mines are foreign owned and, therefore, where the dividends end up. From the new research:

The foreign ownership share of the mining industry is difficult to determine for several reasons: many publicly listed equities are held in the name of nominee companies; holdings of companies listed on the ASX that are less than five per cent of their total equity do not need to be disclosed; and the degree of foreign ownership varies by industry and even by specific mine. Overall, based on published data by the iron ore, coal and LNG producers, effective foreign ownership of the current mining operations in Australia could be around four-fifths, with the share for iron ore producers a little lower and coal and LNG producers a little higher. Part of the earnings to Australians is distributed by mining companies as dividends, with the balance retained by the companies and reflected in rising share valuations. Indeed, mining equity prices increased by 180 per cent relative to the broader market over the 2000s, providing a significant boost to the wealth of Australian residents over the decade.

That is not to say that Australians share of the boom is neither sufficient nor fair. Much of the boom would not transpire at all without the huge inputs of foreign capital. But let’s examine the question more closely. From the new research, here is a table breaking up the distribution of mining revenues:

Direct spending on labour  is a low quotient of revenue and indeed constitutes only a small fraction of the benefits, as the paper says:

Direct labour costs in mining operations have been equivalent to around 10 per cent of total mining receipts. After falling gradually during the 1990s, employment in the mining industry grew rapidly during the 2000s, rising by around 10 per cent a year, compared with growth of around 2 per cent a year in the national economy. Indeed, the pace of mining employment growth during the decade was significantly higher than for other industries. However, mining is very capital intensive and hence the amount of labour demanded for mining operations has remained comparatively small. Despite its rapid growth over the decade, total employment for mining operations increased by only 110,000 over the decade (to around 200,000 or 1.7 per cent of total employment), representing a small share of the 2.2 million increase in employment nationally.

On the other hand:

Intermediate input costs have been much larger than direct labour costs, typically representing around 40 per cent of total mining revenue. Goods and materials used in mining operations constitute around one-third of intermediate input costs with the remainder being services, such as freight, contractors, rent and repairs. Intermediate input costs grew quickly after the onset of the mining boom, rising at an annual average rate of 15 per cent, or 3 per cent of GDP over the decade.

Yet the report also admits that two thirds of these are spent on local services:

…for instance mining companies often contracting Australian businesses to undertake their ongoing service and maintenance due to their locational advantage. Around one-quarter of these purchases are support services provided by the mining industry itself, such as drilling, draining and plumbing. Another one-quarter are property, finance and business services, which includes a wide range of services such as engineering consulting, employment placement, legal, accounting, computer system design, marketing, rental and hiring of equipment, and mine support staff provided by service operators (e.g. cooks, cleaners and bus drivers). The rest of the intermediate service inputs covers activities such as transport and storage, distribution, accommodation and services provided by utilities companies.

Such provides myriad jobs but largely on site and, therefore, doesn’t do much for the big metropolitan populations, given locally means the ‘back-a-Bourke’. So, the first observation we might make is that regional Australia often benefits directly considerably more than do city-slickers.

The next distribution of mining revenue mentioned by the RBA is the dividends that flow from increased profits:

The gross operating  surplus of the mining  industry, after  deducting  royalties and tax payments, rose from around $15 billion in 1999/2000 (2.2 per cent of GDP) to around $65 billion in 2008/09 (5.2 per cent). Earnings (after tax, interest and depreciation) are distributed to shareholders as dividends or retained within the company. Since the mining industry in Australia is majority foreign-owned, most dividends and retained earnings accrue to foreigners and therefore do not add to national income.

But now we come to the real dividend. The great equaliser is tax. There are two points of collection:

Royalties and company income taxes paid by the mining industry increased from around ½ per cent of GDP at the start of the decade to around 2 per cent in 2008/09 (the latest available data) – their highest share of GDP since at least the late 1960s. As a share of annual mining receipts, these payments increased from around 10 per cent to almost 15 per cent over the decade. The rise in royalties and taxes was driven by the significant increases in global prices and to a lesser extent export volumes for bulk commodities, while the share of the oil and gas industry in payments to governments fell over the period reflected the gradual depletion of Australia’s oil fields. Most of this increase was driven by mining income taxes; company income tax is levied on taxable profits, while mining royalties are generally levied on production and hence are less sensitive to movements in commodity prices.

That looks impressive doesn’t it. But it’s not easy to judge how much this actually is when expressed as a percentage of nominal GDP. So, here are some charts I made up for my original post. These are State government revenue splits and listed from the highest impact from royalties to the least. Note that the “other” category includes taxes raised from public corporations and royalties but I’m betting its mostly the latter. Another category to keep an eye on is “grants and subsidies”, which is GST and special project money provided by the Federal Government. First is WA:

A very nice accelerating ramp in royalties from $1.9 billion in 2001 to $5.6 billion today. One wonders, however, why it isn’t a lot higher given the iron ore boom. Next is QLD:

A much more delayed response presumably owing to royalties not enjoying a boost until volumes took off after the GFC and, perhaps, when new mines came on stream. Nonetheless, royalties are now rivalling other tax revenues combined with growth from $3.3billion in 2001 to $8.3billion in 2010. Next is NSW:

A good stream of revenue that has tripled since 2001 from $3.4 billion to $10.4 billion in 2010. Now SA:

Again a delayed response with $770 million in 2001 growing to $2.8billion in 2010. Finally VIC:

Poor old Victorians got nuthin’. Except a fiscal transfer so gargantuan it would make Greece choke with envy.

Looking at these charts, it impossible to miss the distinct upwards trajectory in all State’s total revenues since 2003. We are living through a largely unrecognised government boom in this country. Give or take a few billion, every state government doubled its revenues in the decade between 2001 and 2010. There are some very large and important private sectors that cannot claim the same growth. Outside of WA, royalties played a small part in that growth but a far larger part has been played by fiscal transfers from the Federal Government. To understand how that was possible, we must take a look at the budget of the great sugar-daddy. Note, in particular, the boost to corporate taxes and to individual tax income (which we’ll come back to):

After flat revenues between 2000 and 2003, the next four years saw Federal corporate tax revenue rocket from $37billion to $66billion. I have been unable to disaggregate mining but its a fair bet that that is where much of the growth came from. The above RBA table of mining revenue distributions shows that in 08/09, which was a very poor year, mining tax revenue was $13 billion, versus $3 billion in 03/04.

BHP and Rio alone grew their tax bills from a combined $2.2 billion in 2003 to $14.8 billion in 2008 (though not all of this was in Australia):

All of this mining tax revenue had one direct benefit to all Australians: tax cuts. Between 2004 and 2007, the Howard government committed to some $70 billion in tax cuts. Another $20 billion in superannuation relief, as well as providing a raft of new middle class welfare reforms like the ‘baby bonus’.

In order to determine whether or not the whole kit and caboodle is worth it, against all of these distributions of mining revenue, we must weight the costs of the mining boom. As the Canberra eggheads love to tell us, mining has to be given room to grow and that means other industries must shrink or, at least, plateau, which is the same basic thing. The tradeable goods sectors are the ones in the gun: manufacturing, tourism and education.

So, in some very significant way, the mining boom is simply a transfer of wealth from one area of the economy to another, ie miners. It’s not, strictly speaking, a generalised boom at all.

But, as the growth in Federal tax revenue from individuals (as seen in the above chart) shows, we did have a generalised boom from 2003 to 2008. The difference then was that the world had not yet had its Minskian awakening, debt was free-wheeling the world over, and we were free to leverage up the gigantic commodity revenues. Low taxes and other benefits of mining revenues enabled us to borrow and pump up assets like stocks and houses. The banks fed this beast by borrowing enormous sums offshore and giving it away at home for next to nothing:

The leveraging of the resource revenues and the asset price appreciation that resulted was, in some large measure, the real redistribution mechanism of Mining Boom Mark I.

But it wasn’t real after all was it? As the chart above shows, the GFC suddenly returned global credit distribution to a more sensible appreciation of risk. And now, even though Mining Boom Mark II ploughs on, the changed world still does not want to lend us cheap money. Nor, indeed, does the RBA want it to, having realised its mistake the first time around. Hence the mining boom feels malignant second time  around as neither the stock market nor the housing market can be jet-fuelled with new credit.

In my view, however, Mining Boom Mark II, for all its pitfalls, continues to benefit the nation in one very important way. As Glenn Stevens said recently,

That is partly because the change in the terms of trade, being a relative price shift, will itself occasion structural change in the economy: some sectors will grow and others will, relatively speaking, get smaller. That is particularly the case if the economy’s starting point is one that is not characterised by large-scale spare capacity.

But those pressures for structural change are also coinciding with changes in household behaviour that are associated with the longer-run financial cycles I have just talked about. Just as some sectors are having to cope with the effects of changes in relative prices – manifest to most of us in the form of a large rise in the exchange rate – some sectors are also seeing the impacts of a shift in household behaviour towards more conservatism after a long period of very confident behaviour.

It would be perfectly reasonable to argue that it is very difficult for everyone to cope with both these sets of changes together – not to mention other challenges that are in focus at the same time. However, if we were to think about how things might have otherwise unfolded – if households had been undergoing these shifts in saving and spending decisions without the big rise in income that is occurring, to which the terms of trade have contributed – it is very likely that we would have had a considerably more difficult period of adjustment.

That is, without the mining boom, we would almost certainly have faced the same constraints on borrowing that we do now. Indeed, they would likely have been far worse as the world would have made the cost of lending to us much more expensive given the risk that we might not be able to repay would have been higher. And all of this in an environment of falling incomes.

To be perfectly frank, we’d have been stuffed as the assets we’d so recklessly inflated reversed course in dramatic fashion.

None of that is to say that the boom couldn’t be managed better. It could, and without bidding farewell to diversified export industries. But, at the end of the day, I’ll take a poorly managed mining boom ahead of no boom at all any day of the week.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)

Comments

    • One thing re WA royalties – government has recently removed concessions from ore fines (a part of the market that has really grown) and this will boost royalty revenues.

  1. Victoria got nuthin because they dont have royalites on most of the things that they mine there. (no royalty on gold, 2.75% av on mineral sands, a pitance on brown coal).

    • Both interesting observations. Both go to the argument that States do not have the power to negotiate a fair royalty deal on their own. Hence a national resource rent tax is the way to bring in a fair royalty.

      • Alternatively the federal gov could look at restricting transfer payments between states based on “potential royalties” and reduce them for ‘industry subsidies’ to prevent the current situation where royalties are a race to the bottom to attract projects, and industry subsidies cause an auction between states. Very easy to do when you know the federal gov will fill any black holes you create in your budget.

        Got to give the WA gov (both sides over time) one thing. they know how to build a royalty regiem and extract their 4.5c worth.

      • I think WA is doing OK in negotiating royalties – not all companies were happy with the recent removal of concessions from fines (eg FMG).

        As you know the Constitution ensures royalties are the province of the States so a federal government can only adjust tax rates on profits to raise more revenue. Government seems satisfied with it’s MRRT.

      • or a J/V type arrangement instead of royalties/MRRT/corporate tax

        Resource extraction is not the same as creating income or being an industrial and should be taxed/handled completely different.

        too late for that now of course.

        • JV arrangments work reasonably well overseas experience suggests, although they do tend to cause conflicts of interest with some governements. There is also often a significant risk of influence over managerial control, and complete denial of any responsibility when things go wrong. Particularly when the govenment needs the income from the mine.

          The aust govs previously owned and ran their own mines (most notable coal), but have since privatised most of them.

          I agree that there should be a different taxation arrangment for all primary industry, not just mining. Reflecting both the volitility of the pricing and the use of common/semi common goods.

  2. Thanks for the post H&H, and in debunking the myths about mining. Like you say it could be managed better, much better IMO. I love to see what Ken Henery would say to this.

  3. Yes great post. One thing I can agree on with Fanboy.

    So, in some very significant way, the mining boom is simply a transfer of wealth from one area of the economy to another, ie miners. It’s not, strictly speaking, a generalised boom at all.

    Agreed.

    if households had been undergoing these shifts in saving and spending decisions without the big rise in income that is occurring, to which the terms of trade have contributed – it is very likely that we would have had a considerably more difficult period of adjustment.

    But for most households this “big rise in income” has now stalled and reversed. It may have helped households through the period immediately after the crisis (although fiscal stimulus and sharply lower interest rates helped more) but its not helping now.

    Today, stimulus is being withdrawn, interest rates are higher than anywhere in the world, and income from the mining boom is very narrowly focused.

    • “So, in some very significant way, the mining boom is simply a transfer of wealth from one area of the economy to another, ie miners. It’s not, strictly speaking, a generalised boom at all.”

      Booms rarely are generalised. The recent property boom only benefited those in the game, leaving many marginalised unable to enter a rising market. Tech booms are rarely felt by those not directly participating. It is the nature of a boom.

      In terms of personal income the wages chart from yesterday indicated reasonable gains in most sectors, and national income continues to benefit.

      • That was contradicted by several later indicators. As Data Sword said yesterday…

        Looking forward, other indicators of wages don’t support this data – the more recent June Labour Price Index showed diminishing pressures yesterday, as did the August Melbourne Institute Wages Report and both were reenforced by July unemployment figures from the ABS and Roy Morgan. With the prospects for employment deteriorating the outlook for further strong wage increases is fading. Indeed, the majority of industry groupings are seeing a deceleration in yoy growth rates.

        The boom is not being shared, and while the dollar remains high and interest rates remain high, the divide between the winners and losers from the mining boom is widening rapidly.

        Not good.

  4. Thanks H&H. Great post which gives us some FACTS on the distribution from the mining boom.
    Love your charts on the States revenues…and they are (mostly) still running deficits!!!

    There is that same old persistent number again….we have sold off 80% of our mining assets. Add to this the whole food chain and most of our industry of any significance. We didn’t do all this in the last few years. For what?

    One really has to ask why was this estimate dropped from published stats about 10 years ago?

    • The real question to why it was sold off is why wasn’t more of it funded locally ?
      Banks were busy lending for houses and avoiding all business lending.

      Equity markets had very little interest given the low prices & profitabilities of the 90s. And very nervous about the big aussie’s ability to build anything.

      Given the lack of australian businesses that would consider a mineral investment as an inputs cost hedge, that didn’t leave many funding options.

      • Dirt Digger
        Back to the old chicken and egg. At the Bank and enterprise level you are absolutely correct. You could get money for a house anytime…easy as can be. Apply for a loan for an investment in a productive enterprise of any sort and you had to jump through fifteen hoops and pay about 2 to up to 5% higher interest rate than for a house.

        On a macro level we were over-consuming and that was what everyone wanted. There were no savings and we had to sell the assets to maintain our lifestyle.

        I doubt the % of foreign ownership has changed much in the last decade. My own calculations some years ago (maybe 8) came up with a number of 78%.
        I can’t remember the last time the foreign ownership of resources and industry was published but my thinking now is that it must have been much longer than 10 years.
        I agree with you that it is a number that those who rule us, both from Govt and Banking etc, want to hide from the populace.

        • I agree whole heartedly with the savings issue flawse.

          I susspect that the ownership has not changed much in the past 40 years though. The big iron ore / coal JVs started around then, and the 70s nickel boom was very heavily financed by UK cash, as was the gold boom.

          Maybe slightly less o/s ownership when state govs controlled the coal mines.

  5. Nice analysis, thanks. There is one statement I don’t agree with however….

    ‘Such provides myriad jobs but largely on site and, therefore, doesn’t do much for the big metropolitan populations, given locally means the ‘back-a-Bourke’. So, the first observation we might make is that regional Australia often benefits directly considerably more than do city-slickers.’

    Here in the West I would contend the great majority of the jobs and benefits created by the boom in the Pilbara are here in metropolitan Perth. Firstly, while construction crews are located on-site, the support crew that designs, approves, hires, arranges logistics, builds components, supplies food, accommodation, then transports all the people and equipment backwards and forwards is enormous, and located in Perth.
    Secondly, almost all of the construction crews are FIFO, so while they may work in Hedland, on Barrow, at Lambert, Newman etc, they work 12 hr shifts for x weeks and then fly home for y weeks which is where their families are based…and where they spend their wages. Many of the FIFO workers fly east to homes in other metropolitan centres. A visit to any of these boom towns….Hedland for example, will reveal that there is precious little evidence of local businesses thriving as a consequence of all these new people in town. Most of the contractors who work on the expansion projects are based in dormitory villages while on-site, and these villages supply virtually all of their needs. The people who service the villages, cooks, cleaners, etc are also FIFO. Once the construction boom for these expansion projects is over, then the workers will return home, and the villages will be dismantled.

    • The FIFO phenomenon is one of the reasons much of the value of the current boom is not understood in Perth.

      Because people dont wear their HiViz on R&R many businesses in city really dont know how much of their custom is from mining.

      In previous booms the effects were very locallised to residential towns. (check out kamblda house price history) Although a fixed exchange rate and a politically controlled RBA meant that most people didn’t see direct effects.

    • +1

      You are spot on. Commercial office vacancy in Perth CBD was 0% (of over 1,000,000 sqm) for much of 2005+6+7.

      It is headed that way very quickly again (about 5.0% now). That is a lot of bums on seats in Perth.

      • ‘That is a lot of bums on seats in Perth.’

        That’s where mine is!

        FIFO is major, some 85,000+ on a regular basis was the recently reported figure (mind you that was in The West). Visit Perth airport early morning early evening and be blinded by Hi-Viz.

        • And there was me being a good country west aussie and flying east once a month to blow up NSW and ship it overseas.

        • But seriously I have sat in the pub at home (non mining town) and listed to the barman complain about how the boom is hurting them. Of the dozen odd people in there at the time (wet lunch) I know at least 8 plus me were directly employed in the digging game.

    • Firstly, thanx to all at MB for a fantastic site, I have been an avid observer since you all combined ( I only found DE 2 weeks beforehand)

      And thanks Russell for pointing this out, I also work in resources ( the mineral processing side )in SA and the distribution is massive as almost everyone lives somewhere else and takes their hard earned back home… mostly regional centres but mant from all over OZ, they just arent spending it.

      As i see it, our “patchwork economy” is purely resultant from the total combination of all that MB encompasses.

      The nation has maxxed out its credit ( some of whom are facing negative equity ) and shit scared of the state of world finance so are in self imposed austerity
      They dont need another flatscreen as they already have plenty.
      The biggest consumer group has just lost all its super and retirement will have to wait till they save more.
      A property bubble on top with buyers and sellers in a stalemate to see who will break first ( we all know who will win there!).
      then there is the glaringly obvious point that any stimulative measures will mostly just go straight into savings not consumer spending….so no benefit to Hospitality ,Tourism, High street etc there

      The list goes on but you all know all of this.
      I dont know about the rest of you but without any visual leadreship or direction in sight I am doing just the same… I work my rotation, save everything i can, pay off the house as quick as i can, grow my own veg etc, the only big gainer from any of my spending is a small local Pub in a town with 30 people which pays me the beer back to help in the kitchen ( Im a Chef by trade )when its their turn to host a local sporting club dinner.

      I know this all makes the situation worse in someways, but what else is a man to do in times like this?

  6. “To be perfectly frank, we’d have been stuffed as the assets we’d so recklessly inflated reversed course in dramatic fashion.”

    Wouldn’t that be a better alternative?