Squabbling over the carcass

Advertisement

There’s a tremendous MSM brouhaha today over mining taxes, the cost of doing business for mining, commodity competitors, the failure of Labor to manage the boom, so on and so forth. Some of it is pretty good too.

My personal favourite is Paul Kelly’s take on Labor getting caught flat-footed on the politics of the boom as China slows:

There is a double bind at work in resources. Demand from China is easing while costs and productivity in Australia become more problematic. Labor is caught with a political message inconsistent with the turn in the resources sector. Its political message is still anchored in the high price phase yet the new policy demands originate from the investment phase.

Labor’s political message is about redistribution of the boom’s benefits via the mining tax, the Fair Work Act, a softer cop on the building and construction beat, more spending on disabilities, dental and schools, and demonising mining bosses Clive Palmer, Gina Rinehart and Andrew Forrest in the cause of such redistribution – yet the story from the investment phase is that its policies have entrenched higher costs, poor productivity, excessive regulation, counter-productive green tape along with a reluctance to allow the Productivity Commission to review factors driving higher project costs.

The boom demands a flexible, skilled, mobile labour force with the capacity to draw on foreign workers. Labor’s record on these fronts is mixed at best. It has committed to funding skills. It has unveiled a new scheme to get foreign workers on to projects starting with 1700 workers on Rinehart’s Roy Hill project yet Gillard was highly equivocal at its inception and caucus remains suspicious.

Advertisement

True enough. No doubt mining labour costs have run ahead of reality. And recent union behaviour has been…err…just a little short-sighted.

But there is also the problem that the rest of the community, most of it, has taken it in the team to enable a small number of miners to make lot’s of dough. That’s not to say that the community hasn’t benefited, it has, through avoiding the counter-factual scenario of a serious debt and asset price shakeout. But they’re hardly grateful for that are they? Most don’t even know it.

So, when Queensland sets about raising mining costs further by increasing the royalty take, it’s going to have strong community support, even if miners threaten to close up shop. From the AFR:

Advertisement

BHP Billiton, Rio Tinto and other miners are reconsidering their plans in Australia’s biggest coal-producing state after the new conservative Queensland government hiked the coal royalty rate to help drive a record $6.3 billion budget deficit back to surplus.

Premier Campbell Newman’s first budget yesterday predicted a bullish rebound in global coal prices and a surge in the state’s biggest export as it sought to raise $1.6 billion over four years by increasing the coal royalty from 10 per cent to 12.5 per cent for coal prices above $100 a tonne and to 15 per cent for coal prices above $150 a tonne.

…The spot price of hard coking coal is around $US155 a tonne compared with a $US150 average cost of production in Queensland, according to Wilson HTM analyst Andrew Pedler.

…The new rates, which are not indexed to inflation, would raise industry costs by $1.75 a tonne based on a coal price of $160 a tonne and $3.75 a tonne if the coal price hits $200 a tonne.

“It is going to hit coal producers relatively hard at times of low coal prices,” the stock analyst, Mr Pedler, said. “What it takes no account of is increasing costs. It just takes notice of the top line.”

This looks like a lot of hot air and preparations to blame the tax hike for closures that are coming anyway. If low cost mines are running on these margins, they’re already stuffed. The tax is hardly onerous, especially when you consider that there will be no MRRT to pay. Also from the AFR:

Companies can offset royalty payments against their MRRT liability, but Queensland Resources Council chief executive Michael Roche said the higher royalties would impose an extra cost on companies as they would pay little or no MRRT.

“The MRRT is paid when there’s super profits,” he said.

“Companies will be lucky if they make a profit at the moment, let alone a super profit. So no one pays MRRT but they will all be hit by this royalty increase.”

Advertisement

But all of this is really beside the point. There is one very easy way to give miners time to adjust to the lower prices that are coming, allow governments to increase revenues (especially QLD), and to begin the rebalancing away from mining that’s going to be needed as the boom fades away. For some reason, not one person mentions it today.

Lower the dollar. There is no inflation issue. Wages growth is already easing and rising unemployment is going to offset any decline in the effect of the dollar on tradeable prices. There’s been next to no growth in household credit and really doesn’t look like there is going to be.

The RBA could do it by following the arguments of Warwick McKibbin.

Advertisement

Or, we can start having the conversation that should have transpired years ago about capital controls, Tobin taxes and other fiscal nudges that can retard hot money flows into the Aussie. Just talking about it will help.

Or, we can just wait a bit and the Federal government is going to do it anyway by sticking to its surplus promise during an external shock and forcing the RBA to act.

Either way, it can’t come soon enough. A 10% fall in the dollar would dwarf any wage deflation. It would immediately boost the profitability of mines across the nation. It would boost tourism for QLD and GST takings everywhere as online sales diminish at the margin. As well as many other positive impacts.

Advertisement

It’s the high dollar has got to go.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.