Australia’s New Taxes on Iron Ore and Coal...How will they Impact Prices

The Australian government has just enacted a new law that has created two taxes which may very well impact the country’s mining industry and the national economy.

The 2 taxes, a Carbon Tax and a Mineral Resource Rent Tax, became effective on the same day, July 1, 2012 … just about one week ago.

It is anticipated that the taxes will have their greatest impact on investment in Australian-generated new projects and not on short-and-medium-term iron ore and coal prices.

In the case of the MRRT, (Mineral Resource Rent Tax) the onerous and costly 30% tax that will be imposed on iron ore and coal mining companies whose profits exceed $125 million, industry spokespersons have expressed confusion about how the tax is to be applied.

Complicated and difficult to understand, the tax is already being viewed as a nightmare and many companies have stated publicly that they are unsure if the tax will have any impact on corporate bottom lines.

Interestingly, many industry executives believe that, as happened with the Australian petroleum resource rent tax, mining companies will fight the tax in court – for years and years – and, as a result, the government will realize little, if any, revenue from the tax.

And yet, the mere imposition of the tax can – and likely will – negatively affect the mining and sale of both iron ore and coal.

As noted earlier, however, mining companies will seek relief from the tax in court. That is already happening …

Fortescue Metals Group has issued a legal challenge against the tax, questioning its constitutionality. The case has already reached the court system. Arguments for and against the tax are being heard. The case may turn out to be even more important than initially anticipated because the Western Australian state government may soon add its considerable clout and public support to the mining company.

The Australian government, however, has no intention of backing down and walking away from the fight. The government estimates that the MRRT tax will generate a healthy $10.6 million in new revenue over the next three years, 90% of which will be paid by BHP Billiton, Rio Tinto and Xstrata, three industry giants.

Andrew Forrest, chairman of Fortescue Metals Group ,disputed the revenue estimates put out by the government, claiming that lower iron ore prices would negatively impact the amount of revenue earned and received by the government.

But, what about the other new tax … the carbon tax? This tax of $23 per metric ton could cause great harm to one of Australia’s new industries – the still very young magnetite industry which requires lots of energy to process ore into concentrate and pellets.

Fortunately, industry analysts are predicting that the taxes will have virtually no impact on coal prices. Tom Sartor, a coal industry analyst for Brisbane-based RSS Morgans, said recently that there are far bigger forces driving coal prices than the MRRP and Carbon taxes.

So … if coal and iron ore prices are not the real concern of mining companies now that the new taxes are in place, what worries them? As noted at the beginning of this article, it is investment. Mining companies fear that if investors no longer consider Australia a safe place in which to invest capital, it will dramatically affect future projects and revenue.

Will investments in Australia mining really dry up? The answer is … probably not. However, it’s important that the country’s mining companies market their projects effectively so that investments remain steady and constant.

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