The truth about the mining Super Profits tax

By David Hetherington

Great piece by John Garnaut in yesterday's Fairfax papers which sheds an interesting light on the recent mining tax debate.  Garnaut explores the mining boom from the perspective of Chinese mini-miners – one-man bands who collect and sell iron ore by hand, and can make a living once the price hits $120/ton.

As Garnaut points out, the economics of their business make an interesting contrast with Australian suppliers.  Two arguments from the RSPT debate resonate.

The first concerns ‘super profits’, those profits above a reasonable rate of return on capital which justify a resource tax.  As we know, the Government’s original plan was to levy the tax on profits above the long-term government bond rate, a ludicrously low level of profitability.  The revised MRRT will kick in at a more reasonable level of the bond rate plus 7%.  What’s interesting about Garnuat’s piece is that it shows that, at the current price of $160/t, Rio Tinto is making profits on its iron ore of 433%!  Admittedly, this is based on cash costs so a capital charge should be added, but it leaves no doubt that super profits are alive and well.

The second argument debunked by Garnaut is the notion that miners would be forced to move offshore if the Australian government introduced a resource tax.  Yet Garnaut shows that Chinese domestic suppliers are actually the swing suppliers in Chinese iron ore, while Australia sits right at the bottom of the cost curve.  No reasonable level of resource tax is going to shift that pecking order, so there’s no question that the miners will turn their back on Australia.

This is just as true for coking and thermal coal as it is for iron ore.  The big open cut mines in the Bowen Basin are the cheapest in the world, and no sensible resource tax will change that.  It’s their golden goose as well as ours, and there was no way they were walking away from it.