Replies to post #579 on The Rising Influence of Rising Affluence

[DewDiligence]

Australia Could Tax the Lifeblood of BHP, Rio Tinto

[Expropriation of assets, whether legally via unduly heavy taxation or illegally via outright seizure (as in Venezuela), is ever the risk in natural resources investing.]

http://www.ft.com/cms/s/0/fa24a7f0-0c74-11df-a941-00144feabdc0.html

›By Elizabeth Fry in Sydney, Paul Betts
January 29 2010 02:00

Reports that the Australian government plans to hit the mining industry with a new tax - which could cost BHP Billiton and Rio Tinto a combined $5bn a year - has spooked the industry and created further tensions between Canberra and the resource-rich states of Western Australia and Queensland.

A wide-ranging tax review has reportedly recommended that Canberra extract billions of extra dollars from the mining industry by scrapping the state-based royalties that are currently paid and slapping a 40 per cent resource rent tax on operating profit.

Basically, the resource rent tax would extend the scope of an existing petroleum resources rent tax that is levied on petrol products to additional minerals such as coal and iron ore. Currently, state-based royalties grab 2-10 per cent of mining revenue.

Back-of-the-envelope calculations by Merrill Lynch suggest that if a 40 per cent resource rent was applied, BHP could lose about $2.6bn a year from 2012 to 2016, a 16 per cent drop in full-year earnings.

Rio would take the biggest hit, losing about $3.01bn a year in the same period, a decline of 25 per cent.

Neither of these scenarios includes the prospect of a corporate tax cut.

The leaked documents are viewed to some extent as a kite-flying exercise to gauge industry vitriol as well as the ferocity of industry push-back, but it is also felt that where there is smoke, there is fire.

Moves to increase the tax take from the burgeoning resources sector have been under way for years. Even if a 40 per cent tax on operating earnings is a worst-case scenario, most industry insiders are bracing themselves for a much larger tax grab than is currently the case.‹

[DewDiligence]

Here’s an example (one of many) of how Chinese commodity buyers
use the political system to try to gain an edge over foreign suppliers.
(See #msg-43960884 for additional background.)

http://online.wsj.com

›China Hebei Iron Seeks More Control of Iron-Ore Prices

Mar 1, 2010 02:36:44 (ET)

BEIJING (Dow Jones)--Hebei Iron and Steel Group, one of China's most influential steelmakers, has pitched a raft of proposals to the Ministry of Industry and Information Technology, focused on moving the country toward a unified iron ore import price and gaining better control of the raw material's prices.

The company--which recently surpassed Baosteel Group Corp. as China's largest steel miller by output, according to analysts—suggested to the ministry that global miners be prevented from getting involved in a proposed iron ore distribution center at Qingdao, a senior company executive said Friday at a closed-door industry meeting.

Such a move would limit the possibility of miners promoting a spot market for iron ore, said the executive, who didn't want to be named.

Brazilian miner Vale S.A. (VALE) is building a regional distribution center for 400,000-metric ton ships at Qingdao.

The Hebei executive said it would hurt the interests of China and its steelmakers if iron ore miners are allowed to establish a distribution center that would probably become a "base for the spot market" at Qingdao Harbor.

China is trying to unify import prices for iron ore and to increase its leverage against the major global producers--Vale, Rio Tinto PLC (RIO.AU) and BHP Billiton Ltd. (BHP), so Hebei has suggested that an iron ore company be formed to centralize imports and price negotiations.

The proposal was for the company, tentatively called National Ore Resource United Co., to be formed using initial investments by the country's 16 largest steel mills.

The company would be responsible for "centralizing iron ore imports and investments," and the imported iron ore could be distributed to investors according to their investment amounts, the executive said. "This could also be a better way of negotiating with iron ore miners than having every steel mill handle their own long-term negotiations."

Chinese steelmakers face the prospect of sharply higher benchmark prices for iron ore this year.

The 2010-2011 benchmark is likely to rise more than 40% over last year's price, putting a great burden on steelmakers, the executive said. Most contracts cover periods starting on April 1.

"If the price rises 40%, it will exceed the 2008-2009 benchmark price (the historic peak for China's bulk discount rate) by 3%; if this year's price rises 50%, it will exceed the 2008-2009 price by 13%," the official said. "We have a huge burden."

Negotiations for the 2010-2011 iron ore benchmark price continue with no clear deadline.

"The spot price of iron ore is over CNY1,000 (a metric ton) now," he said. "Our company is undergoing full-scale losses on all products based on the spot prices between Feb. 18 and Feb. 24."

The executive also said that Hebei Iron is in talks for a stake in a Brazilian miner on a deal that could potentially be valued at $6 billion, though he didn't indicate whether this amount was what Hebei intends to spend.

"Whether it's a majority or minority holding is not yet decided," he said. "The talks are still in progress."

A media official at the ministry had no immediate comment Monday. Hebei couldn't be reached.‹