The proposed resources tax has an echo of past policy failures.
ALTHOUGH power-hungry politicians relish reminding business who’s boss, so often they inflict severe electoral pain upon themselves and working families.
State Scene recalls how Whitlam government minerals and energy minister, ‘Rex’ Francis Xavier Connor, went from being nationalist folk hero to an electoral liability.
Although he had various dreams about Australians ‘buying back the farm’, his implementation put us onto the same road Juan Peron took Argentina down – from first- to second-world status.
Implementing those fanciful Connor dreams meant foreign resource investment dried-up overnight, and work for those in the nation’s capital markets dwindled.
Geologists, drillers, surveyors, cartographers, and ancillary professionals followed, with many becoming lawn-mowing contractors, office cleaners, taxi drivers, night watchmen, and other lower-paying service tasks.
I recall a now-deceased friend, laid-off by an overseas mining company, becoming a truckie with a soft drink distributor.
“We’re going down the road to only taking in each other’s washing, thanks to Rex,” he’d say.
Engineering and steel fabrication work vaporised.
And machinery and other capital goods suppliers had whopping sales slumps.
What Australia’s bright-eyed economic policy trio – Prime Minister Kevin Rudd, Treasurer Wayne Swan, and Finance Minister Lindsay Tanner – are now doing to miners, especially Pilbara-based ones, is reminding them that Canberra remains all-powerful.
The trio has therefore already partially filled Rex Connor’s big studded boots with their 40 per cent tax on mining profits above the 6 per cent rate of return on capital.
What’s the likely impact of their Connor-style move?
Here’s what Ivor Ries, of Melbourne stockbrokers, EL & C Baillieu, said of the plan that they’re marketing as taxing ‘super-profits’.
“The resources ‘super-profits tax’ will generate no new revenue for five years, and has stopped new projects dead,” Mr Ries said.
“There are 270 major resource projects in Australia undergoing feasibility studies and financing with a total capital value of $320 billion.
“These projects would have employed somewhere around about 120,000 people during the construction phase.
“This tax has stopped them dead in their tracks. All of those projects are now frozen. There are probably about 20,000 engineers working on these projects and by the end of the month half will be unemployed.”
That’s lots of working families set to be hurt.
One reason State Scene’s contacts agree is because Labor’s financial trio has set the capital recouping rate at the confiscatory low level of 6 per cent.
“I’ve spoken to three very level-headed Perth lawyers in resource project work and all say everyone they’re dealing with claims Rudd is simply crazy,” a contact, with years of experience in Western Australia’s resources sector, said.
And those in fabrication work will certainly feel any downturn stemming from slow-downs due to the ‘super-profit tax’.
But back to that incredible 6, yes 6, per cent.
The Bank of Queensland is presently offering Western Australians 6.15 and 6.25 per cent for six and nine months respectively on deposits from $5,000 to $250,000.
Why would anyone, therefore, risk losing all their money by investing in resource projects when banking is safer and can earn more?
Scott Cowans, WA First’s lead Senate candidate at the coming elections, said the fact that Australia’s offshore oil sector had a 40 per cent offshore resource rent tax didn’t justify a mining ‘super-profit tax’.
Firstly, the petroleum rent tax doesn’t apply to petroleum extracted from the North West Shelf project and Timor Sea joint petroleum development area.
And in Commonwealth waters where it prevails its threshold is the long-term bond rate plus 5 per cent, so about double the Rudd-Swan-Tanner ‘super-profit tax’ level.
“Neither Rudd, Swan, nor Tanner have ever raised capital for investments, reported to shareholders, or run a profit-and-loss statement,” Mr Cowans said.
“That’s why they believe investors won’t be scared-off by what they’re calling their ‘super-profit tax’.”
Mr Rudd was a public servant after leaving university; Mr Swan a management lecturer; and Mr Tanner a solicitor and union secretary, all far removed from the world of wealth generation.
Perth-based iron ore industry analyst, David Archibald, who has been monitoring and lecturing to Australian and foreign investors on the Pilbara’s economy since 1990, said the ‘super-profit tax’ was a turning point, one pointing downwards.
“You always know when you’ve reached the peak of a cycle because that’s when people become greedy,” he said. “Now it’s the federal government – Rudd, Swan and Tanner – that’s become greedy, wanting ever more.
“Since the Pilbara’s emergence as the world’s leading iron ore province, only in the 1960s and 1970s were prices at levels that can be described as high.
“During the 1980s, Japanese steel production contracted, so prices fell.
“During the 1990s and into this century prices continued being flat.
“Miners were basically just ticking-over until 2004-05, when China’s demand emerged thereby boosting prices.”
But Messrs Rudd, Swan and Tanner evidently believe another slump won’t happen.
Mr Archibald said one should never believe in the never-never.
“China has over-built in commercial and residential real estate and even has several brand new cities – yes cities – with no-one living in them,” he said.
Melbourne-based editor of Diggers and Drillers, Dan Denning, cites cases of other empty structures, including the New South China Mall.
“Opened in 2005 in the city of Dongguan, this 9.6 million square feet behemoth is the biggest shopping mall in the world, with room for 2,350 stores,” he said.
“It has seven ‘zones’ modelled on various cities and regions of the world.
“It also has a 25-metre high replica of the Arc de Triomphe, a 2.1 kilometre internal canal complete with gondolas and a 553-metre-long indoor-outdoor roller coaster.
“Trouble is, 99 per cent of the stores in the so-called ‘Great Mall of China’ lie empty.”
Mr Denning, who last month lectured to West Perth-based Mannkal Economic Education Foundation, said Australians assumed China was hooked on economic growth.
“It isn’t,” he said. “China’s expansion is politically, not economically, motivated. This isn’t about economic growth; it’s about political stability ... stability at any cost.”
Since reading those stunning lines, State Scene promptly emailed expert China affairs contact, retired New Zealand academic Dong Li, on such amazing revelations.
“Denning’s information and understanding is correct. He is absolutely right to point out that everything the Chinese Communist Party does is to maintain stability, a euphemism for keeping itself in power,” he said.
“Given the surplus supplies, the Chinese property market should collapse, as no-one can defy the logic of gravity. But the CCP always does things that are not logical.
“The Chinese property market can’t go on like this forever.
“The CCP has already taken serious measures to cool it. Yesterday (May 3) news came that the central authorities again instructed big banks to raise their deposit rate by 0.5 per cent.
“The Chinese property market will probably have a soft landing.
“Denning’s warning is timely. Chinese demand for Australian raw materials will drastically decline.
“Aussie mining companies will suffer from less demand and more taxes by the Rudd government.”
The Rudd-Swan-Tanner ‘super-profit tax’ is headed down the same failed path all other Rudd government programs have so far gone – southwards.