Tax bogeyman may end magnetite dream

TAXES can kill, as the world has seen countless times, and while the threatened application of the new minerals resource rent tax (MRRT) on magnetite iron ore might not be a killer on its own it could be the straw which breaks the back of a proposed $40 billion industry.

The problem with magnetite, which true believers perpetually play down, is that it barely qualifies as an ore, with properties more akin to rubbish.

Getting rid of the surplus material dug up with magnetite is the great challenge, and cost. Not only does a mining company recover just 35 per cent of the material moved as a viable iron product, but it has to foot fat gas, electricity, water and transport bills.

Layering a 30 per cent MRRT on top of those costs, even if the tax is applied at the lowest value point (the mine gate when magnetite is 65 per cent sand and other impurities), is a cost that will be hard to bear in a climate of falling iron ore prices.

WA premier, Colin Barnett, understands the magnetite tax problem. Gary Gray, a federal Labor politician with a prime minister’s baton in his knapsack, does not – or, at least, says he does not.

Sitting on the sidelines with grins a mile wide are the executive teams at BHP Billiton, Rio Tinto, Fortescue Metals Group, Atlas Iron, and Hancock Prospecting, who knew years ago that magnetite was nothing but trouble, unless the ore body is located adjacent to a steel mill, as it is at OneSteel’s Whyalla plant in South Australia.

The big players of iron ore, who account for about 99 per cent of Australian exports, understand that value-added processing is a complication that renders magnetite uncompetitive, except in boom-market conditions.

That’s why countless opportunities to join the magnetite gig have been ignored. Far better, believe the existing miners, to focus on direct shipping ores such as haematite, goethite and pisolite, the stuff that averages around 58 per cent iron.

Mr Barnett, singing from his ‘I love WA’ songbook, has done what any state premier must do – argue for a tax break for an emerging domestic industry.

Mr Gray, desperate to smooth the troubled tax waters that killed the career (for now) of former prime minister, Kevin Rudd, says magnetite must be treated as any other iron ore given that it, and coal, are the only minerals caught in the MRRT net (for now).

Trapped in the middle of the haematite versus magnetite debate are investors, who have succumbed to the marketing push, and public relations spin of the magnetite lobby which argues that ‘this time it will be different’, despite 40 years of iron ore processing failure that started with mothballed pellet plants, moved on to scrapped hot briquetted iron, and includes the non-commercial HIsmelt experiment at Kwinana.

Magnetite as an ore of iron has a place, but it will always be a high-cost place, and when either iron ore prices fall (which they are today), or the cost of gas and electricity rises (which they are today), then it doesn’t take much of a push to upend a project’s economics.

That’s why a teensy-weensy little MRRT at the mine gate is emerging as a magnetite bogeyman, or perhaps just a convenient excuse to admit the obvious – that this time it isn’t different.

In a rush to relocate?

THERE is one international competition in which Australians are clear winners – house prices.

The latest survey of global house prices by London’s Economist magazine calculated that ours are 61 per cent overvalued, with the clear implication being that our house prices have only one way to go, and that’s down.

However, the problem with the survey is that a comparison of house prices in different countries can never quite incorporate all the pertinent factors, such as tax, national economic growth rates, and population trends.

In Australia we have that trifecta of factors working in our favour, which other countries do not.

Profits on the principal place of residence are the last tax-free investment available to most people, which is one reason why our average house is now bigger than the average American house. We are growing at double (or triple) the rate of growth in other Western economies, and our population is young and expanding whereas Europe is old and declining.

Those explanations considered, there is something worrying about the local property market that might well have got ahead of itself, squeezing young buyers out of the market and forcing old owners to stay in their too-large family home for tax reasons, especially onerous stamp duty costs if downsizing.

But if there is some good news in being over-priced it is that Australian homeowners can consider selling at a peak here and buying in a trough there. Japan, for example, is said to be 34.6 per cent undervalued, and the US 6.5 per cent undervalued when measured on a national basis – perhaps a chance to sell high, buy low, and relocate.

Rusted on

A FINAL, unpleasant word – rust. Not the type in the body of your car, but in the world’s wheat crop.

According to overseas media reports, a new variety of the disease known as stem rust has been identified in Africa, and it appears to be as deadly as the original stripe rust, which was largely wiped out decades ago.

Australian farmers will have their fingers crossed that the fungus does not make its way across the Indian Ocean, but if it does WA will be the first hit.

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“The hardest thing in the world to understand is income tax.”

Albert Einstein. (Ed Note: what would he have thought of the MRRT!)