Australia proposes to impose a 30% tax on iron ore profits

Australia recently announced the long-awaited draft of mineral resource lease tax. The draft proposes to impose a 30% tax on the profits generated by iron ore and coal mines in Australia. If approved, the plan is expected to be implemented on July 1, 2012. The industry is concerned that the increased tax burden of this part will eventually be transferred to iron ore prices, which will further increase the burden on domestic steel companies. However, many industry insiders explained that, in fact, the collection of resource taxes has little effect on China's iron ore prices.

Resource tax draft with multiple offers

In 2010, the Australian government planned to increase the resource tax to allow the lucrative mining industry to subsidize more of the national finance. In May of that year, then-Prime Minister Kevin Rudd launched a mining tax reform program that proposed to impose a 40% resource windfall tax on miners, and mining companies must pay 40% of their profit from exploitation of non-renewable resources as taxes. According to this plan, together with corporate taxes, refining costs, and capital investment recovery, the total statutory tax rate for resource companies will increase from 43% before the levy to 57% in 2013. This move was met with fierce opposition from mining giants including Rio Tinto and BHP Billiton.

Australia proposes to impose a 30% tax on iron ore profits

After the new Prime Minister Girard came to power, he revised the resource tax plan, including reducing the tax rate from 40% to 30%, adding a number of preferential deduction clauses, etc., and formed the draft of this announcement. After analyzing the main characteristics of the draft mineral resource lease tax draft, the industry found that the main target of its collection is iron ore and coal enterprises that have been mining for many years and have enjoyed huge profits. However, the draft also adopted deductions and preferential terms to maintain the attractiveness of investment in emerging companies, and also promoted the development of new projects by qualified companies. For example, to allow investment in a new project to offset a project tax that has already been completed and is in production. Or for states that set up resource taxes, companies that have already paid resource taxes can offset the tax on mineral resources.

Under the comprehensive calculation, the new mine does not actually need to pay the resource tax before it generates profits. This means that at present most of the mines that Chinese companies operate in Australia will not be affected for the time being, as there are only a handful of projects that have matured and are stable and profitable. The old mines that have become stable and profitable will have an actual cost increase of about 15%, which is also lower than the apparent 30%. However, Chinese companies still need to actively respond to the impact of the new program. It is reported that the Australian government allowed "stakeholders" to propose amendments to the draft before July 14. This is an opportunity for Chinese-funded enterprises in Australia.

Australia is difficult to take the opportunity to increase prices

According to calculations by an iron ore analyst, Hu Kai, the current Australia CIF price is US$170/ton, the cost is US$30/ton, gross profit is US$140/ton, and MRRT is US$21/ton. “This is a completely digestible cost for companies like Rio Tinto and BHP Billiton.” said Hu Kai. In fact, the more important factor than the cost-digesting ability is that, in the current market system of indexed pricing and supply-and-demand prices, it is more difficult for Australian mines represented by “two extensions” to increase this cost, and to realize iron ore. Terminal prices rose. The reason is that, first of all, the current iron ore market has been converted to spot index pricing. Therefore, Australian mines can no longer claim price increases on the basis of rising costs due to the form of long-term negotiations.

Second, in the spot market, the spot price is determined by the marginal cost of ore and supply and demand. Qi Hui Securities analyst Chu Hui pointed out that the marginal cost of iron ore production is China's high-priced domestic mines. Compared with Australian mines, the cost of domestically produced mines, which can be as high as one thousand yuan per ton, determines the height that the ore price can reach. That is to say, in the absence of great changes in supply and demand, the marginal cost will remain unchanged. Even if the cost of Australian mines below the marginal cost rises slightly, it will not be possible to realize price increases to transfer costs.

In terms of supply and demand, the domestic iron ore market has maintained a weak trend in recent months. Although the purchase of ore has rebounded slightly since the ore inventories of steel mills have been consumed to a certain level in the recent past, the overall outlook is that transactions are still light. Therefore, the industry believes that there is no need to worry too much about the impact of resource taxes on iron ore prices.