Mining taxes and straight-line projections


Much has been made over the last year on the relative merits of a “mining tax”, which has also been called a “super profits” tax. Very learned folk have invested a lot of time and energy into looking at Australia’s economy and trying to work out how to better spread around the benefits of the improved terms Australia is currently enjoying.

And then in step politicians.

The latest move has been to link the proposed increase in superannuation guarantee charge (from 9% of salaries to 12% of salaries) to the “mining tax”. It sounds so logical. It sounds so fair, in that more money going into superannuation will undoubtedly improve the outcomes for the members who receive that extra support. It will provide a larger pool of investment capital that should be beneficial for the country as a whole. And the increase in super costs for employers will be offset by a drop in the corporate tax rate, so employers should not be impacted too much.

All sounds so logical and simple.

It’s probably best not to dwell on the fact that low income workers will be worse off under this system, as they will pay more tax in a super fund than they would taking the payments as salary. It’s probably best not to consider the long term cost to the Government (and therefore taxpayers), when the “super profits” being earned by mining companies aren’t being earned any more, and the corporate tax take drops, raising the prospect of the corporate tax cuts reducing Government revenue, with no offset. And perish the thought that there should be a logical, public discussion on the opportunity cost of money – in other words, what else could short term funds be used for in a country beset by fire, flood and pestilence, inappropriate, worn and outdated infrastructure, and bottlenecks to maximising the utility of existing resources?

It’s Friday, and this particular whinge was triggered by the release of Australia’s commodity index figures. You don’t really have to understand them all that well to see why i am complaining about basing long term expenses on the current prices being obtained for commodities.

RBA Index of Commodity Prices

Would you increase your very long term expenses with extra income that looked like this?

The mining companies are investing billions of dollars into projects to increase their ability to provide more tonnage into the markets while prices are at these levels. However, mining companies are generally very aware of the risks of doing so, as they have seen periods in the past when such high prices are very rapidly reduced by the increase in supply generated by this very same activity. This is where “straight line projections” come into it. How logical is it that prices will remain at these levels?

For those wanting to read the news around this release, go to the RBA website link here.

There is a phrase “stronger for longer” that has been used to illustrate the possibility that this commodity price cycle will have a long way to run. It was dented quite a bit during the Global Financial Crisis (GFC) and a lot of extra mine capacity was put ‘on hold’ owing to the GFC. Think of BHP and the Ravensthorpe mine – and the write-off of billions of dollars of invested capital. Think of the oil projects put on hold when the price of oil dropped from $147 a barrel to less than $40. With commodities back up in price and oil following suit, the ability of these projects to get funding becomes much better. Improved credit markets make large lenders more ready to put cash into these projects. All this helps bring on large chunks of new supply, which reduces the pressures on those buying and, in a classical Economics 101 statement, bring the supply/demand equation back to a sustainable level.

So back to the Soapbox Rant. Why do politicians think that increases to fixed, long term employer costs (through higher SGC payments) can be justified by a tax on “extra” profits earned by a handful of resource companies over a very short period? It can only be justified if you think in terms of straight line projections.

This behaviour is illustated by investors, analysts and commentators for investment markets, who generally look at the recent past and project that into the future as if it is an obvious outcome. It is the kind of thinking that makes people look at the 50% drop in the sharemarket from its 2007 high and then make the deduction that it is unsafe to invest into the sharemarket, missing out on the subsequent 50% lift. Ah-hah! Got you Michael, you say. The market still has to lift 50% to get back to its previous high point!

Just so, my friend. And when the market has made up that 50% and moves on to a higher point, is that when it will be a good time to invest into growth assets?

Similarly with the price of gold (or silver). The price has escalated dramatically – until it is running at a level higher than the return available on active equity over a reasonable measurement period. This doesn’t get seen as a bubble – it gets seen as a trend that someone needs to participate in to make money. We’ve talked about gold before, so long term readers know that there is a lot more to the gold price than i am suggesting. However, the investor behaviour in relation to gold is very much based on straight line projections of recent trends.

Similarly with housing in Australia, and more appropriately Perth. The long term (10 years+) return of Perth real estate has in many cases exceeded the return from active equity. This does not indicate that it is due for a correction or that prices cannot still rise but it would suggest that projecting out from here in a straight line would be a dangerous game to play, when you are playing with lumps of cash in half-million dollar bags.

That’s my rant for today. Feel free to comment or criticise, complain or cogitate.

Please always remember the Great Disclaimer – nothing in this post or on this site is to be taken as personal advice. It is simply opinions and thoughts of a very general nature and cannot be used as a basis for making investment or strategy decisions.


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