Last week’s change in Australian prime ministers has produced an early result for mining companies with assets in the country. A proposed excess profits tax of 40%, put forth by the former government, has been negotiated down to 30% and restricted to iron-ore and coal miners.
Mining companies BHP Billiton Ltd. (NYSE: BHP), Rio Tinto Ltd. (NYSE: RTP), and Xstrata plc (OTC: XSRAY) have signed an agreement with the ruling Labor government in support of the new tax rate. Brazil’s Vale S.A. (NYSE: VALE) did not participate.
The tax will not be applied to onshore oil and gas projects, and excludes all mined commodities except iron-ore and coal. The new rate reduces the take to the government by about $1.26 billion over four years. The tax rate will be lowered to 29% for the fiscal year starting July 1, 2013, but won’t be lowered below that point unless the country’s fiscal situation improves.
Smaller mining companies are still unhappy with the revisions because they believe the new tax continues to limit their access to capital.
The iron ore miners also continue to struggle with their newly instituted quarterly pricing scheme, which earlier this year replaced 40-year old annual pricing deals. The miners had hoped that re-pricing every quarter would lead to a more liquid market that would eventually lead to prices based more on the spot market than on long-term contracts.
What the miners didn’t count on was iron ore prices falling as demand from China slowed. The CEO of Rio Tinto has even said that the quarterly pricing system could be rescinded as a result of the low spot prices. The third quarter contract price has been set at $147/metric ton, about 8% higher than the spot price of $135/metric ton at Chinese ports. Chinese buyers, most of which have not signed on to the contract pricing, are certain to take advantage of the lower spot prices, forcing prices even lower.
The miners face the classic conundrum of “be careful what you wish for.” Low spot prices, while hurting revenues now, could allow the miners to make more in the long run. But steelmakers fear that margins could be squeezed and end users, like automakers, fear excess volatility in the steel market.
Forward pricing for iron ore is even lower than the current spot price, posing an additional threat to the miners revenues.
It’s not clear that the change to quarterly pricing has caused the fall-off in iron ore prices. It’s just as likely that slower growth in China and the less-than-tepid global economic growth have played just as big a role. Still, the miners may have gotten too much too soon if spot pricing takes over.
Paul Ausick
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