Resources tax is hurting the Australian dollar: Gottliebsen

The Australian Prime Minister claims that the mining tax has not hurt the Australia dollar and the big fall in our currency over the last three weeks was solely a result of the European crisis and other overseas events.

Assuming he was correctly quoted in The Weekend Australian, Kevin Rudd is simply wrong. Had he moved around the currency marketplace last week he would never have made such a statement.

As I pointed out last week, there was a huge bear raid on the Australian currency and shares, driven by both the European crisis and the lack of confidence created by the local mining tax. No one will ever know which had the most impact except that the overseas savagery and the pile of selling orders that emerged led me to believe that the mining tax was the most important force driving us down – at least for a few days last week.

But you can also legitimately argue that the European crisis itself was the main dollar depressing force and had greater impact than the mining tax in causing the downturn. But to suggest that the mining tax had no impact compounds the global view that the Rudd government has no idea of the forces it has unleashed.

Since the end of April, the Australian dollar has been hit much harder than the euro, so for our decline to be entirely linked to the global crisis, Australia would need to have been on its knees with a huge debt problem. But, of course, as Kevin Rudd correctly points out, the Australian government is in a strong borrowing position. Leaving aside what was apparent in the marketplace, logic dictates that the mining tax had to be part of the slump.

The Prime Minister’s mistake is evidence that the mining tax debate is starting to polarise around entrenched views. As I moved around the community at the weekend I found a lot of support among small and large businesses for the Rudd and Swan view that as the miners can afford more tax, they should pay up and stop bleating. Others had a different view.

I received two strongly worded private emails, one suggesting I had been far too soft on Kevin Rudd for too long and another from a Rudd supporter suggesting I was in the pocket of the miners. I agree with the government that a resources tax like the petroleum resources tax makes a lot of sense. My opposition to the current proposal concentrates on the 6 per cent trigger point and its retrospectivity.

While we have received messages from Canberra that there is going to be partial mining tax back-down from the government, it is not coming through in public statements. And as far as I can tell, the big miners are divided internally about how far they should take the closure of new mine developments. They do not want to lose their key people. However, as I wrote at the start of this battle, words have limited effect. To overturn this tax will take some very hefty actions and the project that will have most impact is Olympic Dam. But Whyalla and WA iron ore are not far behind in impact.

BHP has some difficult decisions at Olympic Dam. About half way through this decade, the rich ore that Olympic Dam mine is currently based on will become harder to access in the existing mine. If nothing else happened, production would need to be reduced. But of course BHP plans a massive new mine which would overshadow the run-down in the current operations.

Now BHP has to decide whether, under the tax proposal, it is worth going ahead with the new Olympic Dam development or whether it would be better to mothball or drastically reduce the expanded operation and spend the money in countries where BHP gets a better return.

OneSteel will have to decide whether to keep mining iron ore at Whyalla. Both BHP and OneSteel want to see exactly what the final tax is going to be before making a decision. For example, will the tax embrace the steel making plant at Whyalla? If it did, the plant would struggle to survive.

And when the companies make up their mind, they also have to decide whether to announce that intention before or after the election.

I can’t recall a government action that has caused so much global consternation. Forces have been unleashed that have not only hit the currency but will slash investment in this country and in turn will affect our banks’ ability to borrow overseas. But this week we are going to enjoy a rally, during which the Rudd supporters will say ‘we told you so’. Unfortunately, the anti-Australian global forces will not go away.

This article first appeared on Business Spectator.

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