A Thorn in Australia’s Side

Talk about making a difference! Just one week after stepping up to the plate, Prime Minister Julia Gillard, the new superstar of Canberra’s Sex and the City, has managed to work out compromises on Australia’s Resources Super Profits Tax (RSPT).

According to Gillard, the new version lowers the previously proposed 40% mining tax by ten whole percentage points to 30%. This tax, which will be applied to iron and coal mining, will only be implemented when miners go beyond a 12% return on capital. This revision from former Prime Minister Kevin Rudd’s proposal is expected to lighten the tax burden on mining companies by as much as 1.5 billion USD.

Still, 30% is very big, especially since it was one of the key sectors that helped Australia stay resilient to the negative effects of the global recession. Don’t believe me? Here are some key facts about Australia’s mining industry:

• The mining industry chipped in a whopping 82 billion AUD to Australia’s GDP in 2009, the highest contribution since 1974.

• Mining products, which include mostly coal and iron ore, comprise 37.6% of Australia’s exports. As you can see from the pie chart below, that’s the largest chunk among Australia’s main export industries!

PoD Chart

• Can you guess where the world’s largest reserves of lead, nickel, uranium, and zinc are found? Yep, that’s right – Australia!

• Even though Australia ranks fourth (after China, US, and India) among the top producers of coal, it ranks first among the top coal exporters in the world. It also happens to be the top exporter of iron ore, lead, and diamonds.

• Mining companies, such as BHP Billiton, Newcrest, and Rio Tinto, account for approximately 20% of Australia’s stock market.

Now, the problem with this tax regime is that it could have some bone crushing effects on Australian growth. To use a World Cup analogy, the mining industry is like the Lionel Messi of the Australian economy… When you put a major obstacle like the German defense – in this case, the super tax – not even a superstar like Messi can get through that!

Raising taxes on high performing mining companies would shun investors away. If companies have less money for investment, they can’t grow as fast as they would like, which of course will lead to a bumpier road to recovery.

In turn, lower demand for investments will cause demand for the AUD to fall as well. Remember, in order to invest in profit-making ventures, one has to transact in the local currency. But if profits are being cut away by ridiculous taxes, then investors would just look elsewhere.

As you can see, putting the clamps on Australian’s best performing industry could dampen the economy as a whole. And after this weekend, we all know what happens when the star can’t push through – everyone stands to lose!