Iron Ore royalties leave, just when we needed them most…
All is not well in the great Southern quarry that tourists know for its koalas and Ramsay St. For the last ten years selling iron and coal (and building infrastructure to sell ever larger tonnage) kept Australian mining companies busy, and rich. But since early 2011 the price that mining companies (and the royalties governments get) has been plummeting(1). If you want the gory details of the iron ore boom and bust, Mike Sainsbury and Mike Seccombe have both written excellent articles recently.
The gist is this; the price for a tonne of iron ore is now under $50 (and still heading south), less than is a third of the $150 it was only a couple of years ago. The main customer for all this iron ore (which, along with coking coal, is used for making steel) is China And it turns out that the Chinese
a) have not retired/mothballed as much of their own iron mining capacity as was predicted, and have cut taxes on their own producers ( Sanderson, 2015)
b) are recycling more of their old steel. (Who knew, that you could do that, eh? It turns out that “steel is 100 per cent recyclable. Steel created 100 years ago can be recycled today and used in new products and applications.” I’m quoting from an article (Howes, 2009) in which the national secretary of the Australian Workers’ Union tried to claim that steel workers were in ‘green jobs.)
c) are building fewer houses than was predicted even recently. Perhaps they can’t find enough ghosts to live in the ghost cities they built?
So, with assumptions of profits turned to dust, a bunch of “smaller” mining companies (e.g. Atlas) are doing mothballing of their own, because they are losing money on every tonne they dig up. Meanwhile the big boys (especially Rio Tinto, BHP and Vale) can scrape by (or indeed ‘thrive‘) because they have got deeper pockets and run more efficiently (i.e. economies-of-scale and more automation). Still, even there the market is sending signals – “BHP, Rio and Vale were among the eight iron ore miners put on negative credit watch by Standard & Poor’s this week.” (AFR, 17th April).
Meanwhile, the Western Australian government has a whacking great hole where a goodly chunk of their budget used to be. (They were expecting to be creaming off royalties per tonne. Fewer tonnes equals more migraines for the treasurer).
Last September, back when the Iron ore was selling at $85 per tonne the economics editor of the The Western Australian put the edges of the hole at $1.7 billion.
It’s a wider, deeper and blacker now… The next state election is almost two years away, but nobody is predicting a magical price rebound anytime soon
The Australian Financial Review(AFR; think” Financial Times”, only not quite as pink) has some predictions and observations about this–
[Western Australian] Premier Colin Barnett has repeatedly expressed palpable anger at the threat to state revenues and the Pilbara’s mining landscape that is posed by the big boys’ approach to growth. (April 15th)
As the AFR (April 16th) points out.
There is a clause in each and every one of WA’s iron ore mining agreements that says an operator must “ship from the company’s wharf all iron ore mined from the minerals lease and sold and use its best endeavours to obtain therefore the best price possible having regard to market conditions from time to time prevailing… there is very well-informed speculation that this is the point that Barnett intends to labour in meetings that he will schedule with the local bosses of Rio and BHP over the coming weeks, and that he will again remind them that they require further state approval of retention licences and of future development plans.
Longer term implications (or “where can I buy one of these ‘ social licences to operate?’”)
The AFR (April 15th) wrings its hands that the “social licence to operate [of BHP and Rio Tinto could face the most severe test in this country since native title”, warning that “the winners of iron ore’s Darwinian struggle have a Himalayan public affairs challenge ahead.”
[For non-Australian readers- “native title” refers to the legal headaches that come up once you’ve admitted that the land the white Australians ‘found’ in 1788 wasn’t empty after all.]
Social licence to operate? That’s corporate/academic speak for how ‘legitimate’ business is perceived to be. Suchman (1996) is the key text, if you’re that interested. Especially since the 2002 Mining, Minerals and Sustainable Development report the global mining industry has been paying more (than?) lip service to whether they have the tolerance of the communities they operate in. Let’s go to some academic classifications
According to … Lindblom (1994) also identified four strategies an organisation seeking legitimation may adopt. The organisations can use external disclosures to seek to:
(1) educate and inform its “relevant publics” about (actual) changes in the organisation’s performance and activities;
(2) change the perception of the “relevant publics” – but not change its actual behavior;
(3) manipulate perception by deflecting attention from the issue of concern to other related issues through an appeal to, for example, emotive symbols; or
(4) change external expectations of its performance.
(Yongvanich and Guthrie 2004:8)
Note that nothing in the above says “demonstrably pay your taxes.” And here the Australian narrative goes to levels that a satirist just would not dare push it. It is an exquisitely bad time to be perceived to be tax-dodging, but that’s what BHP has achieved, (with Rio Tinto in the same fleet, if not the same boat.)
BHP Billiton executives have infuriated a Senate committee by refusing to say how much the Australian Taxation Office believes it is owed because of the way the mining giant channels profits through a marketing hub in Singapore.
They also declined to say how much tax it paid in that country.
The Senate economics references committee has now demanded BHP Billiton answer its questions. Continued refusal could ultimately result in the company being held to be in contempt of the Senate.
[This ‘transfer pricing’ was identified by Bernard Keane (2011) as a more important issue than ‘foreign ownership’.] Meanwhile, the corporate behemoth Glencore, which swallowed Xstrata in 2011 and is licking its lips at the prospect of swallowing Rio Tinto (2), is doing what it can to look good. It is going to relocate its coals sales from Singapore to Australia. This follows “a clear signal this week from Joe Hockey, Australia’s treasurer, that he would block any formal takeover proposal [of Rio Tinto] due to concerns about protecting the country’s tax base.” (Smyth, 2015)
Meanwhile, the New South Wales government has changed the law to give Rio Tinto permission to mine “Saddle Ridge”
– (which in 2003 had said it would never do). Why does this matter? Because it would make the town of Bulga uninhabitable. The locals aren’t going to take this lying down.
So, to recap – the mining companies are laying off workers, causing budget chaos, selling coal to anyone who’ll burn it (Japanese emissions are up) and are apparently unbothered about being seen as tax dodgers. And now they want to pick fights with farmers, wine-makers, the tourism industry and people who are fighting for their homes. That is quite a display of … confidence.
(1) This “commodity cycle” is one of the oldest stories in commodities, but always seems to come as a surprise to our “groundhog day” brains.)
(2) The story of all the attempted takeovers of Rio Tinto – by BHP, Chinalco etc – is fascinating, but not one for now.
Australian Financial Review (2015) Let them eat iron ore dust 15th April
Australian Financial Review (2015) Magnificent Seven to Atlas’ rescue 16th April
Australian Financial Review (2015) Miners go from rock stars to ore wars 17th April
Howes, P. and Leahy, M. (2009) Steel is green as the wind The Australian 25th March
Keane, B. ( 2011) ‘Selling off the farm’ isn’t the problem for the mining industry Crikey 30th June
Mitchell, T. (2015) Dumping On Bulga: How The NSW Government Abandoned An Entire Town To Big Coal New Matilda 8th March
Sainsbury, M. (2015) How Big Iron’s mistake cost you billions Crikey 9th April
Sanderson, H. (2015) Iron ore sinks further after Chinese tax cut Financial Times 11th April, page 19
Smyth, J. (2015) Glencore to shut Singapore coal hub amid tax concerns Financial Times 11th April, page 15
Seccombe, M. (2015) Resources bust worse thanks to Howard-Costello The Saturday Paper 18th April
Suchman, M.C. (1995), “Managing legitimacy: strategic and institutional approaches”, The Academy of Management Review, Vol. 20, No. 3, pp. 571-610.
Taylor, L. (2015) BHP Billiton refuses to reveal tax bill estimate to Senate committee Guardian 10th April
Yongvanich, KI. And Guthrie, J. (2004) The Australian Mining Industry’s Sustainability Reporting: An Examination of Legitimation Strategies Macquarie Graduate School of Management Working Papers