What Lies Beneath
By Bernard LaganApril 19, 2012
Australia’s big miners have already seen off one Prime Minister in their public campaigning to keep their huge tax breaks and public subsidies. And now, as the budget nears and the Government hunts for savings, the miners are back campaigning. How much have miners got to lose?
Ad men like to remind us that we get one chance to make a big impression.
Australia's miners appeared to have had their moment — spectacularly — two years ago when their $20 million advertising campaign against the Rudd Government's proposed 40 per cent mining tax not only cruelled the tax but also ended Kevin Rudd's prime ministership.
Now, they're back. The miners have new ads but their message is timeless: more taxes are bad.
The Minerals Council of Australia's latest campaign — launched with the placement of full-page advertisements in The Australian and AustralianFinancial Review newspapers — signaled the end of the miners' two-year truce with the Government, over their mining tax war. The deal saw the Prime Minister Julia Gillard's Government agree to a sorely neutered mining tax that will begin in July.
Headlined "Australian Mining. It's not a bottomless pit", the new ads appear not to be making a case against the new tax — the Minerals Resource Rent Tax — but rather are designed to pre-empt suggestions that the Government's May budget will place extra taxes on mining or reduce existing tax concessions. Pollsters says the Australian public is better informed about mining's vast profits than they were when the mining tax was first mooted and are more willing to accept the arguments for greater taxes — though not on the scale pushed by the former Rudd Government.
The large mining companies – such as BHP Billiton – are now worried that the Government will announce in the budget the end of highly favourable tax treatment for huge new open cut mines. The move — if true — would have a serious effect on the economics of BHP’s planned Olympic Dam mine in South Australia where earthmovers are about to begin stripping away a one billion tonne, 350 metre thick layer of overburden.
The ads have also appeared amid revelations about how close the former Prime Minister Kevin Rudd was to cutting a deal with the second tier miner, Andrew Forrest’s Fortescue metals, to break the tax impasse with miners, hours before he was rolled in 2010. The deal with Forrest would have seen Rudd ditch his controversial mining super profits tax for a Fortescue plan that would have promised a huge injection of mining-led infrastructure for Australia.
Says AC Nielsen's director of research, John Stirton: "My impression is that people are more positive, more disposed toward taxing the mining industry than they were."
Campaigns from industries feeling under threat are not uncommon in advance of a federal budget — especially when a Treasurer is as determined to deliver a surplus as Wayne Swan.
But a close examination of the ads crafted by the Minerals Council of Australia — the miners' lobby group — reveal them to be of more interest for what they don't say, than what they do.
A central claim in the ads is that Australian mining already pays 500 per cent more in taxes and royalties than it did 10 years ago. Yet not a word is said about the tear-away profits of the industry. And nothing of where those profits go. The ads are also silent on the estimated $10 billion a year which Australian taxpayers hand to mining companies by way of tax breaks and subsidies.
A second key claim in the ads is that Australia is starting to risk its competitive advantage to attract investment in exploration. The ad produces scant evidence to support it.
A third is the implied suggestion within the ads that the main beneficiaries of the hard labor of the miners are millions of Australians who own mining shares in superannuation funds. The main beneficiaries of Australia's mining boom are, overwhelmingly, foreigners.
What follows, then, is a guide to what the ads might also have told us about the mining industry's ability to pay, its profits, its real owners and beneficiaries and its future prospects. We draw heavily on research conducted by the Australia Institute, the influential Canberra think tank.
According to the Australian Bureau of Statistics total pre-tax profits earned by miners was more than $51 billion in 2009-2010. That's up from about $13 billion a decade earlier. That's an increase of almost 400 per cent within a decade. And the outlook for the future is extremely robust. Based on Treasury forecasts, mining profits over the next 10 years will exceed $600 billion if world commodity prices remain high.
Taxes and royalties:
It is true, as the ads says, that the mining industry pays 500 per cent more in royalties to the states — for the extraction of minerals — and in taxes than it did 10 years ago. But, based on Australian Tax Office figures and the National Accounts, the mining industry continues to pay a very low rate of corporate tax. The mining industry's average corporate tax rate is below 15 per cent — less than half the theoretical 30 per cent company rate. One reason is the generous tax breaks the mining industry gets for research and development and for capital expenditure.
The ads' lumping together of taxes and royalties is a practice frequently employed by the mining industry. It gives the impression that mining's tax burden is beyond that of other industries. While royalties are technically classed as taxes, they are not taxes within the normal meaning. They are the recompense that miners pay to state governments for the minerals they extract, which they on-sell internationally. One way of looking at royalties is to see them as payment for the raw material on which the mining industry is based. Other industries, of course, pay hard cash for their raw materials — as a restaurant pays food suppliers and a builder for bricks. These are not taxes, they are business costs.
Another feature highly favorable to miners' profits is that the royalties they pay are a much smaller proportion of mining company revenues than the royalties required from the oil and gas industries. According to the Australian Bureau of Agriculture and Resource Economics (ABARE), coal mining companies, in 2010, paid 6.7 per cent of their $25 billion revenues in royalties and iron ore companies paid only 5.3 per cent of their $16 billion revenues in royalties. But oil and gas producers were made to pay 11.5 per cent of their $26 billion in revenues in royalties.
The biggest taxpayer subsidy to the mining industry, however, comes from the low prices that Australian mining companies pay for the raw materials they take from the earth. The ABS values Australia's subsoil assets — the miners' raw material — to be worth $559.7 billion. Only a comparatively small proportion of this amount will be recouped by taxpayers through royalties, corporate taxes and the coming mining resource rent tax.
The latest miners' ad states: "Only a strong and competitive mining industry can continue to give attractive returns to millions of Australian shareholders and super funds." But, as the Australia Institute's study of the mining industry, Mining the Truth, says, it is not just coal and iron ore that Australia now exports in large quantities — it exports the mining profits as well. The vast majority of the mining industry's attractive returns go not to Australians but offshore instead.
Average foreign ownership of the mining industry in Australia is about 83 per cent. That, according to the Australia Institute study, means that some $42 billion worth of pre-tax mining industry profits flowed out of Australia to foreign investors over the last financial year. And, over the next 10 years, pre-tax profits for mining will be around $600 billion, which means that $500 billion of those profits will be shipped offshore.
The miners' ad warns that what it describes as the rush to increase taxes, royalties and charges on the industry, risks weakening mining and making it less able to contribute to Australia's future. Indeed, according to the ad, that moment is upon us. "The first signs of that are emerging," the ad says.
As evidence of the moment's arrival, the ad quotes an unidentified independent expert report to the Government, which, the ad says, has found "some evidence of a trend toward exploration in other countries at the expense of Australia."
The report from which the ad's quote was lifted was presented to the Government in December 2010. It examined impediments to new mining exploration in Australia. The panel that oversaw the report included the Federal Minister for Resources and Energy, Martin Ferguson. And while the report does contain the words highlighted in the ad, the ad left out the report's explanation as to why some new mining exploration may be moving to other nations — the minerals left to discover in Australia lie so deep that they're going to be very expensive to get to.
The report contained — and the ad omitted- the key qualification: "Not all stakeholders agreed with the perception that Australia is becoming less prospective. Rather, they held the view that the next 'big' deposits are under deeper cover and the task of discovery is more difficult and costly."
The Minerals Council of Australia's chief executive, Mitch Hooke, has said the ads are intended "to counter the emerging politics and redistribution of wealth.
"This is exactly the kind of atmosphere that we were in before the super profits tax was announced in May 2010 — softening up the public, creating the perception that we are not paying our way, and therefore rendering us an easy hit for new taxes under the budget,'' Mr Hooke told ABC radio.
Mr Hooke was unavailable to be interviewed by The Global Mail as he was travelling.
However, Dr Richard Denniss, executive director of the Australia Institute, and co-author of the institute's study of the mining industry, claims the ads are false and misleading and would likely be in breach of the Trade Practices Act had they been used to sell more minerals to consumers. He says they are really political advertisements designed to shift public perceptions about mining and should be identified as political advertising.
For the miners who paid for them, the central question must be whether they will work toward hardening public opinion against further increases to taxes and charges upon the mining industry.
John Stirton, the Nielsen pollster, says: "The Labor Government, when they (first) tried to introduce the first mining tax, they did no clearing of the ground. They didn't prepare anybody for the idea that this was coming or make a case for the need for it, probably because they believed the case was self-evident. And they found out very quickly that the case was not self-evident and the miners were able to completely beat them up and make them back down."
But, says Stirton, in the two years which have passed since the Government backed down to the miners over the first mining tax proposal, Australians have become better informed about the issues surrounding mining taxes.
Recently Nielsen polled on the question of whether people thought the mining boom was a good or a bad thing for Australia.
Over 80 per cent thought the mining boom was good. Says AC Nielsen's John Stirton: "So in some ways I think the debate is probably turning against the miners, but only from a position of very considerable strength and people remain sort of very positive towards the industry and towards the mining boom."