Stephen Bartholomeusz
A backward step for WA
While West Australian Liberal leader Colin Barnett threatens to increase the royalty rate on iron ore if the Liberals win government and BHP Billiton succeeds with its bid for Rio Tinto, it won’t just be BHP anxiously watching the outcome of this cliffhanger of an election.
Barnett has framed his plan to increase the royalty rate on fines from 3.75 per cent to 5.625 per cent purely in the context of the proposed merger, which he opposes.
He doesn’t believe it is in WA’s interest for one company to dominate the Pilbara, criticises Rio and BHP for not doing enough to add value to their iron ore, complains that there isn’t sufficient economic development and population growth in the Pilbara and is worried about the impact of a merger on relations with the Japanese and Chinese.
A merger would, of course, only occur if the Federal Government and competition authorities around the world, including the Australian Competition and Consumer Commission, approved it.
While he has tied the issue of an increased royalty to the merger, most of his arguments in support of an increase have nothing directly to do with that prospect but sit within a continuum of discussion in WA that dates back to Sir Charles Court and the continuing efforts of governments from both major parties to use WA’s iron ore resources and vast offshore gas reserves as the basis for general economic development and downstream industry development in particular.
In terms of the merger, one would have thought it was in WA’s interests for the Pilbara producers to have the strongest position relative to iron ore customers as possible. It ought to be in WA’s interests for the Pilbara to be as efficient a producing region as possible. It also should be in the state’s interests that BHP and Rio, or their combination, is able to produce as much iron ore as possible to sell into the current strong market and to do so with the most efficient use of capital and infrastructure.
One of BHP’s core arguments for the merger is that it would enable it to get more ore into the market earlier and from a lower cost base than the groups would be able to achieve independently.
’Punishing’ BHP for acquiring Rio would have some impact at the margin on the economics of new developments in the Pilbara and on BHP’s competitiveness relative to Brazil.
Barnett also talks about forcing greater access for third parties to BHP and Rio’s Pilbara infrastructure if the merger succeeded. That, too, would impact on the efficiency and economics of BHP/Rio’s Pilbara production and its competitiveness.
The larger issue, and one that is echoing around the country as state governments look to the current boom on commodity prices and volumes for easy revenue, is whether increasing royalties and taxes at the height of the boom (which is softening) is intelligent policy.
An increase in the royalties on a merged entity wouldn’t have broader implications in WA because new mines already pay the higher rate – the concessional rate for fines was originally put in place to encourage the companies to develop markets for what was originally a by-product of production of lump ore. Which they have done.
BHP and Rio, however, are the groups investing tens of billions of dollars to expand their existing production base and creating the rail and port infrastructure to handle the vast increases in output.
Introducing uncertainty into the royalty or tax environment could have an impact that wouldn’t be confined to BHP – prospective new investors would be unsettled by a demonstration of a government’s willingness to increase royalties or taxes once their investment is trapped. Investment is influenced by assessments of sovereign risk.
Any re-evaluation of WA’s attitude towards resource sector investment, even if it were marginal, could have damaging long-term consequences and would impact harder on new and more marginal producers and less-well-resourced and diversified companies than BHP.
The Liberals may not, of course, be able to win enough seats and convince the Nationals or independents in WA to support them to have the numbers to form a minority government. The price of winning the Nationals’ support – devoting 25 per cent of the state’s mining royalties to regional spending – means, however, that the new government, whichever party forms it, will probably be looking for new or enhanced revenue streams.
The torrents of profit now flowing from BHP and Rio’s mines in the Pilbara are an obvious target, even though they are already generating massive increases in royalty income for the state. As Queensland’s Treasurer, Andrew Fraser, said earlier this year when he raised the royalty on coal exports, it’s not as though BHP or Rio or any of the smaller Pilbara producers can pick up their deposits and shift them to another state.
They can, of course, choose to spend their marginal investment dollars elsewhere and avoid investing in expansion that might, when the commodity boom eventually loses some of its intensity as new supply starts to pour into the market or Asia’s economies slow, themselves become more marginal within a different taxation or royalty regime.
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