Wednesday, May 5, 2010
In a brutally tough competition with Greece, Australia wins this week's "dumbest government" award.
It's an election year in Australia... and sweet promises must be made. So this week, Australia's leaders made the classic "get re-elected" move: Win the hearts and minds of the masses by hiking taxes on evil corporations.
The hike came in the form of a "super-profit tax" on its mining industry. Analysts expect the tax hike will reduce earnings for mining giant BHP Billiton 17%... and reduce earnings for fellow giant Rio Tinto 21%. BHP claims the new rules will increase its effective tax rate to 57% of profits from 43% right now.
The mining industry is much more important to Australia's overall economy than it is to the U.S. This new tax is like Obama & Co. going after Google and Intel. But the politicians promised to spend the windfall on roads and retirement entitlements.
Here's what the politicians aren't saying: This new tax is a way to soak the Chinese.
As I'm sure you know, China is scouring the world for oil, natural gas, copper, coal, and iron ore supplies. It has a desperate need for the stuff... and lots of money to throw around in order to get it. And China doesn't just buy products from Australia, it buys mining companies, too ($20 billion worth in the last 18 months or so).
The Australian government is using this new tax to take a little extra cream off the top of China's resource purchases. In short, Australia's plan is a tax on China.
This isn't the first time China's "lots of money, desperate need" position has gotten it screwed. The Australians levied a similar tax on oil and gas exports in 2006. The U.S. also stuck it to China in 2005 by blocking the sale of the huge U.S.-based energy company Unocal to China's state-run oil company, CNOOC.
The proposed Australian super-profit tax reinforces the lesson China learned in 2005 and 2006: The resources aren't yours unless they are in your house.
After the Unocal debacle, China ramped up spending on domestic oil exploration from $12.6 billion in 2004 to $21.5 billion in 2006. It continued to rise over the next two years at a rate of 22% in 2008.
China can't replace Australian supplies of iron ore, tin, and oil with domestic deposits tomorrow... But the country does have some excellent prospects. Instead of sending more money on taxes to foreign governments, China will spend that money in its domestic mining and energy infrastructure.
Right now, China has no choice but to "pay up" for Australian resources. It has to have them to continue building. But stories like this are huge drivers for China's domestic exploration programs... something my readers have made a fortune on in the past few years. I expect they'll make many more as this story plays out.
Europe erases 2010 gains... Stoxx Europe 600 Index plummets to new 2010 low.
Volatility races higher... VIX spikes 21% as investors buy options to insure against declines.
Copper dives to nine-week low... down 13% in a month to $3.18 a pound.