Customer Service 1 (888) 261-2693
Advanced Search

Another Tailwind for Chinese Commodity Investments

By Matt Badiali, editor, S&A Resource Report
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.
 
Good investing,
 
Matt Badiali




In The Daily Crux Recent Articles
Market Notes
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.
 
Earnings today...CBS, Devon Energy, Prudential, Pulte, Time Warner.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 38.31 +1.4% -0.6%
Gold 138.07 +2.1% +16.3%
Silver 28.60 +2.4% +53.6%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 18.01 -7.1% -19.8%
Gold Stocks 581.56 +3.0% +17.0%
10-Year Yield 3.02 +0.7% -10.7%

World ETFs
Symbol Price
Change
52-Wk
USA 122.89 +0.3% +11.3%
Canada 30.50 +0.2% +16.2%
Russia 21.94 +1.4% +18.1%
India 37.85 +0.3% +22.3%
Israel 16.69 +1.3% +10.8%
Japan 10.64 +0.6% +6.5%
Singapore 13.73 -1.1% +18.8%
Taiwan 14.78 +0.4% +19.2%
S. Korea 57.31 +1.3% +23.4%
S. Africa 71.87 +1.4% +28.2%
China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%