Australia | Jun 04 2010
By Greg Peel
While Australia's rate of economic growth slowed in the March quarter, from 0.9% GDP growth in the December quarter to 0.5% GDP growth, Macqaurie notes there remains an underlying strength. The slower rate was no surprise given government stimulus is winding down (in particular the schools project is done), so now its over to the private sector to pick up the slack.
The first boost here will come in the form of balance of trade impact from the big iron ore and coal contract price hikes recently achieved. The March quarter was a period in which imports outpaced exports (in dollar terms) and that should reverse in the June quarter. Notably, yesterday's monthly numbers showed the April trade balance has already surprised economists with the first move into surplus since March last year.
A ten cent weaker Aussie dollar should also help stymie import demand while supporting exports.
But crucial to GDP growth going forward will be the expected but lagged rebound in overall business investment. A lot of investment was “front-loaded” in 2009 when the government was offering tax breaks, so there's been a bit of a lull. But surveys suggest businesses are ready to begin ramping up capital expenditure again, especially in the mining sector.
But there is one small problem. Such capex intentions have been a pre-RSPT consideration. Now that we are hearing news of various projects being stalled the risk is that expected capex will fall short of the numbers required to keep the Australian economy ticking over. At this stage it is not so much the RSPT as it stands but the uncertainty of just what any final RSPT might look like that is forcing mining companies to put projects on hold.
The biggest stumbling block is the so-called “indexation” rate within the proposed super tax, along with depreciation rates. The indexation rate refers to the “super” threshold of 6.5%, being the bond or “risk-free” rate.
The problem is that while the government is espousing that it will support start-up projects through capex rebates, (a) the funds have to be found and money spent before the rebate can kick in and (b) the bond rate is well below the realistic cost of capital of mining projects, which is more like 11-12%.
In other words, while the government argues the RSPT is only a tax on “super” profits, the mining industry quite rightly argues there's nothing “super” about achieving a 6.5% return. Until revenues exceed the cost of generating those revenues a project is still losing money. But the government wants to start taxing anyway.
The analysts at GSJB Were have performed some sensitivity analysis of different “concession” scenarios.
The base case is the earnings impact on miners of the RSPT as it stands now. Scenario 1 moves the indexation rate up to 11.5% (to match cost of capital) from 6.5% (the bond rate). Scenario 2 adds an accelerated capex depreciation of two years instead of the life of the mine. Scenario 3 depreciates capex simply in the year it is spent (which was the original Henry recommendation).
What the analysts have found is that playing around with depreciation rates has little impact on ultimate earnings forecasts. However, moving the indexation rate to 11.5% causes a “material” improvement in earnings for several companies.
Were this indexation concession to be given then it could be argued the process of deducting state volume royalites from the RSPT and then the RSPT from corporate tax (at 29% or 28%) would be a taxation system the mining industry should find acceptable, albeit it will stringently argue against any tax. It must be remembered that the Mining Council originally pushed for a profits tax instead of the state-based royalty taxes on volumes. They still exist, but as they can be deducted against the RSPT then in effect they are negated as long as profits are made.
For a while there it looked as if the Rudd government was prepared to give ground on the RSPT proposal and the indexation rate in particular. But now it looks like Rudd has dug in. From a political point of view, another back down (such as was the case with the ETS) would emphasise a growing public perception that Rudd has no ticker, and is untrustworthy on promises.
On the other hand, such a concession would probably keep everyone happy, and allow both sides (government and miners) to declare a “victory”.
