Monday, June 21, 2010

so is this the answer? does China own us now?

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from "the Business Speculator"
China's RSPT bounty
STEPHEN BARTHOLOMEUSZ The Rudd government's resource super profits tax will force miners to ask China's state-owned financiers for cash, bringing in more Chinese state-owned enterprises as shareholders. 4:13 PM read more
4:13 PM, 21 Jun 2010
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Stephen Bartholomeusz
China's RSPT bounty

Kevin Rudd might want to characterise the $10 billion or so of deals with China unveiled today during the visit of Chinese vice-president Xi Jinping as evidence that the resource super profits tax is not affecting investment, but then the Chinese are not your ordinary investors.

And, indeed, given that China Development Bank (CDB) features in several of the resource deals signed today, the deals themselves aren’t necessarily conventional resource sector investments.

The Chinese might be a little annoyed that the RSPT was announced after their state-owned enterprises had invested tens of billions of dollars in the Australian resource sector but (a) their deals are likely to be the least affected by the RSPT (with a couple of exceptions) and (b) they aren’t necessarily as fixated with profitability as Australian miners.

It needs to be remembered that the Rudd government has hailed the tax – which would be paid largely by the big miners on well-established low-cost and highly profitable mines – as helping to promote hitherto marginal production within the sector. Its initial impact is positive for new and high-cost/low quality mines.

China is unlikely to be fussed if the big iron ore and metallurgical coal producers are less competitive, relative to their international peers, as a result of the tax, given the paranoia of its big steel producers about the level of influence and market power the producers have over key inputs into China’s industrial activity.

Conversely, it is in China’s own long-term interests to encourage new sources of iron ore and coal and other commodities to increase supply, temper price rises and counter the influence of the global resource groups.

Indeed, much of China’s activity in Australia in the past has been focused on the emerging iron ore producers like Fortescue and the Mid West iron ore province, which could be classified as marginal producers.

The memorandums of understanding China Development Bank has signed with Aquila Resources and Karara Mining – they both have West Australian iron ore projects in which there are pre-existing Chinese partners – fit the kind of strategy that is more interested in security of supply, increased supply and wider available sources of supply than in its absolute profitability.

Helping to finance the Oakajee port and rail infrastructure that helps open up the Mid West is a relatively obvious way for CDB to facilitate China’s strategic interests.

There is, potentially, enormous mutual interest in partnering with the Chinese to bring new projects and resource provinces into production.

That, however, doesn’t validate the proposed tax, which would amplify the strategic benefits the Chinese are seeking by slowing expansion of the production of our most efficient iron ore and coal producers – the ones able to use their market position to maximise the value received from exploiting those resources.

The other issue raised by the tax, and one that Fortescue’s Andrew Forrest has been particularly critical of, is that it will effectively destroy conventional project financing because the RSPT applies before financing costs.

To obtain project funding, smaller producers – who traditionally have used project financing to develop their mines – will have to turn to financiers more interested in gaining access to supply than in the security of their loans.

That almost inevitably means bringing in Chinese state-owned enterprises as shareholders and asking the Chinese state-owned financiers for help with the debt component. The impact of the RSPT would dictate that miners looked to financiers less interested in profitability than conventional capital providers.

One suspects that Rudd and Wayne Swan – both very sensitive to the politics of Chinese investment in the past – haven’t properly thought through the implications for Chinese interest in Australian resources of a RSPT that encourages marginal production during a boom, discourages conventional financing and commits the taxpayer to underwriting 40 per cent of the losses in a downturn.

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