Iron ore fall raises doubts on Australia mine tax plan

Wed Jan 4, 2012

SYDNEY, (Reuters) - Australia's politically charged mining profits tax could raise less of the initial A$11 billion Prime Minister Julia Gillard is promising if iron ore prices return to November levels, accountants BDO warned in a senate submission.

Mega-miners Xstrata, BHP Billiton and Rio Tinto , last year agreed with Gillard to pay the Minerals Resource Rent Tax only if the tax was cut to 30 percent from 40 percent and limited to profits from iron ore and coal mining.An earlier version was deemed unworkable within the ruling Labor Party and led to the removal of Australia's first Labor leader in 11 years, Kevin Rudd.

Analysts are divided on the direction of iron ore prices, which this year dropped as low as $116 a tonne and ranged from $119 to $147 a tonne over November.On Wednesday, the price stood at $138.30 a tonne.

Steel industries in most countries requiring ore are suffering, leaving China and other robust Asian economies with healthier balance sheets the key buyers.If iron ore experiences a "double dip drop" prices could fall to a point "where no one will pay MRRT", BDO said.

Between $120 and $125 a tonne for ore, it was "difficult to envisage" established mining companies paying any tax, given large deductions afforded to them under the plan, BDO said."We respectfully request treasury advise what MRRT tax will be collected if iron ore prices remain at $120 for an extended period of time," BDO said in its submission.

TAX BEING CLOSELY WATCHED

Gillard wants to use the tax to boost payments into worker pension funds and to spread the benefits of Australia's resources boom to other parts of the economy.The tax is being closely watched by other resource nations.Huge expansion plans underway by big mining houses promise to deliver hundreds of millions more tonnes of iron ore to the global supply pool.

At the same time, there are some signs China's steel production is waning after years of near-uninterrupted growth.China's daily crude steel output fell to 1.666 million tonnes in the second 10 days of December, down 0.44 percent from the preceding 10 days, data from the China Iron & Steel Association showed.

JULY 1 START

For the first half of 2012 -- the tax starts on July 1, 2012 -- seasonally weaker seaborne iron ore supply and some recovery in steel production should keep iron ore prices in a $130-$150 range according to CLSA analysts. By 2014, the price could be as low as $100 a tonne, CLSA forecasts.

Supporters of the tax have accused detractors of waging a scare campaign by saying Australia, whose economy relies heavily on mining, would see less investment in mining if the tax was introduced.

Mining is the lifeblood of the Australian economy and iron ore and coal generate the lion's share of national overseas earnings.But to date, even detractors concede that there's been little sign Australia was losing its appeal as a mining centre.

Rio Tinto is accelerating a plan to lift output by 50 percent to 333 million tonnes a year by 2015. BHP is aiming for a 37 percent rise in production to 220 million tonnes by around the same time.Gillard's supporters estimate Xstrata, BHP and Rio Tinto would shoulder 80 percent of the $11.1 billion in added tax revenue collected in the first three years.

(sourced Reuters)