Australia: Nil all

Queensland's coal royalties decision is just one face of the sovereign risk confronting miners as governments struggle with budget logic. In the end, no one wins.

At least Queensland coal miners now have a face to put on their dartboard – that of Premier Campbell Newman.

Yesterday’s decision in the Queensland budget to increase coal royalties more than expected has put the mining industry into a frenzy of outrage, since the plunging price of coal has already reduced profits to the point where miners are being laid off.

How a state so blessed with fossilized forests that it can supply the world’s turbines and blast furnaces with coal as well as the world’s stoves with gas from the cracks in the coal beds, managed to lose more than $6 billion this year is a source of wonder, but there it is. Years of growing expenditure at 7.5 per cent a year, or almost three times the inflation rate, will do that.

The answer is to sack public servants and tax the coal miners, since they have the money. Or at least they did. The faster than expected slowdown of the Chinese economy has cut the prices of both coal and iron ore and mine workers are joining public servants on the dole: what the cycle gives, the cycle takes away.

But beyond exasperation lies 'sovereign risk'. First there was the RSPT, followed by debacle, followed by the MRRT, which at least will have the benefit of not raising any money, followed by the carbon tax, followed by its 'fine tuning'.

The rules of the federal mineral resources rent tax allow taxpaying companies to claim ad valorem royalties, so in theory the Queensland coal miners who are due to pay the $1.6 billion extra the Queensland government expects to collect over the next four years will be able to get it back from the Commonwealth. But they weren’t expecting to have to pay that anyway.

Sovereign risk used to be defined simply as the risk that a government will not be able or willing to meet its debt obligations, or that a central bank will alter the foreign exchange rules to similar effect.

But these days the term is being more broadly defined for the benefit of corporations to include unexpected changes in taxation and other regulations. That’s because of the growing competition between nations and states for capital investment, which firms are only too happy to exploit.

Coal appears to be pretty evenly spread over the earth’s surface so that the countries with the largest land mass have the most coal: Australia has 8.9 per cent of it according to the World Energy Council, China 12.6 per cent, Russia 14.4 per cent and the United States 22.6 per cent. Kazakhstan and Ukraine have quite a lot of it as well, as does South Africa.

Will Australia’s coal miners tire of the ever-hungrier mouths fastening onto their teats and decamp to Kazakhstan? Unlikely, although President Nazabayev is no doubt a man one can do business with, unlike Campbell Newman, who must face the inconvenience of proper elections.

But they might think twice about building another mine here, and the companies spending $100 billion or so on plants near Gladstone to liquefy gas from the coal beds for the Asian market are probably wondering when they will get hit as well.

Meanwhile Queensland’s austerity budget brings to an end an unhappy round of state budgets for 2012-13 that add up to a total of $8.4 billion in deficits.

It is a marvellous thing how rising property and commodity prices, leading to rivers of stamp duty and royalty revenue, creates the need for more, better paid, policy advisers advising state ministers on policy – after all, a minister’s worth can only be measured by the number of advisers he or she can muster for a meeting. Unfortunately they are hard to get rid of when the real estate and resources parties end, as they have done.

Happily the state deficits will offset to some extent the fiscal crunch at the federal level in 2012-13, when Wayne Swan is due to remove 3 per cent of GDP as he attempts to restore his budget to surplus.

Thus Australia is Europe writ small: fiscal austerity, monetary stimulus. Nil all.

Follow @AlanKohler on Twitter


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