Struck by Canberra's mining curveballs

Just as the major miners are adjusting to a changing game for global minerals prices, Canberra is hurling a barrage of assaults at the industry.

The nature of the Australian mining boom is going to undertake a fundamental change in the next four years. That change will dominate the next parliament and have a major effect on mining shares.

Already shares in our major miners have been sluggish in the market as a forerunner to that change, which obeys all the economic textbook models. One of the risks Australia faces is that in Canberra, those who make decisions do not always read such books. Mining unions are not interested.

The prices of Australia’s major minerals, such as iron ore, coal, gas etc. have risen well above the marginal cost of producing because demand has been greater than supply. Not surprisingly the major customer, China, has encouraged a widespread international mining investment boom, which in the next four years will boost supply dramatically. China expects by lifting supply they will reduce the prices they must pay.

Recently in the Eureka Report Gerard Minack, who is head of global developed market strategy at Morgan Stanley, published this graph:

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As you can see we are looking at an enormous supply increase. I should alert readers that the timing of supply increases can be later than what is expected by forecasters. Nevertheless, in the next four years Minack believes supply is going to rise by a very large amount. Even at a lower growth rate China will underpin demand but there is unlikely to be much joy in the US and Europe. Accordingly, there is a very good chance that the higher supply will reduce prices considerably – exactly what China was looking for.

The major miners have graphs that are similar to the Minack projections. As a result BHP Billiton, Rio Tinto and the other majors make sure that any projects that increase supply in their introduction have a cost that is in the bottom quarter of global costs – so that even if the price falls their new production will still be profitable.

Many of the smaller miners do not have that luxury because they are building their facilities from scratch rather than adding extra production to an existing mine.

Enter our friends in Canberra. The revenue for the government's current mining tax was estimated at above $10 billion in the next three years. Everyone now knows that estimate is almost certainly wrong because it anticipated a further rise in both tonnages and price. So now the government is exploring ways to bridge the gap and is looking to tax diesel fuel, make overburden removal much more costly and other nasties (Canberra's mining project hit list, April 19).

At the same time the unions reckon it's time to use the new industrial relation rules to resume control of certain areas of mine management and boost the costs by lessening labour flexibility.

So at the very time that we have to watch our step because the game has changed Australia is making all the wrong moves.