THE DISTILLERY: Jac's knife

Jotters digest the scathing remarks BHP Billiton's chairman Jac Nasser made about tax-happy governments, while one takes a peek behind China's inventory curtain.

BHP Billiton chairman Jac Nasser had a perfect opportunity to vent about the Queensland government’s coal production royalty hikes yesterday at The Australian Financial Review and Deutsche Bank Conversation Series yesterday. He took it. Many of Australia’s business commentators looked on as Nasser sat down with the AFR’s Matthew Stevens for a discussion that was wide ranging, but headlined by the topic of taxation.

It’s best to start with the man himself, the AFR’s Matthew Stevens, who had the best seat in the house.

"Nasser observed that governments collectively seem to have decided that the resources boom ‘is going to go on forever’, with the result that they feel free to transfer ever more wealth from operator to government. ‘That’s just not the way the world works, and that’s not the way boardrooms behave, and therefore there will be consequences. I can’t tell you what those consequences are at this point.’ Fiscal security and certainty was an essential component of competitiveness, Nasser said. ‘At the moment, no change in taxation policy in Australia is a good change. No change is a good change, because it seems to me every time they change, it’s to the detriment of industry and economic growth. And, therefore, maybe we’re not terribly happy with what we have, but let’s just leave it alone for a little while. Stop fiddling.’”

Business Spectator’s Stephen Bartholomeusz shares Nasser’s frustration with the meddling from federal and state governments. He argues that government seem to be oblivious to, or unable to accept, these realities; mining is cyclical and global; capital is global and investments run for decades.

"Booms come and go and this one is going. The mature part of the industry understands that and invests over 30, 40, 50-year time horizons on the basis that the good times will be good – but likely to be the aberration rather than the norm. As Nasser said, ‘they’ (read governments) ‘want to take the upside and want someone else to take the downside’. In effect, governments in this community in recent times have adopted a ‘tails I win, heads you lose’ approach to the sector. It doesn’t work like that. If you deny the industry the benefit of the good years to offset the inevitable bad eras you flatten the prospective returns in an industry that has a high risk/reward equation. It is an industry dominated by global companies with global options and where capital is therefore highly mobile and which will flow towards the opportunities with the best risk-adjusted returns.”

Still on taxation, Business Spectator’s Robert Gottliebsen says the two most compelling elements of Nasser’s conversation with Stevens were the two obscured events from the Queensland royalty hike. The first was Premier Campbell Newman’s contact with the heads of BHP Billiton, Rio Tinto, Peabody Energy, all of who warned him against raising royalties. He ignored them.

"The second hidden event that influenced what Nasser was saying came from the discussions currently taking place with the federal government over possible changes to tax concessions to pay for a lower company tax. When the miners walked into the discussion they discovered that almost all the concessions that the government is considering changing are aimed at the mining industry – they include diesel fuel price hikes, thin capitalisation rule changes, and exploration write-off changes. In the interests of the nation, Nasser almost pleaded with governments not to make further changes to taxation which were aimed at business.”

The Australian Financial Review’s Chanticleer columnist Tony Boyd has a fantastic insight into the management philosophy inside BHP as to how it will deal with the end of the commodity boom.

"Chanticleer understands that all managers within BHP have been told something along the lines of: "Look boys, you have all been here for a long time, just pretend you are back in the 1990s and you will all be okay”. The 1990s was a very tough period for the mining industry because of recessionary conditions around the world. The early 1990s were especially tough in Australia because of the bursting of a property bubble that nearly brought down Westpac Banking Corp. The mantra within BHP now is to cut costs where possible, eke out incremental gains on the infrastructure and don’t do anything that is non-added value. BHP is fortunate that virtually all of the seven managers who report to chief executive Marius Kloppers were in the industry 20 years ago.”

Boyd’s analysis allows for an even broader discussion about why governments play so badly with mining companies. Precious few of the parliaments in Canberra or Brisbane held their seats 20 years ago; even fewer currently hold a seat in government.

While corporations, and indeed governments, are routinely lambasted for their obsession with the short-term, mining companies are unique in the way they are structurally forced to look at the long term. Governments come and go, quicker than commodity booms and busts.

Meanwhile, The Australian Financial Review’s Jennifer Hewett takes a big swing at Newman for the lack of rationale behind the royalty increase.

The Australian’s Barry Fitzgerald says Nasser might be making outward signals about succession planning, but chief executive Marius Kloppers is the only executive on the board. Hence, he’s not going anywhere soon.

Also, Fitzgerald also had a curious line about how the market could "feel more comfortable knowing that there was a replacement ready to go should Kloppers – heaven forbid – fall victim to a Melbourne tram”.

Fitzgerald is one of Australia’s most respected resources watchers and The Distillery wonders whether this is a reference to some obscure mining executive fatality in the last few decades, a dig at Melbourne’s iconic form of public transport, or just morbid imagination.

Whatever the case, The Distillery loves that line.

Elsewhere, The Australian’s Rowan Callick warns that the Victorian trade mission to China, the largest in Australian history, shouldn’t be judged on the number of "announceables” because business relationships in China take more than a single trip.

The Australian’s Robin Bromby has read some worrying reports about the outlook for commodities, starting with Standard Chartered analyst Judy Shou, who’s done a tour of Chinese warehouses.

Fairfax’s Elizabeth Knight investigates the implications of Target’s apparent stocking of fake cosmetic products, which the writer concludes must have been accidental, for the wider retail market. Her analysis comes as a primer for the David Jones full year results next week.

The Australian’s economics editor David Uren looks at the collapse of company profits and the implications this has for federal and state budgets around the country.

The Australian’s Andrew White explains how the appointment of insolvency experts KordaMentha in the Nine Entertainment negotiations is fairly predictable, not insignificant.

The Australian’s John Durie says the legal battle between the Australian Competition and Consumer Commission (ACCC) could end up in court sooner rather than later, with Woolworths sizing up a three hardware stores in the Ballarat district.

And finally, Fairfax’s Michael Maiden writes that European Central Bank President Mario Draghi would have been left in limbo if the German Constitutional Court had ruled against his permanent bailout. Thankfully, it didn’t.

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