[miningmx.com] – COULD it be that the planned tax on mining revenues might be the South African government’s worst damp squib to date? It depends on whether you believe in people such as Murilo Ferreira, CEO of Brazilian diversified mining company, Vale.
In December, Ferreira declared: “We are at the end of the super-cycle, we are living a new moment in the mining industry. The new scenario requires stricter discipline in capital allocation’.
He might be right. If he is, the South African government won’t be able to swoop on mining companies producing stellar revenues so easily because the revenues might not materialise.
In fact, the notion of profits in excess of “normal levels’ – described by the ANC’s State Intervention in Mining report (Sims) as profits qualifying for a super tax – will at least require some careful review. If Sims’ tax overhaul is to be implemented, those behind it may have to adjust their scope. There may be a “new normal’ in terms of higher than average profit-making.
Is the super-cycle over as suggested by Ferreira? Certainly, China’s economy has slowed, while US growth is pedestrian and is dogged by confidence drainers, such as the recent ‘fiscal cliff’ anxiety. Europe, meanwhile, remains in stasis.
Trying to time-table the cycles, however, is a hazardous business. There have been some horrendous mistakes; all manner of market watchers, experts and commentators have been calling the commodity cycle monumentally wrong for years and years.
According to one eminent analyst at the time, the super-cycle dated from April 2003 because commodity prices had recorded 23% average annual growth for the three previous consecutive years.
More likely, the super-cycle had started decades before, as the US magazine Time once pointed out. It thought that a policy shift by China’s Communist Party, in which it allowed its agricultural sector to sell produce for profit, was the genesis of an upwardly mobile economic middle class in China from which the last 15 years of urbanisation could be sourced.
By May 2005, however, there were attempts to call the end of the up-cycle. Speaking at a Merrill Lynch conference in Holland, Anglo CEO at the time, Tony Trahar, said that the group was in the throes of “a super cycle’ and that its “up portion’ had lasted 24 months – the longest since the late Seventies.
His suggestion was that the commodity cycle might be approaching a correction, and that China was heading for a soft landing. It led to the premature sale of Anglo’s Zambia copper assets.
Today, a soft landing is being predicted again. Morgan Stanley estimates industrial production (IP) will fall to 12% in 2012 in China from 15.7% in 2010. India’s IP will fall to 7.7% from 11.1% over the same period. Brazil is forecast to drop to 2.2% from 10.5%, hence perhaps Ferreira’s particular pessimism.
But there’s enough data to suggest the opposite.
According to Deloitte, the UK audit, tax and financial consulting group, China’s commitment to its five-year plan implies $1.6 trillion (CNY10 trillion) by 2015 in seven strategic industries. The urbanisation that typified the earliest stages of the super-cycle is set to continue.
The evidence from the entire mining sector, not just the majors, is that exploration budgets are still quite robust. Data from SNL Minerals Economics Group, a Canadian research house, found that the estimated worldwide total 2012 budget for non-ferrous metals (base metals like alumina, copper, tin, nickel etc) rose to $21.5bn and was “well above’ long-term averages. In 2012, the total world budget was some $3.3bn, 19% higher than the all-time record set in 2011.
And despite the expected fall in Brazil’s IP, there’s conflicting data on the amount of mining investment there.
Deloitte found that Brazil will attract $33bn in mining related investment between 2012 and 2031, just below Australia which is estimated to attract some $55bn in new mining-related investment.
As for the South African government’s tax plans, it should dwell on the effects its own policies have on the fundamental health of its mining sector.
“South Africa is 18 times less investment friendly than Australia,’ remarked UK stockbroker Whitman Howard Mining in a recent note to clients. This is based on the fact that committed investments for 2012 to 2031 found.
Amazingly, considering the history of mining here, South Africa ranked at a lowly $3bn below Indonesia which was at $7bn, Mongolia ($6bn) and Dominican Republic ($4bn).
