What's yours is mine

Aussie tax: Australia’s new super-tax on mining companies may be a pre-election profit grab, but that doesn’t make it bad. It is a counter-cyclical measure that the targets will hate — as long as times are good.

The idea behind the new tax sounds populist: to recoup “super” profits resulting from the recent commodities boom. The price of iron ore from Australia has doubled in a year, while coal has risen more than half. Such high prices provide miners with huge “economic rents”, profits in excess of the costs of doing business. The spot price for iron ore is eight times what the biggest producers spend to dig it out of the ground.

But over time, the tax plan should be good for producers, despite a headline tax rate of 40 per cent. Today, Australia’s miners pay a fixed levy per tonne of production, whatever the market price. That's great for boom time profits, penalises high cost and still unprofitable projects. It also raises the selling price needed to make marginal mines pay off. And like any fixed cost, it makes businesses more exposed to swings in the value of the products they sell.

Since the new tax is based on profits, it will make the good times less good. That might discourage excessive investment in new mines, which can make the bad times worse. Also, the new tax offers deductions for capital expenditure and exploration, which should keep investment from falling too much when prices are low — contrary to the argument given by my colleague Martin Hutchinson. Finally, it would reduce the effect of commodity “financialisation” on miners. Easy money has magnified the effect of supply shortages on prices. It seems fair for taxpayers to get more gains and shareholders to get less.

Don’t expect miners to see it that way. They will have to revalue their assets, and watch their shares fall as investors do the same. Mining assets could lose 7 per cent of their value, according to Deutsche Bank. But any measure that stabilises the commodity market deserves a hearing — and producers may eventually be thankful.