Iron ore: Reply

Marc Faber suggests:

There have been four mega bubbles in the past 40 years. In the 1970s it was gold; in the 1980s it was the Nikkei, and in the 1990s it was the Nasdaq. Bigger than all of them, though, has been the iron ore bubble, a tenfold increase in prices in less than a decade.

Here’s iron ore priced in dollars:


source: zerohedge


UBS Sees Mining Tax Take Below Forecast; BHP, Rio Profit Cut Reply

Australia’s planned mining tax will raise less than half the amount forecast by the nation’s Treasury in the next two years and reduce profit estimates for BHP Billiton Ltd. (BHP) and Rio Tinto Ltd. (RIO), UBS AG said.

Mining companies, including BHP, Rio and Fortescue Metals Group Ltd. (FMG), will pay A$1.8 billion ($1.8 billion) in the 2013 fiscal year and A$1.4 billion in 2014, compared with government forecasts for revenue of A$6.5 billion in both years, Glyn Lawcock, a Sydney-based analyst at UBS, wrote in a report dated June 22. The bank cut its estimates for profits at both BHP and Rio by 4 percent for 2013, citing the impact of the mining and carbon taxes, which take effect on July 1.

The mining levy “is designed to be a volatile stream of tax revenue for the Australian government, but funding a stable and growing series of government obligations,” Lawcock wrote. “As a result of this mismatch of a declining revenue position on our commodity price forecasts and rising obligations, we believe a future Labor government may seek to either raise the tax rates or bring in other commodities.”

The government, seeking to return the nation’s budget to a surplus in the year ending June 30, 2013, has said A$1.8 billion in revenue from the mining tax will be diverted to increases in family payments. Australia’s price on carbon emissions, set at A$23 a metric ton, is expected to raise A$24.7 billion in four years. The nation will transition to an emissions trading system in 2015 that lets the market determine the cost.

Carbon Price

The carbon price will contribute to Australia’s economic growth that will include creating an extra 1.6 million jobs by the end of the decade, Treasurer Wayne Swan said in his weekly economic note today, citing Treasury modeling. The average income per person will rise about 16 percent, he said.

The carbon tax will increase electricity prices by an average of A$3.30 a week, raising the cost of living by 0.7 percent, he said. More than 98 percent of households with incomes of as much as A$150,000 will receive some government assistance, in the form of tax cuts and increased payments, and all families making less than A$100,000 will get help, he said.

“In the years to come no first-rate economy can be anything other than a clean-energy economy,” Swan said. “Every cent raised from a price on carbon will be used to provide tax cuts and increased benefits to households, to support the most affected industries and the jobs that depend on them, and to tackle climate change.”

Falling Prices

The carbon price is projected to increase power supplier AGL Energy Ltd. (AGK)’s earnings-per-share by 10.8 percent in the 2013 financial year, while lowering profit at Qantas Airways Ltd. (QAN) by 11.6 percent and Virgin Australia Holdings Ltd. (VAH) by 14.7 percent, JPMorgan Chase & Co. Ltd. said on June 18.

Iron-ore prices have declined 20 percent, and mining company valuations 24 percent, over the past year as slowing economic growth erodes demand. Rio in April pulled out of talks for a potential coal port expansion in Queensland state, citing uncertainty in global economic markets.

BHP will pay $715 million in mining tax and about A$300 million in carbon tax in the year ending June 30, 2013, Lawcock said. The mining tax will cost Rio $676 million, and the carbon tax $202 million in the 2013 calendar year, he said.

The most emissions-intensive businesses, including those belonging to BHP, Rio and Alumina Ltd. (AWC), as well as liquefied natural gas projects, will be eligible for carbon tax assistance from the government, Lawcock said.

Earnings Downgrades

While this will help Alcoa Worldwide Alumina reduce its carbon tax liability to about A$20 million from A$380 million before the assistance, Lawcock still cut Alumina’s 2013 earnings estimate by 5 percent to A$130 million. Alumina owns 40 percent of Alcoa Worldwide Alumina.

The bank also cut Whitehaven Coal Ltd. (WHC)’s expected earnings for 2013 by 8 percent,Mount Gibson Iron Ltd. (MGX) by 6 percent and BC Iron Ltd. (BCI) by 5 percent.

The mining tax, levied on 30 percent on earnings of iron ore and coal, is payable when a company’s annual profits reach A$75 million, so as not to burden smaller businesses, Lawcock said. BHP and Rio’s coal divisions won’t be required to pay any mining tax in the near term, and other coal miners’ liabilities may also not be large, he said.

The government expects to raise A$3.2 billion from the mining tax in fiscal 2015 and A$3.7 billion in 2016, compared with UBS’s forecasts of A$1.1 billion in the year ending June 30, 2015 and A$538 million in 2016.

Fortescue, the nation’s third-biggest iron-ore exporter, is suing the government, saying the tax discriminates between states, curtails their sovereignty and restricts their ability to encourage mining.

Western Australia state Premier Colin Barnett has pledged to participate in any action, saying opposing the tax would be in the best interest of all state citizens, the Western Australia Today newspaper reported on March 20.


Source: Bloomberg

BHP cuts outlook for commodities prices Reply

BHP Billiton, the world’s largest miner, has trimmed its outlook for commodities prices over the next three to five years, a sign that natural resources groups are braced for a lasting impact from the global financial crisis.

The miner, which has operations from Chile to Australia and produces commodities from copper to natural gas, is a bellwether for the natural resources industry.

In its latest review of internal forecasts, BHP reduced the medium-term outlook for commodities prices, according to people familiar with the matter, who added the cuts were small and did not affect the longer-term view of the market.

“The [economic] crisis has made everyone a bit more conservative,” said a senior industry senior executive. “The world is looking more complicated.”

The London Metal Exchange index, a basket of six metals, has dropped nearly 30 per cent from its most recent peak reached in April 2011. The price of copper, aluminium, lead and nickel is down year-to-date. Tin and zinc prices are up.

Investors look to raw materials for clues about oil, mining, agribusiness and trading companies’ internal outlooks, to anticipate changes in the cycle. The downgrade by BHP is likely to cement the view that the decade-long commodities supercycle on the back of China’s industrialisation has peaked.

Internal commodities forecasts are important because natural resources companies use them to assess the profitability of their pipeline of investment projects.

In the case of BHP, the changes could affect large projects including the $20bn Outer Harbour expansion to serve its iron ore operations and the multibillion-dollar Olympic Dam copper-uranium development in Australia. BHP declined to comment.

Jake Greenberg, a mining specialist at investment bank Jefferies in London, said that as BHP trimmed its internal cash flow assumptions, some projects could fall below the necessary profitability hurdle rate. The natural resources industry is reassessing expenditure plans as slowing Chinese demand growth and the European sovereign debt crisis depress the outlook for commodities prices and as rising costs threaten to erode profitability.

The mining industry is unlikely to step back from any big project entirely, but developments could be reduced in scope or proceed more slowly, executives said.

BHP had already signalled that it would take a more judicious approach to capital spending, after coming under investor pressure to show greater discipline in its plans to invest more than $80bn in several mega-projects.

Rio Tinto, which together with BHP accounts for about a third of the industry’s capital investment, has also said it is re-evaluating spending plans, while Glencore and Xstrata have suggested that they will focus on expanding current mines rather than build new ones from scratch.

Jan Nasser, BHP’s chairman, said in May that the company’s investment programme was under review, adding that the mining industry now had “more projects than cash flows”. The comment echoed those of Alberto Calderón, BHP’s head of aluminium, nickel and corporate development, who said the miner would phase or stagger its spending to reduce risk.


Source: FT