In the vicinity $100 billion of resource projects that were almost certain to go ahead are now headed for mothballing until the resources tax is either abandoned or severely modified. If the private words to me and other journalists are converted to action and a new mining project capital strike is launched, then almost certainly Kevin Rudd will not win the next election. The economies of Queensland, WA and South Australia would be decimated.
I have never seen an industry so angry. As we saw in the medical area, Rudd just put the proposal on the table and tried to bully his way through. But miners are much tougher than state premiers and the international majors have a raft of projects in other countries that will now take precedence over Australia. They can wait until sanity returns down under. The sufferers will be the myriad of contractors that have based their business on what appeared to be major mining investment programs.
Yesterday I had the chance to talk with a number of people who will play a key role in whether there is a capital strike or the miners roll over. The people I spoke to have no doubt that there will be a strike.
Stephen Bartholomeusz pointed out yesterday the $60 billion worth of coal gas and LNG projects at Curtis Island and surrounds are now in grave danger of being mothballed.
Rio Tinto has $5 billion globally to spend on new projects and $12 billion on global project candidates – WA iron ore was close to the top of the list. It is now at the bottom and will be scrapped.
BHP is in no hurry to develop Olympic Dam further and the project that SA Premier Mike Rann staked so much on, is a prime candidate for mothballing, which would devastate South Australia. There is a raft of other smaller projects likely to be suspended. Like the Western Australians and Queenslanders, the South Australians only have Kevin Rudd to blame.
Just as the Rudd Government had no idea about the chaos they were creating with the badly structured emissions trading scheme, the inexperienced Rudd team had not the slightest idea of what they are doing to resource projects when they drafted the new tax.
Less than a decade ago resource projects were struggling. They will struggle again some time in the future. The Rudd plan assumes a ridiculous 6% return and then lumps a 40% extra tax on earnings above that, which takes the tax rate to the vicinity of 58% and in some cases it can be higher. If a miner is well into the construction of a new project they will have to keep going, but if they have not started, the rewards now do not match the risk. Even if a resource company was prepared to take a punt it is unlikely that a banker would back it.
Moreover, all the major resource groups have projects from all around the world competing for their capital spending dollar. By starting a new project in Australia big miners are declaring that a 58% tax rate is acceptable. If any global company, including Australian-based global companies are prepared to be taxed at that rate in Australia, then they would face the danger of similar rates elsewhere.
Nevertheless it is always possible that Kevin Rudd may get one major resource company to break the strike, but for the most part it will remain for as long as it takes.
Already Canada is pleading for global resource companies to divert money from Australia to develop their projects. Africa will point out that they are more politically reliable than Australia and that past decisions in Australia have been made on a totally wrong tax premise.
But it gets worse for Australia. The flower of confidence has been trampled on by our Prime Minister and no one will want to go ahead with a major project unless there is an act of parliament setting the tax rate forever.
Kevin Rudd is now caught in a massive pincer. At the top, there is about to be a capital strike. At the bottom, assistant treasurer Nick Sherry wants to eliminate independent contracting as we now know it.
And in the middle, we have a series of blunders led by insulation and education building and a botched emissions trading scheme. Oppositions don't win elections, governments lose them.