It’s rather encouraging that in the face of crumbling state revenues around the world more governments haven’t turned to export taxes on metals as a way of raising much needed funds. It suggests the old socialist way of taxing business the moment you need a few more dollars in the coffer is largely a thing of the past. States have realized that a stable tax and legal regime is vital to attract much needed foreign investment, indeed that the success of such ventures is what leads to long term prosperity not the ability to tax such ventures on a whim.
It should come as no surprise then that the inclination to levy windfall taxes, either domestic or on exports, is manifesting itself mainly in previously socialist and/or totalitarian states. Russia is reviewing the re-imposition of a progressive export tax on nickel when prices are higher than $12,000/ton on the London Metal Exchange ” they are currently over $ 19,000/ton. Vladimir Putin abolished a 5% export tariff on nickel in January to support national champion Norilsk as nickel prices crashed but clearly the state finances have deteriorated since then. Russia is not alone though in Europe, Britain’s socialist Labour party has in the past raised the specter of windfall taxes on various industries when they find themselves short of funds.
Mongolia famously imposed huge windfall taxes on copper mining back in 2006 only to find plans to develop what could become the world’s largest copper deposit Oyu Tolgoi, promptly ground to a halt. Existing miners at Erdenet soldiered on but new copper, moly, gold and other mining ventures were shelved while investors waited for the government to come to its senses. Statements this quarter suggest that is finally happening. Oyu Tolgoi is expected to produce an average of 440,000 metric tons of copper and 320,000 troy ounces of gold a year over the life of the project and could have broken ground by now.
Zambia should have learned from Mongolia. Just before the start of the recession, in April last year, Zambia introduced a 25% windfall tax on copper and a variable tax on income only for metal prices to crash within months and investment to freeze. It has taken nearly a year but the government has seen the error of its ways and rescinded the law opening up investment as the copper price climbs.
So far though such moves have been few and far between. If countries want a model as to how to maximize gains from fluctuating commodity prices they could do worse than look at Chile. The Chileans have two sovereign wealth funds used to soak up excess revenues when metal prices are high and to support the economy when prices are low, as happened earlier this year. Let’s hope governments can keep their hands off the tax revenue raising lever while mining companies recover. With so much capacity closed or idled over the last 12 months we may find we need all the production capacity left by late next year.