Commodities Tax Backlash May Undo Gillard Vote in Australian Mining States

Australian Prime Minister Julia Gillard will face her biggest election fight in mining states to win Saturday’s too-close-to-call ballot. These communities oppose her planned tax on coal and iron ore companies.

“The mining tax will be an important issue in important seats, particularly ones in the resource states of Western Australia and Queensland where there are tight contests,” said John Warhurst, a political analyst at the Australian National University in Canberra. Some voters will favor the opposition’s plan to scrap the tax, he said.

Opposition leader Tony Abbott may win the 17 extra seats he needs to form a government after gaining support in mining communities, as well as in Sydney, where voters are concerned about rising borrowing costs, according to a Galaxy poll this week. The tax will cut A$10.5 billion ($9.5 billion) in profits in the first two years from companies including BHP Billiton Ltd., the world’s biggest mining company, and Rio Tinto Group.

“Australia’s issues about the mining tax aren’t gone,” Evy Hambro, manager of BlackRock Investment Management Ltd.’s flagship $14.3 billion World Mining Fund said this month in an interview. “Gillard is facing some pressure in the polls.”

Gillard’s Labor Party is locked 50-50 with Abbott’s coalition, according to a Newspoll published in the Australian newspaper today. A Galaxy opinion survey in the Herald Sun newspaper today gives Labor a narrow lead on a two-party basis.

Key Issues

Australia’s dollar may extend its world-beating gains this quarter if voters go for Abbott, David Forrester, a currency economist in Singapore at Barclays Capital, said Aug. 19.

“The mining tax issue will trend voters towards the Coalition,” David Goodwin, president of the Chamber of Commerce & Industry Queensland, said in an interview. “It’s a key issue for voters in Queensland.”

Controversy over the tax brought down Gillard’s predecessor Kevin Rudd in June as opinion polls and his own party turned against him over his plan to impose a 40 percent tax on mining company profits.

Gillard took over and held talks with BHP, Rio and Xstrata Plc, agreeing to trim the proposed levy to 30 percent and said it would only apply to coal and iron-ore mines.

Blunt Effect

The Prime Minister to some extent has managed to blunt the effect of the tax and it’s about half the issue it was when Rudd was ousted, ANU’s Warhurst said.

The “worst case scenario” for mining companies would be if the balance of power in the Senate was held by the Australian Greens who would push the Labor government to reintroduce Rudd’s version of the mining tax, Citigroup Inc. said in an Aug. 2 report. Greens’ leader Bob Brown said this week he wants to renegotiate the mining tax to raise an extra A$2 billion.

While Rio Chief Executive Officer Tom Albanese said this month the company can “work with” the tax, smaller and mid- sized mining companies are unhappy. The Association of Mining and Exploration Companies Inc. restarted an advertising campaign against the tax, saying it will cost jobs and deter investment.

‘Arbitrary Manner’

“It’s always questionable for governments to whack on, in a rather arbitrary manner, taxes on particular economic sectors when they are doing well,” Harvard University historian Niall Ferguson told the Diggers & Dealers mining conference in Australia this month. “It gets more arbitrary when within the resources sector just iron and coal are targeted. This isn’t a good way to proceed.”

Fortescue Metals Group Ltd., Australia’s third-largest iron ore producer, says the tax may force it to halt A$17 billion of expansion plans. Andrew Forrest, Fortescue’s chief executive officer and Australia’s richest man, visited Labor-held marginal seats in Tasmania and Queensland to argue against the tax, the Australian newspaper reported on Aug. 11.

“Nobody really knows what this tax will be in practice when the election is over,” said Harvard’s Ferguson. “That kind of uncertainty can’t be good for a sector that needs to do all the investing it can.”

-- With assistance by Jason Scott in Perth, Marion Rae in Canberra, Candice Zachariahs and Elisabeth Behrmann in Sydney. Editor: Keith Gosman, Peter Langan

To contact the reporter on this story: Rebecca Keenan in Melbourne at rkeenan5@bloomberg.net Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net

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