Gillard Is Likely to Tax Miners, Morgan Stanley Says

Australia’s new Prime Minister Julia Gillard is still likely to introduce a tax on resources profits following negotiations with mining companies over the levy that helped the premier oust her predecessor, Morgan Stanley said.

Gillard was closely connected to former prime minister Kevin Rudd’s policy decisions, which allows little prospect for a big change, Morgan Stanley strategist Gerard Minack said in a telephone interview from Sydney. BHP Billiton Ltd. and Rio Tinto Group slid in Sydney trading on speculation Gillard will pursue the tax. The stocks rose yesterday after she pledged to consult companies on the plan.

“We will still get a super profits tax on the mining sector,” said Minack. “You can’t assume that a change in prime minister means that the tax gets dropped.”

Rudd’s support began to slide after he proposed a 40 percent tax on the “super profits” of resource projects in Australia, the world’s biggest shipper of coal and iron ore. Gillard had been Rudd’s deputy since December 2006 and helped Labor win power in 2007 from John Howard’s coalition after almost 12 years in opposition.

A gauge of materials shares, which includes resources companies, in the S&P/ASX 200 Index rose as much as 1.9 percent yesterday after Gillard said she will start negotiations on the government’s proposed “super profits” tax. It dropped as much as 1.9 percent today in Sydney.

‘Secondary Issue’

Concerns about global growth and a slowdown in Australia’s economy are larger issues for the nation’s market, according to Minack. The MSCI World Index of shares has fallen 7.6 percent this year, while the S&P/ASX 200 has tumbled 9.4 percent, on concerns deficits in Europe and credit tightening by China would undermine the strength of the global economic recovery.

“Taxation is going to be only a secondary issue if there are concerns about a global double-dip,” said Minack. Australia is now reversing its “extremely well-timed policy stimulus” that helped the nation avoid the worst of the global downturn last year, he said.

“This year, Australia is seeing payback for its success last year,” Minack said.

Australia’s S&P/ASX 200 Index surged 31 percent in 2009, compared with 27 percent for the MSCI World Index. The S&P/ASX 200 Index declined 1.5 percent to 4,413 at the close of trading in Sydney today.

BHP ‘Encouraged’

UBS AG also expects Gillard will push ahead with the mining tax. “It remains highly likely that a mining tax will be introduced,” Olivia Ker, a London-based mining analyst at UBS, said in a report. “Given the proposed new negotiation, the resolution of details may now be further in the future, opening up a longer period of uncertainty.”

BHP dropped 2.1 percent to A$38.80 in Sydney, and Rio declined 3 percent to A$69.60.

“We still don’t have absolute clarity on what the Labor government position is going to be,” Richard Knights, an analyst at Liberum Capital Ltd. in London, said in a telephone interview. “The market was hoping that she might come out and say, ‘Look, we oppose the tax,’ or maybe something more concrete.”

BHP, based in Melbourne, said it’s encouraged by Gillard’s appointment and has asked publicity agencies to suspend all of its advertisements against the proposed tax, according to a statement. Rio, the world’s third-largest mining company, said it’s “cautiously encouraged” by Gillard’s comments on the tax.

Xstrata Plc welcomed Gillard’s willingness to engage in talks, and said they must be concluded as rapidly as possible to avoid further damage to the mining industry in Australia, according to a company spokesperson who declined to be identified.

“The change of leadership may have a short-term positive impact on Australia’s currency and equity market,” said Paul Brennan, a senior economist at Citigroup Inc. “Our year-end market target for the S&P/ASX 200 Index remains at 5,500.”

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