The debate around Western Australian iron ore royalties has raged from the moment Brendon Grylls reassumed leadership of the WA Nationals from Terry Redman in August last year.

Conversation around Mr Grylls’ proposed increase to a lease rental fee paid per tonne of iron ore mined in WA 20- fold from 25c per tonne to $5 per tonne sparked passionate campaigns on both sides of the fence and appears likely to come to a head on March 11, when the state hits the polling booths to vote on the makeup of its next government.

Needless to say the WA Nationals won’t ‘win’ the election outright and wouldn’t harbour any ambition to do so. The fate of their ambitious lease rental fee increase rests in the performance of the major parties on March 11, and the parliamentary balance of power.

Such was the case in 2008 when a hung parliament resulted in a WA Nationals partnership with the Liberals and the negotiation of WA’s Royalties for Regions program, a WA Nationals initiative delivering significantly increased funding for rural areas of the state.

While both major parties have talked it down so far, should the balance of power again fall to the hands of the WA Nationals following the state election, the iron ore royalties platform would surely make part of any negotiation.

A change to the lease rental fee wouldn’t impact all WA iron ore operators as the fee is only applied after 15 years of operation at a site.

As it stands, the proposal would affect BHP Billiton, Rio Tinto and Cliffs Natural Resources with more to follow as tenures in the region grow longer.

A matter of perspective

Industry bodies have been quick to vocalise their disapproval for an iron ore lease rental fee increase, with the Chamber of Minerals and Energy WA spearheading a campaign against it for fears of its impact on the jurisdiction’s investment attractiveness and jobs.

In a survey conducted last year by Canadian think tank The Fraser Institute, WA claimed the title of the world’s number one mining investment jurisdiction, beating out Canada’s Saskatchewan and Nevada in the US.

According to CME WA Chief Executive Reg Howard-Smith, such competitive advantage would be lost with an increase to the lease rental fee, which the CME has labeled a $7.2 billion tax.

“The new tax will hurt, not help Western Australian regional communities,” he said in a media release.

“Western Australia would officially become one of the least attractive destinations for investment in the world. It would undo in one fell swoop the efforts of successive Western Australian governments of both political persuasions to develop the great iron ore province of the Pilbara.”

CME WA argues that adding to the already significant taxes imposed on BHP and Rio would make investment in WA less lucrative, and make the state’s iron ore royalties seven times higher than those in Brazil.

The sentiments of CME WA are echoed by Minerals Council of Australia Chief Executive Brendan Pearson.

“The Grylls tax would represent a gold-plated gift to Australia’s iron ore competitors, most notably Brazil,” he said.

“With iron ore accounting for 16 per cent of Australia’s export income, this tax would represent a massive self-inflicted wound on both the national and Western Australian economies.”

In keeping with these themes, rhetoric has been overwhelmingly negative from the majority of industry affiliated groups and figures, though former BC Iron boss David Flanagan told The Australian’s Andrew Burrell in October he had little sympathy for Rio or BHP because of their alleged tax avoidance methods and interactions with smaller miners on infrastructure.

While the industry has been overwhelmingly dismissive of the plan to increase the fee, early polling suggests the public has taken a more sympathetic view to any plan around it.

A survey of more than 1700 people conducted by ReachTEL late last year on behalf of The West Australian recorded support for the plan, with 45.4 per cent in favour, 31.5 per cent opposed and 23.1 per cent undecided.

Whether these early figures translate to votes on March 11 remains to be seen.

Professional opinions

Analysis commissioned by the Minerals Council of Australia and conducted by Deloitte Access Economics was critical of the proposal to up the lease rental fee to $5, saying the increase would not have the intended effect long term and could actually take the nation’s iron ore industry backwards.

Deloitte argues that while increasing the fee would increase the revenue it generates in the short term, the long game is less lucrative for the WA economy.

Deloitte’s report highlights the impact of GST distribution on the profitability of the fee to the state’s economy; a royalty raise would initially generate revenues of around $2.3 billion a year, but WA would be expected to see less than $300 million of that figure.

Long term impact on the nation’s iron ore sector were also raised. While most iron ore mines that have run longer than 15 years are likely to be lucrative operations with high profit margins, Deloitte said the likelihood was that towards the end of their lives, this margin would shrink and the fee more damaging, closing mines earlier, detracting new investment and costing somewhere in the order of 7200 jobs nationally over time.

These arguments were countered in a report by David Richardson from independent think tank The Australia Institute, which held the view that an increase to the iron ore levy would not be a bad thing for the state or nation in the short to medium term, and also picked apart perceived flaws in Deloitte’s argument.

Mr Richardson states that in the short term, miners impacted wouldn’t have incentive to change their behaviour as their costs are far lower than the prices received per tonne of iron ore.
“When and if the old mines become marginal there is more than enough time for a government to change the tax arrangements if it so wishes,” he said.

Analysis by The Australia Institute said if the additional state revenues generated by the tax were to be invested in infrastructure projects, an extra 4600 jobs would be created.

Whatever the case, there will be plenty of interested industry eyes on the outcome of the WA State Election in March and the influence of Grylls and his state Nationals thereafter.

Picture: Brendon Grylls The West Australian