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Commodity trade: Where the scrutiny?


Stephen Grenville

12 June 2012 15:38

Australia came through the 2008 global financial crisis in fine shape and has gone on growing at a good pace in a world where this is unusual, almost unique, for an advanced country.

Even as commodity prices weaken, mining investment is running hot and profits are still growing quickly. You might think foreign investors would acknowledge the good performance and that Australia would be a favoured destination for them. But not, apparently, for Glencore, the world's largest commodities brokerage firm, which is about to become the world's fourth biggest minerals company (worth $90 billion) through a merger with Xstrata.

Australia like Congo and Kazakhstan

Speaking at a London dinner for miners, Glencore Chief Executive Ivan Glasenberg is reported to have likened investing in Australia to doing business in the Congo, Colombia and Kazakhstan.

To put this in context, you need to read the amazing history of Glencore (founded four decades ago by Marc Rich) as described in a recent Foreign Policy article by Ken Silverstein. Glencore should know about investing in the Congo and Kazakhstan, having large resource stakes in both countries. Apparently Glencore finds it easier to deal there than in Australia because, says Glasenberg, 'at least they need you'. Silverstein writes:

...Deutsche Bank identified as Glencore's "key drivers" of growth: copper in the Democratic Republic of the Congo, coal in Colombia, oil and natural gas in Equatorial Guinea, and gold in Kazakhstan. All are places with a heady, dangerous mix of extraordinary natural wealth and various degrees of instability, violence and strongman leaders. Glencore's experience and adeptness operating in these "frontier regions" and "challenging political jurisdictions" - Deutsche Bank's delicate euphemisms for countries known for corruption, autocracy, and human rights abuses - is central, the investment firm wrote, to Glencore's "significant growth potential."

Given that mining industry pressure succeeded in emasculating Rudd's proposed resources tax, leaving it with meager revenue prospects, Glasenberg's reported reference to 'Australia wanting to nationalise 30 per cent of their mines' seems a bit over the top. As well, the carbon tax makes Australia 'another country where you've got to make sure the rules aren't going to change on you'.

There are (at least) two policy issues here. First, is it in Australia's interests to have world commodity markets dominated by large players like Glencore? Second, is this sort of absurd language an acceptable form of dialogue in the debate between foreign investors and host governments?

Commodity prices

First, commodity prices. The former Swiss ambassador to Australia raised the need for international scrutiny of commodity price-setting recently in The Interpreter. If Glencore has doubts about investing in Australia, perhaps, in turn, we should have reciprocal doubts about Glencore. After all, Marc Rich did try to corner the world zinc market in 1992.

Glencore handles one-quarter of world commodity flows, controls half of internationally traded zinc and copper, one-third of seaborne coal, and accounts for 9% of the global wheat market. They are not end users of these commodities. Rather, they control the trade, hold strategic inventories and do the deals with the end-users.

If a foreign end-user sought this degree of control of an Australian mining enterprise, we would be reluctant to approve such investment, not for xenophobic reasons, but because it opens the possibility of distorted pricing contracts, transfer pricing and minimisation of royalty payments in Australia.

While the possibility of manipulation of world commodity prices is real, the merger of Glencore and Xstrata doesn't seem to undergo any scrutiny (as BHP and Rio would have undergone, if their joint venture on iron ore had gone ahead). Where are the European competition authorities and the Australian Foreign Investment Review Board in all this?

Tax and royalties

What about the second issue: taxation and royalties? Of course it's not just the Glencore chief executive who has raised the spectre of foreigners moving their investment to more profitable (and exciting) locales. Last year Tom Albanese, head of Rio Tinto, was reported as saying that Australia was his main sovereign risk concern: 'From my own perspective, this is my No. 1 sovereign risk issue on a global basis.' Yet as that Fairfax report went on to note:

Rio continues to operate in some of the most unstable economies in the world. Its Simandou iron ore project is progressing in Guinea, a country the CIA World Factbook says is in the grip of ''rampant corruption''. Mongolia, home to Rio Tinto's $5 billion Oyu Tolgoi copper-gold project, received a $236 million stand-by agreement last year from the International Monetary Fund to provide some financial stability. 

Mistakes can be made in either direction: the golden goose can be strangled, or our birthright can be sold for a mess of pottage. Over time, the balance may shift and require tax changes, just as there are changes in other forms of taxes such as income tax or the GST. Australia has turned out pretty well for Glencore, Xstrata and Rio. It's now about time to get the debate on mining taxes and royalties onto a more positive, objective and constructive level.

Australian governments, custodians of our mineral wealth, have a duty to negotiate the best deal for Australians. This means striking a sensible balance in dividing up the benefits of minerals between us as owners and them (mainly foreigners) as miners. This balance is not easy to strike, especially in a world where the uncertainties are great and the gestation and life of projects are long.

Photo by Flickr user stephenjohnbryde.