Hunting the golden eggs’ goose

[] — IN A speech e-mailed to media last week by Rio Tinto, the firm’s CEO, Tom Albanese, spoke volubly of the importance of partnership, especially relevant given that he was in China’s Shanghai. It was in China where Rio Tinto had had employees tried and imprisoned for lifting trade secrets.

Less publicised by Rio Tinto, however, was Albanese’s later discussion, this time at a Credit Suisse conference in Hong Kong, where he railed against the evils of resource nationalism. “From a Rio Tinto perspective, we have to do a better job on the curse of resource nationalism,’ Albanese said. The company is fighting to keep its rights to part of Guinea’s Simandou iron ore concession.

CEOs of mining companies take big risks arguing against governments in whose countries they are being hosted, but resource nationalism is a growing problem, and not restricted to developing economies. Two years after first suggesting it, the Australian government seems to have settled upon a new federal tax, the Mineral Resource Rent Tax (MRRT), which now has some acceptance among miners.

Crucially, Australia has proposed crediting royalties miners already pay to the state against the new tax, making the tax more bearable. But its earlier, more stringent version saw mining firms threatening to withdraw fresh mining developments from the country.

Days after the watered down MRRT emerged, the Brazilian government was shown to be working on a plan to remove Roger Agnelli, CEO of Vale. Vale was privatised in 1997 and has generally followed its own path in terms of growing its business and finding customers, but its major shareholders are still predominantly in the Brazilian government, mostly through state-owned banking institutions.

“Governments want access in these difficult economic times to where the cash is gravitating.”

According to the Financial Times, the Brazilian government is critical of increased iron ore exports by Vale to Asia, and consequently of growing ship-building in that region, rather than in Brazil. There’s also about $3bn in unpaid royalties the Brazilian government says it is owed by Vale, a claim disputed by the company and which it will take to judicial review.

There are of course many other examples, not least of which is the hastily withdrawn claim by the South African government that it too was mulling fresh royalty taxes, only three years after promulgating its pretax based Royalty Act. Peru, Zimbabwe and Finland are all reviewing mining laws.

Of course the strength of the commodity sector is behind it. Governments want access in these difficult economic times to where the cash is gravitating.

Unless China’s gross domestic product growth were to fall off a cliff, the demand scenario for many of the world’s key commodities – copper, iron ore and now the coal markets in particular – are in good nick. Even uranium – notwithstanding the image war the nuclear industry is facing again. China annually transports about 3.3 billion tonnes of coal internally, which require diesel and infrastructure. It doesn’t have much present capacity to move more and therefore reliance on nuclear fuel is systemic.

It’s not all demand pressure, however. Economic stimulus of both the first and second quantitative easing (QE1 and 2) may have provided market liquidity, but investors seem to be taking a conscious decision to “sell’ dollars in exchange for commodities as it were – a decision informed by distrust among citizenry in the US Fed. It’s like a vote by investors against US authorities. As if further evidence of investment interest in commodity markets were needed (gold?), look to silver.

The silver market has, unlike gold, relatively strong industrial applications, but the US Mint reported last year a quadrupling in sales to 40,000 ounces, predominantly from retail sources. While this may be unsophisticated demand jumping on the latest bandwagon, the understanding is that it mirrors similar demand among more sophisticated sources elsewhere in world commodity markets.

Now there’s talk of a QE3. Some metals economists think the global economies can’t sustain themselves without additional monetary support. While this fear remains in the market, investors are likely to be risk averse to financial assets and positive on commodities. The irony is that the liquidity is doing a complete cycle, moving from government decree into financial markets back to government coffers.