Miners Make Merry in Davos

January 31, 2012

It’s the end of January, and the newspapers are full of the wise words of the business elite gathering in Davos every year to solve the world’s problems.  Outside the merriment of cocktail parties and catching up with old friends, serious business is also being conducted: nothing less than “improving the state of the world,” according to the mission statement of the World Economic Forum.

But this year some of the participants are not in Davos to improve the state of the world but using this platform to advance their own commercial interests. At a meeting held on January 30, the world’s major mining companies got together for a concerted attack on what they called “resource nationalism.”  Among them were Anglo American, Rio Tinto, Glencore, Codelco and Rusal.

They complained that governments kept changing the rules on how mining companies were taxed. Led by Australia, governments of resource-rich countries belatedly realized that the value of mineral resources fluctuates, and when the market is on a high, companies reap super profits. This has nothing to do with the efforts of the mining company, just good dumb luck. This led to the simple proposition: as a resource that belongs to taxpayers, why shouldn’t they share in the benefits of such rises?

Mining companies are obviously worried that once a resource supertax succeeds in one country, it will surely spread to others. Globalization was never supposed to work like this, and mining companies are now engaged in a fierce battle to ensure that governments do not conduct a “race to the top.”

To counter this threat, the miners head straight to their spin doctors, who have come up with what they hope will be a persuasive narrative. The issue has nothing to do with fairly sharing the benefits of rises in a resource’s value and everything to do with short-sighted nationalism, which will surely destroy the golden goose. This is what the miners meant by “resource nationalism.”

To support their position, the miners point out that before they start a new project, they conduct a feasibility study to address both costs and benefits. If they are suddenly lumbered with a new tax after mining commences, it will undermine the feasibility of the project and turn it into a loss-maker, resulting in uncertainty and reluctance by the mining companies to invest. The problem with this argument is that companies conduct these feasibility studies based on a notional resource cost, which is low. So a supertax does not upset these calculations, merely ensuring a fair allocation of profits between the owner of the resources – the taxpayer – and the company, which has a lease to exploit the resources.

What can we expect next? At Davos, the miners claimed that they will not conduct a coordinated campaign. Nevertheless, they hoped that each will adopt similar arguments against mineral supertaxes.  Such is the conduct of the modern cartel.

I’m reminded of Adam Smith’s warning: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

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