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Thursday, May 20, 2010 10:35 PM

Global Bust Round II; Australia Mining Contagion; Vindication for Steve Keen Coming; What about the Loonie and Australian Dollar?

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Another synchronous global bust is underway. It started in January with the Shanghai stock market and it has now spread to equity shares everywhere.

This review will focus on the commodity producers, especially Australia. Let's start with a review of the Bloomberg article Mining Tax ‘Contagion’ Set to Spread From Australia.

Australia’s planned 40 percent tax on mining profits has set a benchmark for other countries weighing higher levies, reducing earnings forecasts for BHP Billiton Ltd. and Rio Tinto Group and the attraction of mining stocks.

“It could create what the miners are now describing at a global level as a type of tax contagion,” said Tom Price, commodities analyst with UBS AG in Sydney, in an interview. “They might levy a new tax at the miners in Brazil. Canada is another mineral province and South Africa.”

BHP, the world’s largest mining company, Xstrata Plc and Rio said they are reviewing projects in Australia, the No. 1 exporter of coal and iron ore, after the government unveiled the tax this month, saying a country’s resources belong to the people. Citigroup Inc. Sydney-based analyst Craig Sainsbury said Canada, Peru and Chile may be next.

Chile, the biggest copper exporter, is proposing a temporary rise in mining taxes to help pay for earthquake reconstruction that may cost BHP, Xstrata and Anglo American Plc $1.2 billion in the next two years. Brazil, the second-biggest iron ore exporter, may tax shipments of the commodity or raise royalties, Energy and Mining Minister Edison Lobao has said.

The Australian tax plan is “global financial markets suicide,” according to Charlie Aitken, the executive director of Southern Cross Equities Ltd., the equal top ranked predictor of BHP’s share price performance of 17 analysts, according to data compiled by Bloomberg.

Mining companies’ earnings may be cut by almost a third when the tax starts in 2012, Moody’s Investors Services said this week. The tax would be broadly credit negative for the sector and raise uncertainty for some companies over the short- to-medium term, Moody’s said this month.

Nations that resist the tax urge may attract investment. South Africa taxes mining companies at 33 percent, Canada 23 percent and China 30 percent compared with a forecast 58 percent in Australia after the tax, according to Citigroup data. Canada’s Finance Minister Jim Flaherty said this month he’s opposed to raising taxes and the Australian levy makes Canadian companies more competitive.
BHP vs. Copper

The decline in mining shares is not completely related to the tax. Some of it is related to global economic weakness and falling commodity prices in general.

A few charts will show what I mean.

High Grade Copper Daily Chart

BHP Daily Chart

BHP peaked in early April, right along with the price of copper. Now, let's consider the Australian composite stock market index and the Australian dollar.

Australia ASX Index Weekly Chart

Australian Dollar Weekly

Note that the Australian dollar peaked along with the price of copper. However, the big slide did not occur until the "Super Tax" passed on May 2. A daily Chart shows this better.

Australian Dollar Daily

A reasonable conclusion is that the Australian stock market and Australian dollar are affected by commodity prices with an unknown kicker related to the "super-tax".

Given that correlation is not causation and also because there are timing issues, it is not reasonable to assign exact percentages to each.

However, it is certainly unreasonable to blame all of these recent declines on the mining tax alone.

Property Bubbles

While on the subject of commodity producing countries, I would be remiss to not bring up the subject of huge property bubbles in Australia and Canada.

Both are poised to pop. When they do, it is highly likely to further weaken the Canadian Loonie and Australian dollar.

As a word of caution, the weekly charts show plenty of room for further large declines.

Vindication for Steve Keen Coming

My friend "HB" comments:
The Aussie banks are so loaded with real estate loans, it's obscene and embarrassing to discuss.

Aussie real estate could fall 50-60% before the carnage is over.

Australian economist Steve Keen will be vindicated many times over but will not get credit because he missed the timing due to overt attempts by the Aussie government to reinflate the property bubble to keep the party going a little while longer.
Finally, the huge speculative infrastructure and property bubbles in China are due for an enormous spill. That too will weigh on commodity prices and in turn currency valuations of the commodity producing countries.

Global bust round II is now in progress. However, the declines have been extremely fast. We can easily see a relief rally at any time.

Mike "Mish" Shedlock
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