Business News

The two big issues for the week just gone were the replacement of the RSPT with the MRRT — mineral resource rent tax — and slowing down of the US economy. This of course brought double-dippers out in force but as usual these merchants of doom are acting more on speculation than fact.

For those worried about the US going into recession again, JPMorgan economist Michael Feroli can’t see the double-dip happening but has peeled back his growth forecasts. The June figure drops back from four per cent to 3.2 per cent and the September quarter number goes from four per cent to three per cent.

Given these new slower growth forecasts and given that stock markets try to take action six months or so ahead of reality, then the sell off which started mid-April could have been in anticipation of these growth forecast downgrades.

Euro-issues

Certainly the European problems haven’t helped global growth and it has weakened the euro and boosted the greenback, which doesn’t do any favours to US economic growth.

That said, David Darst, the chief investment strategist for Morgan Stanley Smith Barney, says the group’s economists have, wait for it, upgraded global growth from four per cent to 4.8 per cent and possibly going to five per cent! The lower euro would help European growth and they must believe in the China/Asian good growth ahead story.

And while on Europe, a heartening banking development largely went unreported, which should have been.

Last week, many banks were scheduled to pay back loans to the European Central Bank totalling 442 billion euros. Now 57 per cent of the banks rolled over their one-year loans but 43 per cent did not and that means around half of the banks did not need emergency funding or they could borrow it from other banks, which think that their balance sheets are sound.

On the RSPT becoming a MRRT, the conclusion is that the tax has become less draconian. What surprised me was that the take from the big miners over two years has only fallen from $12 billion to $10.5 billion but the changes to the effective tax rate as well as the concessions must prove good for resource share prices.

• The tax rate goes from 40 per cent to 30 per cent.
• But with the 25 per cent extraction allowance the effective tax rate of the MRRT is 22.5 per cent.
• The tax won’t kick until around 12 per cent profit is made instead of five per cent. (That is, the bond rate plus seven per cent.)
• The 40 per cent tax refund on mining investments is gone.
• The oil and gas industry now comes under the 40 per cent petroleum tax but this tax is better than the RSPT.
• This tax has more concessions and Santos’s net present value will drop by only two per cent as a consequence.
• Total tax for a company such as BHP has gone from 58 per cent to 43 per cent, according to analysts.
• BHP’s value will fall by two to three per cent when it would have been 12 per cent under the RSPT!
• Fortescue Metals has gone from 20 per cent loss to under 10 per cent.
• Rio’s value fall will be six to seven per cent compared to 16 per cent!
• Only coal and iron ore mines pay MRRT.
• Other metals won’t pay the tax — nickel, copper, gold, uranium, etc.
• Small mines with profits below $50 million won’t pay MRRT.
• But state royalties will still be paid.
• Company tax will now only be cut from 30 per cent to 29 per cent.
• The super boost from nine per cent to 12 per cent stays.

The final matter to consider is what will Tony Abbott do if he is Prime Minister some time this year. He will the axe the tax and that would be good for resource share prices.

These Gillard changes should help share prices especially when you consider the changes in value for the companies but we might need to see some better news reported from Europe and the US.

Look for good news

Maybe company earnings starting in mid-July could be the market starter for a nice bounce. Darst is a believer in this positive story.

One final point needs to be made. Some 125,000 jobs from non-farm businesses were cut in June which was 10,000 more than tipped but the unemployment rate fell to 9.5 per cent from 9.7 per cent and it’s a psychological plus even though it was not created by a surge of job creation.

Manufacturers actually hired 9000 more workers but construction lost 22,000. The big drop was because Census workers’ contracts ended and this meant 225,000 temporary workers lost their jobs. However, 83,000 workers in the private sector found work.