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Mixed-bag Senate means unclear future for Australian miners

TheLiberal-National Coalition may have returned to government, but the diversemake-up of the new Senate could be problematic for Australian miners.

The Coalitionis approaching 29 seats in the Senate, while the Australian Labor Party has secured23 and is expected to gain one more.

Meanwhile,the rest of the Senate comprises the Greens, which could have up to six seats,Pauline Hanson's One Nation with one seat, Nick Xenophon's team with two seatsand another one likely, Jacqui Lambie with one seat and Derryn Hinch, who isclosing in on one seat.

Amajority of 39 is needed in the Senate to pass legislation, but the Coalitionwill only have up to 29 seats, which means they will need to rely on theminority parties to achieve a majority vote.

Whilethe Greens are already well known for their opposition to mining projects,Xenophon has proved himself to also be a vocal opponent of the industry.

InMay 2015, the Senator called for an independent inquiry into the iron ore sector after thebudget took an A$18 billion hit due to the falling price and by ChairmanAndrew Forrest that larger rivals BHP Billiton Group and were flooding the market.

Thepolitician also voted in favor of landowners having the right to say no tomining and gas exploration on their land.

Unfortunately,the recent Senate outcome gives the Coalition diminished political authorityand therefore Australian miners are likely to be in for an uncertain threeyears.

"Byand large the resources sector is likely to be pleased that the Coalitiongovernment has been returned, but disappointed that it has been returned withsuch a small majority in the House of Representatives and with what may be amore difficult-to-deal-with Senate than during the previous Parliament,"economist Saul Eslake told SNL Metals & Mining.

Oneof the implications is that the Coalition may not be able to deliver on itselection commitments, which include proposed corporate tax cuts.

"Asa result, aspects of the Coalition's election platform — such as the promised reduction in thecompany tax rate to 25% after 10 years, of which the resources sector wouldhave been one of the major beneficiaries — are now unlikely to be enacted intolaw," Eslake said.

"Theremay well be greater political uncertainty for mining companies flowing from theoutcome for the Senate, given that the Senate does have the power to disallowregulations promulgated by the government, e.g. on environmental matters, andto conduct inquiries into matters of its choosing, which can have the effect ofdelaying decisions.

"Theenhanced Senate numbers acquired by Nick Xenophon's team contribute to this,but are not the only factor in it."

However,May Zhong, a Melbourne-based director of corporate ratings for S&P Global,believes that the outcome of the July 2 Australian election is unlikely to haveany impact on the Australian resources sector and "all eyes are onChina" when it comes to the issues facing the industry.

"Idon't think in the near to medium term [the structure of the Senate] will be anissue," she told SNL. "In my view, I think the key factor that willaffect the Australian resources sector is China, in particular the demand fromChina and how sustainable it is."

Eslake,meanwhile, believes the Asian nation could be heading for a financial crisis inthe next two to three years, which could see the iron ore price fall below theAustralian government's predictions of US$44.20 per tonne for 2016 and US$44.80per tonne for 2017.

"Theiron ore price could hold up above the government's budget forecast throughoutthis year and into 2017, as a result of efforts the Chinese authorities havemade to ensure that Chinese economic growth reaches their target of 6.5% for2016," he said.

"However,my impression is that the way in which the Chinese authorities have mostrecently sought to shore up economic growth — by prompting Chinese banks toresort to increased 'wholesale financing' of their balance sheets in order toincrease lending to local governments and to nonbank financial institutions,who in turn lend to [state-owned enterprises], is increasing the risk of adomestic Chinese financial crisis at some point in the not-too-distant future.

"Ifthat turns out to be correct, then the iron ore price will almost certainlymove to and possibly below the government's current forecasts over this timeinterval."

SNL Metals & Mining is anoffering of S&P Global Market Intelligence, which is owned by S&PGlobal Inc.