As An Excise-Taxing Africa Now Demands A Piece Of The Commodity Pie, Commodity Prices Are Set To Jump

With insolvent governments across the world preparing to tax the living daylight out of each and every profitable "externality", also known as any industry with abnormal profits, it was only a matter of time before the perpetual laggard, Africa, caught on, only in this case it is implementing "excise taxes" first. Bloomberg reports: "African countries are moving to grab a bigger slice of their commodity wealth as rivalry for the world’s remaining reserves of iron ore, uranium and gold sap the bargaining power of companies such as Anglo American Plc. Tanzania’s proposal to study a so-called super tax on mines sent African Barrick Gold Plc, the East African nation’s biggest producer of the metal, to a record low in June. Ghana, Namibia, Guinea, Uganda, Mozambique and Gabon also are acting to increase their share of profits from mining." Translation: as the OPEC oil cartel dies with Saudi Arabia unable to balance its fealty to the US, and specifically Obama's reelection chances, with its requirement to act as a monopolist, another one is born, and one whose cartel behavior will see commodity prices surge as soon as the market realizes that producers are forced to pass on incremental taxes to end consumers. Ironically, what will be the West's loss, is about to become a windfall for the developing economies who are doing all they can to stock up their own commodity reserves, further shifting the balance of power from the US to emerging markets.

From Bloomberg:

The balance of power is swinging in favor of African governments as commodity prices soar and Brazil’s Vale SA (VALE5) and China’s Minmetals Resources Ltd. join Western companies bidding for contracts. At the same time, policy makers are looking to finance investment in roads, rail links and power supplies that they say is essential to maintain growth that has averaged 5.7 percent across the continent over the past decade.

“The fact that Chinese, Brazilian and Indian companies are becoming much more involved in the African mining space means that Western mining companies are feeling squeezed,” Chris Melville, a London-based African mining consultant at Menas Associates, said in a June 14 telephone interview. “When you have more suitors, you can afford to be a little bit more selective and a little bit more demanding.”

This is not just a vague warning. It is happening across the continent:

Companies may have little choice but to pay more. The copper belt running through Zambia and the Democratic Republic of Congo holds 10 percent of world copper reserves, while Congo alone has two-thirds of cobalt deposits. Botswana says it has 200 billion metric tons of coal reserves and Guinea is the world’s biggest exporter of bauxite, the ore used to make the main raw material in aluminum production. The continent also has some of the world’s richest seams of uranium, platinum and gold.

Kenmare Resources Plc (KMR), a Dublin-based producer of titanium minerals in Mozambique, dropped 8.1 percent yesterday after the government said it plans to revise the country’s mining law and will seek to give the state a share of projects in “strategic sectors” such as coal. Kenmare’s managing director, Michael Carvill, said by phone today that the plans won’t affect its existing operation in the southern African nation.

London-based African Barrick Gold slumped 7.8 percent on June 8 to the lowest price since the stock started trading in March 2010, after Tanzania’s planning commission recommended the government consider a super tax. The company said in a statement on June 9 that its tax obligations were fixed by existing contracts and could not be changed.

Worse, this scramble for excising is not isolated to Africa:

Countries outside Africa are also raising taxes. Australia estimates that its plan to impose a 30 percent levy on iron-ore and coal profits will earn A$7.7 billion ($8.2 billion) in its first two years, the country’s Treasury Department said last month. The tax, which will help pay for road and rail projects, is scheduled to start in July 2012 after the laws are passed by parliament.

Brazil is studying an additional tax on its most profitable mining projects, the newspaper Folha de S.Paulo reported on June 21, without saying where it got the information.

“There’s definitely more competition and the mining companies that want to be here in Africa in the long run have to revisit to some extent their strategy in terms of how they negotiate concession contracts,” Melville said.

And while customers of Western based mining companies are set to experience a pass through surge in prices as producers have no option but to offset this incremental taxation, China is profiting:

China Union Investment Ltd. is developing a $2.6 billion iron-ore deposit in Liberia, while Cnooc Ltd. (883) is helping to exploit oil deposits in Uganda. China also has a $6 billion deal with Democratic Republic of Congo to build infrastructure in exchange for minerals.

We expect it will take about 1-2 months before the realization of this latest unexpected event, whereby even lowly Africa is starting to flex its muscles, reaches the market and commodity prices react accordingly, resulting in another round of across the board inflation.