A tax won’t work (1)

President Marcos Jr. said in his State of the Nation Address that he would support the revival of mining. Despite what the activists proclaim, this is the right move to make. We have the minerals the world needs in ever increasing amounts.

The demand for nickel needed for stainless steel, and now the rapidly growing demand for it in lithium-ion batteries for electric vehicles and renewable energy (RE) storage batteries, and much else, is seeing growth according to a forecast by Fitch Solutions of global lithium production to nearly quadruple between 2022 and 2031. Meanwhile, demand for copper will rise by over 40 percent. Exporting these minerals, which we have, to a world in need, provides dollars for a government much in need of all the funds it can get its hands on. It also helps develop local communities with much of the infrastructure and facilities they need, and provides jobs where they are most needed.

So there’s a huge demand, but there’s equally a huge potential supply. We are in competition to be one of those suppliers, so we need to provide a competitive environment in how we treat the industry. In recent years, it’s gone from an accepted industry to one where there’s been a moratorium on mining permits and then an open pit ban, (a mining method used all over the world). While these have now been reversed, this flip-flopping puts into question the stability of our policies, and stability is critical to attracting foreign investments to such a highly capital intensive industry.

Now comes a move by Congress to increase taxes to include a 10 percent tax on export of unprocessed minerals in the hope it will force local processing to add more value locally. This would be on top of taxes that are already high, particularly on the FTAA mining permit applicable to foreign mining companies. That would certainly deter investment in the mines we need. I’d normally be much in favour of adding value locally. But then I looked at the details and realized it wouldn’t work.

Take nickel. Indonesia already produces one-third of the world’s supply of ferronickel required to make stainless steel. Its ore reserves are about four times higher than ours, and of higher average ore grade suitable for producing 300 series stainless steel. Ours, mostly, is only suitable for low grade (200 series) stainless and production of various types of ordinary steel.

Without going into too much detail, there are two types of nickel ore: Limonite and Saprolite. Limonite is found in the upper layers of a deposit, Saprolite below that. Saprolite has a higher nickel content, so processing produces more metal at less cost.

For Saprolite, we have no processing plant, and it’s doubtful there’s enough mineral reserves of sufficient ore grade to justify a plant. Processing would be by smelters which require more power than the hydrometallurgical process for limonite—power we don’t have enough of and which is expensive. A smelter also requires coking coal that we also don’t have. Burning coal, particularly low grade coking coal, is polluting, so you can expect activists to oppose it.

We already have two processing plants for limonite. And, yes, we would like to see more of these plants, but how do we make that happen? They are hugely expensive to build. The Taganito plant cost $1.7 billion. It would need a very large mine nearby, and an assuredness of constant supply for many decades to recoup the investment. The history of politics in this country does not give that assuredness. Who knows what the next president six years from now will decide is his/her stance on mining. Making it even less attractive to invest the incentives that would help attract such risky capital have been removed. To entice more plants of this type requires stability, and continuity of mining policies, a competitive tax structure and a decent level of incentives to attract foreign investments for such a capital-intensive project. We don’t yet have that. Once we do, then maybe we can see real growth in mining.

A 10 percent tax on exports won’t overcome these discouragements, it will just send investment elsewhere.

The BSP has a gold refinery, so there is no need for a surcharge tax on gold.

Next week I’ll discuss copper.

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