Australia abandons mining tax as China's resource demand weakens

Prime Minister Tony Abbott's centre-right government finally reached a deal on Tuesday with lawmakers in the country to scrap the controversial tax, which was seen as one of the primary reasons behind the downfall of the previous government.

The 22pc levy on coal and iron ore mining profits was introduced in 2012 by the Labor government of Julia Gillard to pay for pension reforms. However, the tax immediately caused a deep rift between Canberra, state authorities in Western Australia and the wider resources industry in the country.

The political deal to abolish the tax should help to boost London-listed mining groups such as BHP Billiton and Rio Tinto, which have significant operations in the country and are also cross-listed on the stock exchange in Sydney.

The share prices of both companies have suffered recently after the iron ore price fell around than 36pc so far this year to trade close to $87 (£52) per tonne. The iron ore price averaged $135 per tonne in 2013 and fell to an average of $111 per tonne during the first six months of this year. If prices were to stay at these depressed levels for the remainder of the year it could knock around $9bn and $7bn off Rio Tinto and BHP Billiton's revenues respectively.

To abolish the tax, known as the Minerals Resource Rent Tax (MRRT), Abbott's government reached a secret deal with the Palmer United party, which is fronted by the Queensland mining magnate Clive Palmer. The tax was originally tabled by Kevin Rudd who was ousted by his own party partly due to his proposals for the levy.

Despite the tax being unpopular with business, a big problem remains for Australia of how to generate more benefits for the economy while its so called "mining boom" lasts. Resources account for about 7pc of Australia's overall gross domestic product and an estimated 40pc of corporate profits in the country.

But the tax failed to generate much revenue for the government due to fluctuations in the price of key commodities and its demise could signal a broader decline in mining profits as demand from China weakens.

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