Metals Daily (21-May-2021): Tax hikes to imperil new mine investment

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Source: World Bank

A concise summary of what’s moving markets, the impact on base, precious and ferrous markets, including Theme of the Day.

What’s moving markets?

  • Global equities bounced into the green yesterday to halt a three-day losing streak, as risk appetite returned to markets following better-than-expected jobless claims numbers. The number of Americans filing new claims for unemployment benefits dropped by 34k to 444k in the week ending 15 May, a fresh 14-month low and below market expectations of 450k. As a result, both bond yields and the USD are slightly lower as safe-haven flows reversed.
  • The Fed’s latest minutes hinted at tighter monetary policy to come as the pandemic recovery gathers pace. The latest minutes indicated that some policymakers thought the conversations about scaling back the central bank’s $120bn in monthly bond purchases would need to begin as the pandemic recovery heats up. We should note that these minutes were taken before the disappointing April nonfarm payroll came out earlier this month and so the Fed’ s thinking may have changed since then.
  • Gold rallied amid USD weakness and falling Treasury yields, with the sell-off in Bitcoin embellishing its role as a safe-haven. Gold has played a crucial role as an inflation-hedging asset as investors moved to price in a roaring comeback for the US economy and increased price pressures. Other precious metals were higher with the exception of palladium which fell in sympathy with softer base metals prices.
  • Base metals remained under pressure with senior Chinese officials calling for commodity price rises to be constrained. China said it will strengthen its management of commodity supply and demand to curb any unreasonable increases in prices. Tin bucked the overall weaker tone, the fundamentals outside of China remain extremely tight, with little suggestion of prices coming off, according to the International Tin Association. Arguably, supply-side issues are likely to restrict the downside and amid headwinds in the short-term, the base metals complex looks likely to consolidate within fairly elevated trading ranges. Furthermore, if the mantra of “the trend is your friend” is true, then the price trend is still pointing firmly up, and dips should uncover buying interest from both physical and investor communities.
  • Comments from Chinese Premier Li Keqiang are largely thought to target the steel and iron ore markets. Authorities in China called for tougher oversight of commodity markets following recent price spikes and the harm this was doing to the economy. Steel and iron ore prices were weaker amid threats by Chinese policymakers to increase regulation to control further prices gains. Beijing has a lot of levers it can pull in a bid to rein in prices – like withdrawing liquidity from the financial system or rolling back fiscal stimulus. More precise measures for individual commodities, such as inducing additional supply or releasing strategic stockpiles, are also likely to be weighed by policymakers.

Theme of the Day: Tax hikes to imperil new mine investment

  • At a time when demand is rising strongly potential tax hikes in South America and resource nationalism elsewhere could make new mine investment unattractive. Copper and zinc were in the spotlight as tax hikes are being proposed in major producers Chile and Peru, where left-wing politicians are gaining support. Between them, Chile and Peru are home to 7 of the world’s top 10 mines.
  • BHP’s CEO said that that the world will need more than twice the amount of copper than it used in the past three decades if it is to hit Paris Climate Agreement targets in the next 30 years, according to Fastmarkets. “Government stimulus and pro-growth agendas, which are expected to remain in place for an extended period, are expected to lead to robust growth, a lift in inflation and solid demand for mineral resources,” he said. “This is occurring at a time when our industry’s capital discipline and decline in exploration success over a number of years mean there are fewer high-quality growth projects in the pipeline to meet this demand,” he added.
  • Peruvian elections are scheduled for June where left-wing candidate Pedro Castillo is now leading his conservative rival, Keiko Fujimori. Castillo has pledged to draft a new constitution, giving the state more control over the economy, but has backed away from proposals to nationalize companies. The left-leaning Peruvian presidential candidate has proposed a 75% tax on copper sales if elected next month, a proposal that mirrors some of the more radical ideas circulating in Chile as well. This would endanger the viability of mining operations in both countries. Chinese investment in Peru alone has topped $15bn over the last decade.
  • In Chile, the country’s lower house approved a flat 3% levy on both copper and lithium sales and also voted (by 78 to 55) to impose progressively higher tax rates on copper depending on what copper prices are doing. Proponents of the new taxes counter that the country would reap $7bn a year that could be spent domestically. The bill now goes to the Senate, but even if it were passed, the government is planning to use legal manoeuvres to block its passage as it opposes the measure altogether. If approved, the new legislation would take effect in 2024. Chile’s mining association, Sonami, said that around 25% of Chile’s copper output would be at risk if the new tax goes into effect. Teck Resources said that it sees little risk of higher taxes in Chile due to a “stability agreement” that shields the company’s investments from higher taxes.
Source: World Bank

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