Friday, February 16, 2018

BWorld 185, Lower taxes via more mineral exports

* This is my article in BusinessWorld last February 6, 2018.

Countries that impose zero income taxes on their nationals are dependent on extracting and exporting their natural resources such as oil and natural gas. Qatar, Bahrain, Brunei, Kuwait, Oman, Saudi Arabia, and United Arab Emirates are examples of such countries.

Instead of minimizing the extraction of these fossil fuels (and keeping them in the ground, as advocated by environmentalist groups), these countries extract these resources big time, export them to the rest of the world, and sustain their governments’ economic and social programs without creating or imposing any income tax.

This is a lesson for the Philippines with an estimated $1 trillion worth of mineral reserves.

On the graph are data from the US Geological Survey (USGS)which indicates that worldwide, the Philippines has the 5th largest estimated reserves in nickel and 4th largest reserves in cobalt. Cobalt is largely used to produce batteries for electric vehicles.

The reserves/production (R/P) ratio is computed here, the ratio represents estimated number of years before the reserves are depleted on the assumption that both R and P numbers will not change, which is unlikely because modern and evolving technology through time will continue to discover bigger reserves, or improve the utilization of existing reserves (see table).

The Philippines’ R/P ratio of 21 years for nickel is short compared to global average of 35 years but longer than Indonesia’s 11 years. There is a need to continue exploration of other nickel deposits in the Philippines as well as optimize the recovery of this and other metals per ton of metal ores extracted.

Our R/P ratio of 70 years for cobalt is good, higher than the global average of 64.5 years.

As more countries demand more electric vehicles (cars, motorcycles, buses, trucks), the global appetite for cobalt will rise quickly. China is currently the biggest importer and consumer of cobalt as it aims to produce more electric vehicles in the medium to long term.

The rising demand for cobalt relative to supply is shown in its rising prices, currently at $36/pound, the highest since some 15 years ago except for 2008-2009 global financial turmoil where cobalt prices peaked at around $53/pound.

Nickel prices have declined to around $4/ton in 2015-2016, now recovering upwards at current prices of around $6+/pound.

So there are big potential for more investments, more jobs, more government tax revenues, from nickel and cobalt alone.

Then there are big potentials for copper and gold mining in this country — if the Tampakan and Silangan projects would push through. Tampakan, estimated to cost $5.9B in project development, will be the single biggest foreign direct investment in the Philippines. For its part, Silangan is worth about $2 billion.

In 2015, the Philippines produced an estimated 83.8 tons of copper metal content, and 20.6 tons of gold metal content. These are small amounts compared to the big global producers of copper: Chile 5,764 tons, China 1,710 tons, Peru 1,700 tons, US 1,380 tons.

Also in that year, the big gold producers were China with 450 tons, Australia with 278 tons, Russia with 252 tons, and the US with 214 tons.

The uncertainties in the mining sector continue to linger even after the Commission on Appointments has rejected former DENR secretary Gina Lopez in May 2017. The new Secretary Roy Cimatu has not yet formally lifted the closure orders for some mining firms and the debate on open pit mining still continues.

The big mining potentials of the Philippines on four metals alone — nickel, cobalt, copper and gold — when realized by removing the endless uncertainties and by relaxing the various anti-mining policies, will allow the country to significantly reduce income tax rates.

Government should have no “right” to confiscate plenty of resources from the pockets and savings of people and private enterprises, especially where there are plenty of private provisions of infrastructure via integrated PPP, private education, private health care, private housing, private security and peace and order.

Bigger mining revenues and mining taxes through lesser anti-mining policy uncertainties will be a key measure toward lowering income taxes, both personal and corporate, in the medium to long term.

No comments: