Mining Industry

Topics: Mining, Tax, Investment Pages: 6 (2035 words) Published: January 16, 2012
Many factors in the macro-environment impact the development of an industry. These factors can by categorized as Political, Economic, Social, Technological, Environmental and Legal (PESTEL). Economic, legal and environmental factors are closely tied up and mostly controlled by the political factors. Political factors mainly refer to intervention of the government in the economy via introduction and amendments of various new policies and laws. The purpose of this essay is to explain how the mining industry faces an uncertain future in some parts of the world due to various political changes. Increase and unpredictable government intervention across the globe is adding further complexity to a sector that is already heavily laden with risk (Grant Thornton, 2011).

Minerals constitute the back-bone of economic growth for any nation and the entire world has been eminently endowed with this gift of nature. Primary activity of the mining industry is to extract the minerals resources from the Earth. The minerals are mainly extracted through surface mining and underground mining. Coal, iron-ore, aluminum, steel, copper, lead-zinc and other precious materials are some of the major minerals extracted from the earth surface. Around the world, most mining lands are national assets for the county. Hence, government intervention is inevitable.

In context of Michel Porter’s five forces for mining industry:

Rivalry: The mining industry faces a tough rivalry among various companies operating within the sector, due to fewer product differentiations and industry concentration. Substitute: Due to non-availability of any substitute for minerals and metals, mining industry is not faced by any threat from substitutes. Buyer power: Buyer power is boosted by the large size of the buyer and their financial strength (e.g.: car manufactures). However, the fact that metals and minerals are important to its users and the lack of product differentiation tends to weaken the buyers’ strength (Energy Business Daily, 2010). Supplier Power: Limited availability of suppliers and their importance to the industry increases the supplier power. Threat of entry: Threat of new entry is mostly negligible in this industry, mainly because of heavy capital investment and access to the natural resources which are restricted because of the natural distribution and strict laws and regulations (Energy Business Daily, 2010).

Government intervention in the mining industry includes direct and indirect taxes, royalty arrangements, nationalisation and economic empowerment policies, as well as regulatory compliance with environmental and other government standards and business criteria. A wide variety of government interventions pose a real threat to commodity prices, corporate valuations and, most critically, investment in the global mining sector (Grant Thornton, 2011).

“Government is taking a more active role in the way they provide access to national assets. Difficult obtaining permits, negotiating transactions and maintaining mining licenses is making it both more difficult and more costly to access resources” (Neven Hendricks 2011 cited in Deloitte, 2011:7). Government Interventions:

a) Taxation and Royalties:
Increase in taxation and royalties is one of the most important tool used very frequently by the government to increase its revenue. However, the increase in the taxation and royalties influences the growth of an industry due to reduction in the profit margins and ultimately reduces the investor confidence. In the era of current financial crises, the governments of various economies are looking to reduce their financial budget deficit by imposing new taxes and royalty fees on the mining sector (Deloitte, 2011). The heavy taxation will reduce the overall margins in the industry and will ultimately lead to diminishing rate of return on investments. The threat of additional taxation and royalty fee increase will...
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