Competition and Regulation

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Competition and Regulation

Introduction

Australia’s mining industry has been flourishing in the last few years and has made significant contributions to economic growth. The Minerals resource rent Tax is a taxation strategy imposed by the government on the firms in the coal and iron ore mining industry that register profits greater than $75 million. Industry regulation has many impacts not only on the industry but also on the country’s economy. While regulating the mining industry protects the country’s environment it also has a great impact on income generation. It affects National output hence leading to a fall in GDP. The GDP value falls in this case because of the five percent contribution by the mining industry. A fall in the prices of iron ore in the industry further aggravates the situation since firms in the industry will register lower revenues than before hence lower profit margins. The 30% tax levied on these lower profits might lower the motivation to produce more in the industry leading to further fall in general industry output and consequently lower GDP.

The selective structure of the taxation strategy encourages unfair competition. Firms having a profit turnover less than the threshold covered by the MRRT will have undue advantage over those that have to pay the tax. They will therefore incur less production costs in the process than the other firms will. In terms of competition, companies that pay the tax are inhibited from producing more and pursuing further production objectives (Fieldstein, Hines & Hubbard, 2007). The overall general effect of the MRRT is retrogressive; the tax will lead to higher costs causing a reduction in output by the industry subsequently leading to a fall in the contribution to GDP.

 

 

Industry Structure

The structure of an industry can be identified mainly from its competitive environment. The market structure is an efficient way of describing Australian industry. The Australian mining industry is a typical example of oligopolistic competition. The industry is one of the largest suppliers of minerals in the global market. The industry ships approximately one million tones of iron ore daily and 300 million tones of coal annually to international markets (Healey 2012). The industry is a type of oligopolistic competition with few mining firms. International and local buyers of minerals are free to purchase the minerals they want with no restrictions. The industry regulatory mechanisms do not hinder free buyer seller interaction. Another feature of oligopoly exhibited by the industry is the difficult entry of new mining companies in the market. Entry and exit in the industry is costly and restricted. Mining firms can sell their mineral products in the market freely at competitive prices. Many mineral companies in the Australian mining industry sell freely without restrictions such as BHP Billiton and Rio Tinto. Mineral products are homogenous or slightly differentiated typical of oligopoly. The super normal profits that other companies receive result from the oligopolistic competition.

Identifying the market system and the various forces that affect its daily functions is important in describing the impact of MRRT on the coal and iron ore mining industry. This description system takes into account the various competitive forces of the market as described by Porter (Wilkinson, 2005). The competitive forces model involves the assessment of threats and opportunities in the mining industry and develops knowledge of the market structure of the industry. The five threats in the Australian market given its oligopoly structure include the threats of entrants. Firms in the industry are wary of international mining firms that are potential entrants in to the market. Secondly, the bargaining power of suppliers and buyers is significant in the industry particularly given the competition existing among different firms in the industry. Profit maximization is the objective of the oligopolistic firm thus, they have to quote prices that enable them to reduce costs and maximize their revenues (Wilkinson, 2005). Although there are very few substitutes for mineral products, the potential development of substitutes brought about by increased technological advancement threaten already established firms. Coal miners for instance, have to contend with the increasing sources of alternative energy. The oligopoly of the Australian mining industry thus enables greater profit maximization potential.

Regulation

There are many regulations in the Australian business industry meant for the mining industry while others regulate general businesses. Implementation of the mining regulations occurs at the state and the regional levels. States have their own laws relating to mining operations while each territory also enacts laws to guide the process of mining. There are also commonwealth laws affecting the Australian mining industry. Commonwealth legislations concerning corporate bodies, firms and international trade also have an effect on the Australian mining industry (ICDR, 2013). States have a mining Act that helps in regulating the mining industry. There are many other regulations within each state that aim at protecting mineworkers, safe mine operations, better terms of work and protecting the environment. There are several regulations in place to govern the operations of businesses in Australia. The coal and iron ore mining business especially falls under certain regulatory categories outlined by the Australian taxation agencies. Since the Australian market is an example of oligopoly, there is likelihood that mining firms can merge to amass market control. Control of firm mergers in the Australian market is the ACCC’s responsibility (Australian Competition law, 2013). The ACCC controls unfair practices in the market that might hinder competition or render other firms in the particular market unable to participate in healthy competition. Thus, mergers that impede competition in the market are illegal according to Section 50 of the competition and consumer Act 2010. The introduction of the Super profits Act or the MRRT in the mining industry poses a significant policy challenge on the government as well as a challenging business option on investors and current firms in the mining industry. The 30% corporate tax on firms that register super profits regulates mineral exploitation in the Australian mining industry (Healey, 2012).

Factors Affecting the Industry

Several factors affect the functioning of the Australian mineral market. Among the most significant factors affecting the market are government regulations. Government regulations either can negatively or positively affect the operations of mining companies in the industry (Freebairn & Quiggin, 2010). Government taxation policy for instance the MRRT, have a significant impact on mining operations. There is likelihood that the MRRT will slow down the mining activities of both the coal and iron ore industries which having been performing well recently. International investors with interests in other countries might decide to scale their mining operations and divert their resources to other countries. High corporate taxation raises the cost of production therefore reducing the firm’s profit margin. Lower profits especially in the wake of an all time high mining boom have adverse effects on investors and firm’s production motivation. The mining industry is a competitive international venture. Local mining firms therefore compete with international firms in seeking international markets. When local conditions affect the ability of the firm to compete in international markets then international firms have an upper hand in the pricing of mineral products. Increased taxation hinders the ability of local companies to quote competitive product prices in the market. The high production costs brought about by the tax levied reflect in the final price of the product (Caldewell, 2008). This makes local firms quote higher prices for their products than other competing firms. Such a situation has two implications: first, the firm may not sell its product in the market and it may have to quote a low price, which may mount to losses on its part.

Impacts of the Super Profits Tax on the Industry

The MRRT has significant effect son the performance of firms in the industry. The first possible impact of the taxation policy on the industry will be an increase in the total cost of production incurred by the taxed firms. The total costs refer to the costs incurred by the firm in production. Costs incurred by the mining firm feature in the calculation of the selling price of the final product. Higher total costs lead to higher selling prices while lower total costs lead to lower selling price. The selling price is equivalent to the price the good or service sells at in the market. In the case of the Australian mining industry, the selling price will be higher in firms levied with the MRRT. The graph below illustrates the effects of taxation on the prices of goods and services produced in the industry.

The figure above shows the effects of a tax increase on the costs incurred and subsequently the prices charged to the customer. It relates what taxation does to the value of the product and the value received in a case where the producer (mining firm) does not increase prices. The dead weight notion is the difference in the value of the product the customer receives and the money the seller gets in return. Qe and Pe are the equilibrium quantity demanded and Price charged on a mining product respectively. The green-colored line represents the cost of the goods before tax. Qt-Pp is the equivalent price and quantity of the product value the supplier gets before tax. The red line shows the combinations of price and quantity after tax. Pc-Qt is the combination of both price and quantity equivalent to the value the mining firm gets after the MRRT. The blue line is a representation of the value of the product the customer gets. It is important to note that the customer pays a price lower in relation to the value of the good they receive. The blue shaded region is the dead weight value representing the costs of taxation brought about by a reduction in the amount received by the seller in relation to the value the buyer gets. In conclusion, the buyer receives a high value product at a cost that is not equivalent to the cost incurred in producing the product. This necessitates an increase in prices to equate the value of the product to the price the customer receives.

Another effect of the MRRT on the mining industry is its effect on competition. Small-scale firms that do not achieve the $75 million profit threshold do not fall within the tax bracket of the MRRT. Taxation hurts the competitive performance of firms within a particular industry (Cordes, Ebel & Gravelle, 2005). Thus, the selective policy of the MRRT gives such firms undue advantage over their counterparts. The tax lowers the profit margin of the firms sometimes even though the firm has invested a lot of money and equipment in the mining process compared to the other firms. Smaller firms have undue advantage over larger firms because they enjoy a larger proportion of their profits, which they use in more investments or greater promotions. The tax therefore has a negative effect on competition in the industry and the international market (O’connor, 2004). For firms in the mining industry seeking to maximize profits, dealing with international competition and gaining control of the market is an important objective. Mining is a venture with identifiable rigid markets. The flexible market demand and the many sellers in the market enhance competition and firms must brace themselves with strategies that will sustain them in the tough market. Competition therefore affects the mining industry in a significant way. Taxation puts local companies at a disadvantage in both markets.

Conclusion

The Australian mining industry is one of them highest contributors to mineral products in the world market. Most Australian mining companies compete against each other and with other companies in the international market. The recently introduced MRRT on companies with profit margins higher than $75 million dollars has a great impact on the performance of the companies within the industry. The oligopoly structure of the market makes it more competitive within the country for these companies to survive given the higher cost incurred. The MRRT super profits tax therefore greatly affects the competitive ability of companies while at the same time affecting their profit margins.

 

References

Australian competition Law. (2013). Mergers. Retrieved from http://www.australiancompetitionlaw.org/law/mergers.html

Caldewell, T. B. (2008). Taxation: 21st century issues and challenges. New York: Nova Science Publishers.

Cordes, J. J., Ebel, R. D., & Gravelle, J. (2005). The encyclopedia of taxation & tax policy. Washington: Urban Institute Press.

Feldstein, M., Hines, J. R., Hubbard, R. G., & Conference. (2007). The effects of taxation on multinational corporations. Chicago [u.a.: University of Chicago Press.

Freebairn, J. W., Quiggin, J., & University of Queensland. (2010). Special taxation of the mining industry. Brisbane: Risk & Sustainable Management Group.

Healey, J. Ed. (2012). Australia‘s mining boom. (2012). Thirroul, N.S.W: Spinney Press.

Hunt, M. W. (2009). Mining law in Western Australia. Sydney: Federation Press.

ICD Research. (August, 2011). Mining in Australia to 2015 – Industry Dynamics and Competitive Landscape: Market Profile. Retrieved from http://www.researchandmarkets.com/reports/1874072/mining_in_australia_to_2015_industry_dynamics.pdf

MacConnell, C. R., Brue, S. L., & Flynn, S. M. (2012). Economics: Principles, problems, and policies. New York: McGraw-Hill/Irwin.

O’Connor, D. E. (2004). The basics of economics. Westport, Conn: Greenwood Press.

Oleynik, I. S. (2005). Australia: Mineral & mining sector investment and business guide. Washington, DC: International Business Publications.

Tucker, I. B. (2010). Survey of economics. Mason, Ohio: South-Western.

Wilkinson, N. (2005). Managerial economics: A problem-solving approach. New York: Cambridge University Press.

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