Closely linked to the European slide has been a significant fall in most commodity prices. This is a fact that seems to have eluded participants in the Australian tax debate – though perhaps not for much longer.

Eventually, someone will wake up and notice that the $A9 billion-a-year “golden egg” the Australian Government hopes to extract from the Golden Goose called the mining industry has developed a somewhat rotten part in the form of declining prices.

As anyone who remembers the famous cartoon about the Curates Egg will know you can’t have an egg that is “good in part”. It is either rotten, or not.

For Australia’s Prime Minister Kevin Rudd, and his top Treasury man Ken Henry missing profits might become a very serious issue. Far more serious than the speed at which their original arguments in support of a 40% super-tax on profits have been exposed as empty public relations spin of the worst kind.

Dryblower will not bore his reader with a recitation of the arguments about the stupidity of a super tax on mining. We’re all sick of a process that largely involves the mining industry tossing up sensible arguments as to why it will not work, and the government replying with increasingly illogical spin.

What’s more useful in the great tax debate is to consider these two questions: what’s happening to commodity prices, and why? And, what can the mining industry really do to win the day?

The first fact (as opposed to spin) is that the copper price has fallen over the past six weeks from about $US3.60 a pound to its latest price of $US3.10/lb. That is a 14% fall by a metal generally seen as a bellwether of economic activity and overall demand for commodities.

Nickel has performed a similar trick, falling from about $US12.20/lb to $US9.70/lb, a 20.5% decline which, at any other time, would have been described as a crash.

Other commodities have also been diving over the past few weeks. Oil has dropped from more than $US85 a barrel to little more than $US71/bbl, a 16% fall.

There is a pattern (and a powerful reminder) in those figures. The pattern is a direct reflection of global economic uncertainty accompanying the crisis in Europe where country after country is sliding into negative growth (shrinking!) with no obvious way out.

Quite simply, the crisis in Europe is the outworking of the drift in wealth from the western world to the eastern world (China and India). However, it has the potential to derail that shift because it is the combination of European and US demand for cheap manufactured goods that has underpinned the Asian tigers.

This is complicated stuff and no-one, especially Dryblower has the foggiest as to where we will end up.

But, what is obvious is that the world still has a long way to go before it emerges from the global financial crisis with the European meltdown taking over from the US sub-prime disaster.

What next? Well, why not a significant slowdown in China as its exports slow down and social unrest increases. That might sound far-fetched, but so did sub-prime and the bankrupting of Iceland, Ireland, Greece, Spain and Portugal.

For Kev and Ken, the brains behind Australia’s mining sector super tax, events on financial markets of the past few weeks have the potential to do them far more damage than the name calling we’ve heard so far.

Their problem is that somewhere in the Australian Treasury is a computer model that assumes steadily rising commodity prices, which will deliver the super profits for mining companies, and then the super tax for government.

But, like all computer models the one being used by Treasury is nothing more than a series of best guesses, and about as reliable as examining the tea leaves in Kev’s morning cuppa.

It might be Dryblower’ wishful thinking but he reckons that sometime over the next few weeks the Australian mining industry will recognise the power in its hands to totally destabilise Kev and Ken.

That will be achieved by pointing out the bleeding obvious, namely:

• Commodity prices are falling not rising which means profits are shrinking;
• Europe is likely to spend years in the sin bin for pretending that a comfy lifestyle does not require hard work; and
• High taxes in a falling price environment lead to mine closures and job losses.

Boiled down, the price slide and the crisis in Europe means that the scene has been set for words in the Australian tax debate to be replaced by action with those first job losses likely to be the galvanising event that will take the tax debate to a new level.

*Dryblower is a weekly column on ILN’s sister publication MiningNews.net.