- The Brazilian legislature will soon decide whether to move forward with approving a new mining law that has been stuck in the National Congress since 2013, replacing the code that has been in place since 1967.
- In its current form, the new law would establish auctions for mining concessions and raise mining royalties on iron ore â€” a crucial mining export â€” from 2 percent of companies’ net earnings to 4 percent of gross revenue.
- Brazil’s economic downturn may force the government to compromise on additional taxation and other measures in the law that could hamper foreign investment.
After years of inaction, Brazil has signaled that it will soon move forward with its new, long-awaited mining code. A draft mining law has been stuck in congressional debate since 2013 but looks likely to move to the floor of the lower house of the legislature by the end of May. In its current form, the law would give the Brazilian government greater control over which firms are involved in Brazilian mining and would grant the government a greater share of the tax revenue generated by mining. While good for the government, the increased mining royalties, along with a new system of awarding mining licenses, will likely be politically controversial. Nevertheless, Brasilia cannot afford further delays in approving a new mining law.
Like much of LatinÂ America, Brazil has benefited from an increased global demand for minerals. From 2003 to 2013, Brazil’s mineral exports rose from about $8.3 billion to more than $43 billion at one point. These raw materials accounted for 17 percent of Brazilian exports by value last year, with iron ore constituting more than 70 percent of overall mineral exports. Most of the country’s efforts to develop the mining sector during this time went into modernizing the mining and transport infrastructure to secure exports of raw iron ore to a rapidly developing China.
In 2009, at the height of Brazil’s mining boom, Brasilia began considering new legislation to replace the country’s 47-year-old mining law. The new draft law, which was unveiled in June 2013, meant to secure a greater share of government revenue from the rapidly expanding mining market. However, the law is encountering strong resistance from both private firms, which are reluctant to cede more money to the government, and environmental activists, who oppose expanding Brazil’s mining industry. In addition, the country’s 2014 presidential election effectively suspended all discussion of the contentious bill and further delayed its passage. Since the election, the massive corruption scandal at state-owned energy firm Petroleo BrasileiroÂ (Petrobras) andÂ the president’s low popularityÂ have diverted the government’s attention away from congressional negotiations to pass the mining reform.
If passed, the law could significantly alter the way mining investors place their money in Brazil. Under the new law, the first-come, first-served system that the Brazilian National Mineral Production Department currently operates under would be replaced by a system of public auctions. In addition, the law would create a new agency, the National Mining Agency, to oversee and regulate the newly structured mining sector. Finally, royalties on iron ore would likely be almost doubled, with those royalties now being calculated on companies’ gross revenue rather than on net earnings, as is currently the case.
However, before the government can enact the bill, policymakers must first agree on the law’s intent. When it was first drafted, the proposed law was supposed to increase the government’s regulatory and fiscal control over mining but was drafted at a time of booming mining revenue. Now that Brazil faces reduced mining revenue â€” largely a result of oversupplied global iron ore markets â€” it is not in the government’s interest to pass legislation that will impose more obstacles on potential investors. If the government decides to move forward with the law, its approval and implementation could be lengthy because of the need to negotiate with private firms and activists.
For private firms, one area of concern will likely be the additional tax burdens contemplated in the law. In its current form, the law would raise the percentage of mining royalties that Brazil delivers to communities from which the minerals are produced. If this policy is implemented, Brazil’s royalty on iron would rise from 2 percent of net revenue to 4 percent of gross revenue. Such an increase would not necessarily impose prohibitive costs on all of the mining companies operating in Brazil, but its application could raise the country’s already considerable transportation costsÂ for some companies’ operations. Although the government would like to enhance the country’s rail and water transportation capacities â€” which would in turn bolster the mineral industry â€” it has so far been unable to secure the necessary investments. Introducing a new, heftier mining tax while these benefits are still unguaranteed could discourage some investors in the near term. Furthermore, the tax is particularly burdensome when paired with Brazil’s hefty 35 percent corporate income tax.
In addition to imposing heavier taxes, the new regulatory system could unintentionally cut out some potential investors. While an open auction system could limit opportunities for corruption in awarding mineral concessions, it would also probably benefit larger, wealthier mining companies that can outbid smaller competitors. This arrangement could be in Brasilia’s interest â€” maximizing the likelihood that large investments will enter the country â€” but it would also probably limit the pool of investors that could bid for any particular projects.
Finally, supporters of the new law will have to contend with the dynamic global mineral market, particularly for iron ore. Because of oversupply in the last several years, the spot price for iron ore has significantly fallen from more than $180 per ton to less than $60 per ton. Until recently, Brazil had pinned its iron ore exports to continued, linear Chinese demand. However, the sudden decline in prices aggravated an ongoing economic slowdown and brought the country into near stagnant growth in 2014. Since then, Brazilian iron ore revenue has declined by $16 billion from its 2011 high to $25.8 billion last year.
While Brazil’s government is hungry for fiscal revenue â€” and in the midst of an economic slowdown and expected contraction this year â€” there will also likely be pressure on President Dilma Rousseff to eschew measures that could affect the country’s global competitiveness. Consequently, if the law proceeds onto the lower house floor, it is likely that changes to its tax structure will be made. Indecisiveness from regulatory agents have already hurt Brazil’s global standing â€” authorities suspended the issuing of permits from 2011 to 2013 in anticipation of the country’s pending mining legislation. If Brazil is to significantly enhance its mining sector, policymakers must instill some regulatory certainty, whether in the form of the law’s approval or scrapping it completely.
The Brazilian government will have to move carefully, yet relatively quickly, on the mining law. Uncertainty surrounding Brazil’s mining reforms have already probably cost the country valuable investments. However, with Rousseff’s approval rating in the mid-20s, the president is unlikely to take the lead on controversial legislation that could invite more political criticism or protests against her government. Rousseff probably wants to pass the law in its originally drafted form, but it is more plausible that policymakers, business leaders and activists will have to compromise with one another to reach a final deal. The sooner a new mining law is passed, the sooner Brazil can begin mending its economy, generating government funds and restoring its global competitiveness.