BHP chief Andrew Mackenzie on how to trump Trump tax move

BHP’s chief has given Malcolm Turnbull the clearest possible indication of how to respond to the US tax rate cuts.

Andrew Mackenzie, chief executive of Australia’s largest non-bank company, BHP Billiton, has given Malcolm Turnbull the clearest possible indication of how to respond to the US tax rate cuts — provide depreciation and write-off incentives for new investment.

And my guess is that if the Prime Minister doesn’t listen to Mackenzie, Bill Shorten will.

I believe that reducing company tax in Australia is not only too complex given franking credits, but is politically impossible. The way ahead to match the US is via generous accelerated depreciation programs, which have been adopted in the past by both major parties to kick-start investment.

Clearly, it is BHP’s view that if Australia pursues that aspect of US President Donald Trump’s tax revolution, we will generate enormous investment to enable the country to be a major participant in the technology revolution.

In the historic 100th luncheon address to the Melbourne Mining Club yesterday, Mackenzie was asked about the impact of the US tax cut and whether Australia should follow.

He gave a broad approval to tax cuts and then focused on what really fascinated him about the Trump package — the generous write-offs of capital expenditure designed to boost American investment and enable the world’s largest economy to be a technology leader.

I must emphasise that the BHP chief executive did not give a specific instruction to Turnbull, but it was those depreciation/investment write-off provisions in the Trump package that excited BHP and clearly that is the tax strategy that will have the biggest impact on BHP’s investment in Australia.

The Mackenzie address unveiled a new approach to BHP’s long-term investments and explained where he believes the company will win from the trend towards electrification and renewables. But he also advocated a new approach to corporate responsibility by large companies led by BHP.

In terms of investment, Mackenzie set out this basic strategy: “Over the last decade our investment in infrastructure from port to rail and wash plants to crushers has positioned BHP and the country for generations to come.

“And in the coming decade our investment in science, technology, engineering and mathematics skills plus culture and technology will help us navigate a future filled with a wealth of possibilities.”

In another part of the address he said: “We have initiatives to integrate and automate operations to improve safety, unlock resources and create growth options.”

He cited the BHP precision mining project, which explores opportunities to maximise copper output and extend the life of the Escondida mine in Chile.

“We have trialled advanced sensor technologies throughout the extraction process to quickly and accurately analyse the quality of in-ground copper ores and so improve the quality and grade delivered to processing plants,” he said.

When asked how BHP was planning to gain benefit from the swing to renewables, Mackenzie did not hesitate. He believes that copper will be one of the great beneficiaries and he sees copper as the main BHP ticket to the growth from the swing to electrification and greater use of high technology, but he also mentioned nickel as a secondary beneficiary. BHP has the old Kambalda mine in WA.

BHP is planning a major copper investment at Olympic Dam in South Australia, with a massive expansion of underground mining and a new treatment plant.

Although Mackenzie praised the US capital investment write-offs, he did not mention BHP’s Resolution copper mine in the US (owned with Rio Tinto), which is currently mothballed.

The combination of the investment write-offs and the rising coper price will almost certainly bring Resolution back on the BHP/Rio investment agenda but is not going to rank before the investment in Olympic Dam.

Mackenzie believes that the re-engineering of society to make processes to use less carbon is going to require a huge amount of extra steel and other minerals. Indeed, the demand they create may cause revisions if the process is too fast. And, of course, BHP has massive investment in iron ore and metallurgical coal, which are essential for steelmaking.

A strong theme in the Mackenzie address was that part of the profits and rewards that will come from the big increases in productivity that will follow greater technology investment are going to need to be spread around the communities that generate the wealth.

He didn’t say this, but the clear indication was that not all the money would go to shareholders.

Basically, the corporate community is going to need to sell the benefits of its activities and that of globalisation to cement their role in the future. The BHP advertising campaign is part of that process.

This is not an area that many companies now think about, but given they are investing in labour-saving devices in a great magnitude, it is an issue that will need to exercise the minds of many more corporate boards, including banking boards.

Mackenzie did not talk about Australia’s energy policy, but he did open the way for much greater investment in water, food and manufacturing using high technology, and manufacturing and food are big users of energy.

The Shell group, after a long period of isolation in Western Australia, has become a sponsor of the Melbourne Mining Club as it seeks to re-engage with the Australian community. That is why my commentary on Shell’s decision to release a great deal more gas on to the local market from Queensland is of parallel importance to the Mackenzie address.

It is found on The Australian’s website under the heading “Arrow points the way for gas”.