David Prosser: The miners fight back in Australia

Outlook Who will blink first in the battle between the world's largest mining companies and the Australian government? Xstrata upped the ante yesterday with its announcement that it is dropping investment plans for two mines in Queensland that would have provided more than 3,000 jobs. It says Australia's plans for a 40 per cent windfall tax on mining profits renders these projects uneconomic.

This is a fightback. Australia's government calculated that the miners would have no choice but to put up with its new tax. Unlike the banks, say, which have the option of decamping to a different jurisdiction if threatened with taxes they don't like, Xstrata has to stay in Australia if it wants to continue mining its resources.

True, up to a point. But mining companies decide whether to green-light investments on the basis of whether they expect to earn a sufficient return. With a much higher tax bill heading their way, the sums are less likely to add up – particularly at times such as now when commodity prices look as if they are coming off the boil.

Also, while Australia clearly has advantages over other countries with resources miners might want to tap – common language, good infrastructure, stable government and so on – those nations now have their own competitive edge, that their taxes are less onerous.

Australia's government does not have the mining industry over quite the barrel it had thought. The question ministers must ponder now is whether Xstrata is engaged in a bit of none-too-subtle posturing, or whether this is just the first of many dumped project by miners in the country. The miners need Australia, but they aren't going to accept a 40 per cent tax charge without putting up a fight.