- Project will help diversify China’s supply chain but won’t cut out Canberra completely, analysts say
- Australia is the source of about 60 per cent of China’s iron ore imports
The Simandou mountains, a 110km (68-mile) range deep in the interior of southeastern Guinea, is home to the world’s biggest untapped supply of high-grade iron ore, and China believes it could help cut its reliance on Australian imports amid trade tensions.
The huge project, which holds an estimated 2.4 billion tonnes of iron ore graded at over 65.5 per cent, could diversify China’s supply chain but may not cut out Canberra completely, analysts say.
Australia is the source of about 60 per cent of China’s iron ore imports.
Although the presence of commercial-scale high-grade iron ore was confirmed in 2002, the Simandou mine has remained undeveloped because there is no railway line to transport the deposits to the sea for export. The project is also mired in political uncertainty and legal wrangles, including disagreements over who will develop the iron ore deposit.
W. Gyude Moore, a senior policy fellow at the Centre for Global Development and a former Liberian minister of public works, said that although the Guinean ore was of the highest quality, “the problem has always been Guinea’s insistence on building infrastructure to accompany the extraction of the ore – the trans-Guinea railway and a deep water port in Conakry”, the country’s capital.
Private firms had repeatedly balked at the cost of the infrastructure versus the price of the commodity, he said.
But in 2019, a China-backed consortium – SMB-Winning – won a US$15 billion contract to develop blocks 1 and 2 of the development, after Israeli billionaire Beny Steinmetz ended a seven-year dispute with Guinea’s government by relinquishing his claims on half of the mine. Anglo-Australian mining giant Rio Tinto owns a shade over 45 per cent of blocks 3 and 4, while Chinese firm Chinalco holds just under 40 per cent and the Guinean government owns the rest.
The SMB-Winning consortium, which wants to ship iron ore from Guinea within five years, comprises Singaporean maritime firm Winning Shipping, Guinean-French logistics company UMS, Chinese aluminium producer Shandong Weiqiao and the Guinean government.
Baowu Group, China’s biggest steel producer, is also planning to invest in the mine, according to reports.
Last year, Conakry approved a plan by the SMB-Winning consortium to build a 650km railway and deep water port to enable shipments of the iron ore.
China appeared to support the Simandou project when the Ministry of Industry said Beijing would develop one or two significant overseas iron ore mines by 2025. In its latest five-year plan for the steel sector, China said its goal was to source about 20 per cent of its iron ore from its companies overseas.
Atilla Widnell, managing director of Singapore-based Navigate Commodities, said there was no doubt that “the escalation in Australian-Chinese political tensions has prompted China to accelerate its development of the Simandou iron ore project as a diversification play”.
“China feels that Australia has crossed a line with its political rhetoric and this is their attempt to put them in the naughty corner until they are ready to apologise,” he said.
At best, the Simandou mine had an annual production capacity of 200 million tonnes if all four blocks were operated concurrently, he said.
But while the asset was dubbed the Pilbara Killer, “it will never compete with the volumes produced by Western Australia of more than 800 million tonnes per year”, he said.
The Pilbara mines are owned and operated by Rio Tinto.
Unlike other commodities, “Australia and China are in a codependent relationship concerning iron ore, given that you have the world’s largest exploitable resource on the doorstep of the world’s largest consumer”, Widnell said.
Diplomatic relations between Beijing and Canberra have been strained since Australia called for an international investigation into the origin of the coronavirus.
Besides Guinea, there are alternative iron ore resources across Sub-Saharan Africa, such as Liberia, Mauritania, Sierra Leone and South Africa, but Widnell said none could match the scale of Simandou.
The New Tonkolili iron ore project in Sierra Leone, which is invested and operated by Chinese firm Kingho Investment Co, went into full-scale operation last month.
There are Chinese miners in neighbouring Liberia, and recently a consortium of three Chinese companies – Metallurgical Corporation of China, China International Water and Electric Corporation and Hunan Heyday Solar Corporation – signed a memorandum of understanding with Algerian National Iron and Steel Company to mine Gara Djebilet iron ore in western Algeria.
Analysts said that even with a massive amount of Simandou ore, China was unlikely to replace Australia as its largest source market but could reduce its dependency.
Moore said it appeared China’s need to end its overreliance on Australia trumped the infrastructure costs.
“It thus appears that the decision is as much driven by foreign policy objectives as they are by the desirability of high quality Guinean ore,” he said.
“I doubt China will completely abandon Australian ore. However, I believe they will reduce their reliance on Australia instead.”
David Shinn, a professor at George Washington University’s Elliott School of International Affairs, said that in recent years, China had been importing more than 1 billion tonnes of iron ore a year, of which about 60 per cent came from Australia and 20 per cent from Brazil.
“Guinea has high-quality iron ore reserves that experts say could reach 150 million tonnes of exports annually once they come on line. But this amount is well below what China now receives from either Australia or Brazil,” Shinn said.
“Collectively, it seems that African countries could only offset a modest part of any reduced imports from Australia. Larger beneficiaries would likely be Brazil, India, Canada and Russia.”
Erik Hedborg, a senior steel analyst at business intelligence firm CRU in London, said the iron ore market was mainly supplied by Australia and Brazil, which together accounted for more than 80 per cent of seaborne supply.
Africa accounted for about 4 per cent of supply, much of it coming from South Africa, he said.
Hedborg said the best-case scenario for Guinea ore would bring the projects to 150 million to 200 million tonnes per year of production, which would account for about 10 per cent of the seaborne market.
“Such a major addition would undoubtedly put pressure on iron ore prices and would make some of the higher-cost projects in the world uneconomical,” he said.
But the world’s dependence on Australian iron ore “wouldn’t change even if Guinea does manage to produce at a large scale”, he said.
Lauren Johnston, a research associate at the SOAS China Institute, said what was notable about Simandou was not just the quantity but the quality – ore that is higher grade than what China currently imports from Australia.
“This would allow higher-grade steel and less energy-intensive processing – both wins for China,” she said.
Source: South China Morning Post