6 minute read
Iron Ore Wanted
WANTED: W. AFRICAN IRON ORE
China’s push to move away from reliance on Australian iron ore has a strong focus on tapping high quality deposits in Guinea. But this requires establishing and investing in the best route to market. Andrew Penfold assesses the options
China’s construction and heavy industries are dependent upon Australian iron ore and there is seen to be little chance of changing this – at least in the short term.
With political tensions rising in the Pacific the search for alternative sources is accelerating. Australian ore shipments to China increased by seven per cent in 2020 to around 713m tonnes with Brazil being the number two supplier at 236m tonnes.
These ores are high quality with iron content of around 62 per cent. Ore prices are still at very high levels and Australian capacity is virtually maxed-out – there are also supply issues with the number two provider Brazil. This has forced Chinese importers to turn to lower quality ores from India and place increased reliance on relatively lower iron content domestic supplies.
China needs new long-term supplies of high-quality iron ore and is accelerating efforts in this regard. This is a strategic matter and involves both the securing of the ore and – at least as importantly – the development of efficient export infrastructure. This means not simply a high-volume rail link but also the provision of adequate very deep water to handle the largest ore carriers.
Despite current high prices, iron ore is highly freightsensitive and – given the haul lengths involved – only the largest carriers will provide a long-term competitive CIF price, especially when FOB prices return to a more historically sustainable level.
GUINEA GETS GOING?
Against this background attention is focusing on the high grade Simandou ores in Guinea. The iron ore project was finally awarded to the WCS Chinese-Singaporean-Guinean consortium in November 2019. However, negotiations between partners have dragged on and these discussions are far from over.
The concession covers the development of Blocks 1 and 2 in northern Simandou, which reportedly comprise at least 2.4bn tonnes of high-grade ore. The shipping demand generated will reach at least 68 Cape Size shipments per annum. This is a truly massive infrastructure project and includes a 650km rail line to Matakong (south of Conakry) with extensive tunnelling required. It is still hoped to bring this on-line by 2025, but this seems extremely optimistic. The sheer scale of the investment would indicate that it can only really proceed with direct Chinese funding.
For the government of Guinea, the attraction of this development is obvious; not only will it grow a major new source of national revenue, but the rail corridor has the potential to act as an economic catalyst in a wider sense and play a major role in helping develop a backward part of the country.
Discussions are also being held with Rio Tinto, which is in possession of permits for Blocks 3 and 4 at Simandou, which are located at the southern part of the concession. This involvement has a complex history with Rio Tinto reportedly
8 If the shorter haul rail option via Liberia is to succeed, the rail link will need to be upgraded and extended and a new modern and effi cient Cape Size facility constructed
set to quit Guinea at one point as it sought to sell its shares to co-shareholder Chinalco, but this failed and the company is still in Guinea, although its strategy for the project remains unclear. It should be noted that addition of ores from Blocks 3 and 4 would positively impact favourably on development of unit costs for the new rail line and port.
The uncertainty has recently been further multiplied by the coup that took place in Guinea in August. The implications of this are far from clear, but must raise further concerns.
WHAT ABOUT LIBERIA?
There is a (much) cheaper option. Given the location of Simandou (and the somewhat smaller Niron deposits) use could be made of the existing rail line from the established Arcelor-Mittal workings to the port of Buchanan in Liberia. Initial estimates of transport costs place this at around US$2025 per tonne cheaper than the Guinean option to Matakong.
However, this alternative is not simple. There are existing export terminals in Liberia, but these are either at capacity (both at Monrovia and the existing facilities at Port Buchanan) or are too small and limited for suitable infrastructure to be developed. If the shorter haul option via Liberia is to succeed, the rail link will need to be upgraded and extended and a new modern and efficient Cape Size facility constructed at
…demand for iron ore from China has exploded ‘‘
Buchanan to meet the projected demand at an acceptable market price. Some detailed examination is underway into the costs and viability of different export alternatives here.
There are, generally, two options available for the export of iron ore here, i.e., barge and offshore transshipment to bulk carriers, or dredging to provide a sufficiently deep channel to allow the largest ore carriers to berth. Both represent expensive options, but these costs are very limited when contrasted with the alternatives.
Arcelor Mittall which also has a USD800 million plan to raise annual iron ore exports from Liberia, from 5mtpa to 15mtpa, has stated that this incorporates a provision for the installation of a second ship-loader at the port of Buchanan.
POLITICS VERSUS ECONOMICS
The massive costs involved in developing Simandou and getting the ore to tidewater has seen the project languish now for several years. During this period demand for iron ore from China has exploded and this is reflected in its price. A long history of political and commercial manoeuvring has seen the project repeatedly stall and the clearly lowest cost Liberia routing fall into and then out of favour.
Development of these resources has proved highly problematic for several years with failures to agree on the very expensive rail link to tidewater and a new port development repeatedly frustrating development. The Liberia route is cheaper but clearly a less desirable outcome from the Guinean perspective. This has been a story that has been unwinding for at least ten years and is typical of such large-scale developments in Africa.
MISSING THE BUS?
These projects all remain highly dependent upon sustained demand from China and working out a competitive long term FOB price for Guinean ore (shipped by either route) may well be problematic. There is a school of thought that China is reaching ‘peak steel’ and, indeed, its construction sector is extremely vulnerable to any economic upheaval. With this in mind, the Chinese government is already seeking to limit steel output and are moving to cap production with environmental concerns also cited. As an example, the Shagang Group, the world’s fourth-largest producer has said it is curtailing production and overseas sales to comply with government instructions.
This is raising expectations that activity will need to be restricted significantly through to the end of the year and then beyond. At the same time, China has unveiled more measures to curb overseas shipments, with the aim of using lower exports and inventories to offset supply shortfalls. These curbs are weakening ore demand and prices, and are harbingers of some restructuring.
If this interpretation is correct, then a significant readjustment in Chinese ore demand – and a weakening of prices could well result in a further delay for Guinean exports.
There is a danger that continued prevarication will see a further cyclical delay in development with underlying demand much lower than anticipated. The question is – how do you develop and bank a port with all these variables in play?
8 The Trans-Guinea
proposed rail link and the via Liberia option – the latter can deliver a lower per tonne export cost but there are other considerations that have an infl uence
8 The Simandou
