Iron was supposed to change the fate of some of the poorest countries in the world, but a collapse in the price of ore means these nations may have to wait longer for this to happen

By Gavin du Venage, South African Editor

China is the wild card in the current high-stakes game of iron ore supply and demand, influencing strategies for the leading global producers and creating uncertainty for several struggling West African mines and projects. China is the wild card in the current high-stakes game of iron ore supply and demand, influencing strategies for the leading global producers and creating uncertainty for several struggling West African mines and projects. (Photo: African Minerals)

Some of the world’s best deposits of iron can be found in a zone that stretches across west and central Africa, where the very hills are blood red with oxidation. Guinea, Cameroon, Central African Republic and the Ivory Coast are some of the countries that were hoping a seemingly insatiable demand for steel from China would underpin their fragile economies.

As with other commodities, China was the story; a massive demand to feed its own need for manufacturing activities resulted in mining companies expanding operations to meet this growth. Especially aggressive were the Australians, with Rio Tinto and BHP Billiton pursuing mega projects in the Pilbara region of Western Australia.

But in 2011, China took a policy decision to transition from an export-driven economy to grow domestic consumption. This meant manufacturing for export was being reduced as the focus shifted to supplying Chinese consumers. As a result, iron ore demand began to stagnate.

Jim O’Neill, former chief economist at Goldman Sachs and the man who coined the term “BRICs” in reference to Brazil, Russia, India and China, said the era of double-digit growth for the world’s largest economy was over.

“We are looking at a completely different China from the one we thought we knew from the previous decade,” O’Neill said at the Mining Indaba Conference in Cape Town in February. China was aware, he said, that the financial crisis of 2008 was caused as much by the Chinese saving too much as it was by the Americans saving too little. This trend is reversing now as the U.S. is saving more while China is saving less. “Beijing wants people to spend more so that the country’s accumulated wealth can be shared more widely.”

According to Reuters, China is now producing 100 million metric tons (mt) more steel than it consumes a year. As stockpiles grow, the price of iron ore can only go lower. In 2000, the spot price of ore languished at around US$12/mt but, tracking China’s economic emergence over the next decade, rose to a peak of $190/mt in 2011.

While the price trended downward from its peak, the move was relatively slow. However, the decline began to speed up during the past half-year. It’s now lost more than 60% over the past 12 months, and at press time was drifting between $50/mt-$60/mt.

Meanwhile, production is continuing at breakneck speed, which is resulting in a growing surplus of unwanted production. Goldman Sachs predicted that the mountain of excess ore is likely to grow from 43 million mt in 2013 to 260 million mt in 2018, while Morgan Stanley forecasts that the glut may grow to be even higher—as much as 437 million mt in three years.

In April, Shandong acquired full interest in the Tonkolili mine, pictured here, giving the Chinese steel producer control of the project and related infrastructure. (Photo: African Minerals)In April, Shandong acquired full interest in the Tonkolili mine, pictured here, giving the Chinese steel producer control of the project and related infrastructure. (Photo: African Minerals)

For the dozens of projects in West Africa already battling tough geographic and political obstacles, getting to the production stage will become all the more difficult.

“The region has huge potential, but unless a new project sits firmly in the first quartile of the cash curve, has a high-quality product and ideally a low-opex, high-quality DSO product to springboard production with minimal capex, they are unlikely to be developed in the current environment,” said Andrew Chubb, a director at Hannam & Partners, a corporate advisory firm that specializes in mining in Africa.

The first casualties are already in. African Minerals (AM), majority owners of the Tonkolili mine in Sierra Leone, was assigned to administrator management after defaulting on a payment to Shandong Iron and Steel Group. AM had in turn stepped in to rescue London Mining, another U.K.-listed company that operated the Marampa mine, also in Sierra Leone, that went bust late last year.

Others that are yet to begin operations are rethinking plans. U.K.-listed Bellzone’s project in Guinea has been on hold since last year. Also, Russia’s second biggest steel producer, Severstal, which owns the Putu iron ore mine in Liberia, has said the project won’t go ahead without a partner to share the risk. Putu is a 13-km-long, iron-rich ridge inland from the coast in eastern Liberia with iron-ore resources of up to 4.4 billion mt.

Severstal bought the Putu mine from Afferro Mining for $122 million in 2012, and estimates it would need $3.5 billion of capital investment to build the mine and railroad connection to the coast.

Infrastructure is where many of the problems lie. For instance, Sundance Resources is an Australian outfit that wants to develop the Mbalam-Nabeba project that straddles the borders of Cameroon and the Republic of Congo. The Mbalam-Nabeba resource comprises 436 million mt of probable ore reserves at 62.6% Fe, while the total resource is indicated at 4 billion mt at a grade of 36.6% Fe.

In a way, Sundance is a case study for the difficulties of doing business in the wilder parts of the continent. The company lost its entire board to an air crash in the dense jungle near the border of Cameroon and Congo in 2010. Retired Chairman George Jones returned and helped rebuild the board, despite battling an illness.

A few years later, Sundance’s fortunes appeared to change when China’s Hanlong group bought a stake in the company, and offered to buy it up entirely. However, after a few years of foot-dragging, no money was forthcoming. To make matters worse, Hanlong’s CEO, billionaire Liu Han, was arrested for murder—although most likely his fate was linked to backing the wrong horse in a power struggle of the upper ranks of China’s ruling elite.

Han was executed in February, although by then, Sundance had already canceled the proposed sale. The company is now looking for another backer.

The majors have also had their troubles. The giant Simandou deposit in Guinea has been cause for tears among the big three—BHP Billiton, Rio Tinto and Vale. A shady Israeli billionaire, Beny Steinmetz, owner of the BSG group, has also had a central role.

Simandou is billed as the world’s largest deposit, and its completion or failure will be felt throughout the region. It is located in the southern part of the Simandou Mountains in southeastern Guinea and contains friable hematite and goethite hematite.

The two main deposits are about 6 to 8 km in length. Together they hold more than 2.4 billion mt of high-grade iron ore and are being scoped by a consortium consisting of Rio Tinto and China’s Chinalco.

The project has the potential to produce 100 million mt/y of iron ore, but in order to do so, infrastructure must be built. It will need a 650-km railway line, and a deepwater port south of the capital Conakry. All told, it could cost as much as $20 billion to develop.

Part of the deposit is also under an ownership and corruption dispute, adding further doubts to its viability. About half of the deposit was taken up by BSG Resources and Brazil’s Vale. However, in 2010, Guinea changed government—its first democratically elected administration replaced a military junta that had awarded the rights, and as a first order of business, the new leadership accused BSG and Vale of having used bribes to secure them.

Last year, the government took back the rights and plans to re-auction them, Guinea Minister of Mines Kerfalla Yansane told The Wall Street Journal on the sidelines of the Mining Indaba conference. Who would be in the running for the stake is unclear. Glencore has been mentioned, but CEO Ivan Glasenberg has, of late, been outspoken on the “reckless” oversupply of ore on the market. Glencore recently abandoned its Askaf iron ore project in Mauritania—so the likelihood of Glencore moving on Simandou is low.

“Is Guinea going to have Simandou developed at current prices? It’s going to be difficult,” Glasenberg said at a telecast briefing from London in December.

What’s left is a picture of too much ore coming onto the market. China is the wild card. Beijing is both hurt and helped by the struggle of producers under the current price regime; hurt, by its own miners that must battle against low-cost producers elsewhere in the world; and helped by a fall in the cost of a basic commodity it consumes in vast quantities.

China’s own mines are fragmented and among the highest-cost producers in the world. There are now signs that Beijing may be content to let many of them close, while at the same time buying up external resources to make up the difference.

In April, Chinese steel producer Shandong acquired the remaining 75% shares in the Tonkolili mine from ailing African Minerals, giving it full control of the project as well as associated port and railway infrastructure.

In any case, closures in China itself are sure to help the market. “Times will change and if high-cost, low-quality production from China really does shut down permanently, which we are starting to see, the price may recover over time and these projects will be dusted off again,” said Chubb. “Eventually assets of Simandou’s quality will come on line and the potential is there longer term.”