China Gives Global Miners an African Headache

(Bloomberg Opinion) -- China is poised to let some of its biggest state-owned entities help develop a giant West African iron-ore deposit that’s been tantalizingly promising and painfully problematic for two decades. Whatever happens next, this watershed moment for the steelmaking commodity is bad news for big producers, particularly Rio Tinto Group..The State-owned Assets Supervision and Administration Commission is actively pushing forward with the Simandou mine in Guinea, Bloomberg News reported Thursday, citing people familiar with the matter. The project may cost more than $20 billion..Simandou, tucked away in the south of Guinea, has near-mythical status in the industry, having been coveted by everyone from Ivan Glasenberg of Glencore Plc to Andrew Forrest of Fortescue Metals Group Ltd. and the late Roger Agnelli, former head of Vale SA. After 2007 and 2008, when Rio Tinto used Simandou’s promise to ward off BHP Group’s advances, it was heralded as the project that would open up a new, high-quality iron ore frontier in West Africa to rival Australia’s Pilbara. Instead, it’s been caught in years of expropriation rows, corruption investigations and political disputes. Not a ton has been dug up..A lot is still unclear about what Beijing’s blessing would mean in practice for the deposit, divided into four blocks. The first two were handed last year to SMB-Winning, a consortium backed by Chinese and Singaporean companies, while blocks 3 and 4 are held by Rio Tinto and Aluminum Corp. of China, known as Chinalco. In all likelihood, it will involve financing and practical support for the project’s logistics, the lion’s share of the total cost because of its complexity: 650 kilometers (404 miles) of railway, plus tunnels, roads and a port..Approval would be a significant bet on iron ore, and in some ways, a surprising one. Simandou is at least five or six years away from producing anything. It will miss the bulk of China’s latest infrastructure splurge and could well collide with slowing steel demand. Indeed, in 2018, Chinalco passed on the opportunity to buy Rio’s stake..Two years is a long time in commodities markets, though. China, squeezed by the trade war, has put the focus back on self-reliance for key commodities, and even half of Simandou’s deposit could deliver more than 100 million metric tons a year of high-quality ore, roughly 10% of Beijing’s annual imports. That would help buffer China against events such as a supply squeeze in 2019 caused by a disaster at a Vale dam in Brazil, which drove up iron-ore prices. For China, whose seaborne imports total more than 1 billion tons a year, that output crunch may have added roughly $20 billion or more of extra expenses, not far off the cost of Guinean infrastructure..All of this is a headache for the handful of miners that dominate iron ore production, none more so than Rio. It isn’t as if Pilbara will cease to be profitable. Brazil, with higher freight costs, looks more vulnerable on that front..But China’s newfound enthusiasm for Guinea, if confirmed, leaves Rio in an unwelcome quandary: It can’t ignore a project that could flood the market, especially with the high-quality ore that steel producers increasingly favor. Joining in might give it some control over timing, and the ability to blend Simandou ore with its existing output. Yet it will struggle to convince investors, who can see the miner’s technical and political struggles in Mongolia, and recall that it is still involved in an investigation by the U.S. Department of Justice over corruption allegations in Guinea..Then there's the risk that enthusiasm for West Africa could help secure funding for smaller projects, or prompt those already looking at the region, like Fortescue, to invest in destructive volumes..Simandou is still years away at best, and its complex logistics have defeated earlier pretenders. Yet China’s track record in digging up Guinean bauxite suggests it can be done. If nothing else, Beijing has sounded an iron ore warning..To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net.This column does not necessarily reflect the opinion of Bloomberg LP and its owners..Clara Ferreira Marques is a Bloomberg Opinion columnist covering commodities and environmental, social and governance issues. Previously, she was an associate editor for Reuters Breakingviews, and editor and correspondent for Reuters in Singapore, India, the U.K., Italy and Russia..©2020 Bloomberg L.P.

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China Gives Global Miners an African Headache

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