Dig it out!

Guinea in West Africa has emerged to become a significant player in the mining industry. At a time when the world is torn between economical accomplishment and environmental concerns, it might be that the African country’s mining projects will timely come to rescue and satisfy these two goals. Adding to that, the new mines introduce a completely new trade flow for iron ore, the key raw material for steel production. Until now, iron ore trade has historically been dominated by the prominent trio Brazil, Australia, and China as the largest importer.

The largest Guinean mining project, named Simandou, countless years of delays in the wake of political and ownership disputes, as well as logistical and financing problems, is finally close becoming a reality. Two consortia have come together on the one side is the Winning Consortium Simandou (WCS) with Singaporean and Chinese companies, China Baowu Group (Baowu), and Guinean government; while on the other is Simfer held by Aluminum Corp of China and Rio Tinto. On 30 May, the Guinean government officially released a presidential decree to approve Baowu’s investment, which was followed by the finialisation of WCS and Baowu’s slate of mining, railway, and port projects.

In a press release, dated of the 16 July, Rio Tinto confirmed its conditions have been satisfied, allowing the giant Anglo-Australian mining company to invest in the Simandou project along with the Winning Consortium Simandou (WCS), thereby solidifying the timeline for production to start in October 2025.

Rio Tinto revealed that the project is expected to bring onto the market 60 mln mt of iron ore per year within the first 30 months after commencing production. Thereafter, shipments are slated to total 120 mln mt by 2028.

If the target is reached, it will see Guinea become the world’s third largest iron ore exporter, after Australia and Brazil. When compared to global exports in 2023, Guineas volumes would represent slightly more than 7%.

Furthermore, Simandou iron ore is expected to become a key contributor to decarbonization efforts, on which most countries – including China – have been working towards. Rio Tinto praised the high-grade level of Simandou’s iron ore which holds very little impurities and a high iron ore content of almost 65%. This means that Guinean product requires less energy to be refined and therefore would reduce carbon emissions during steel production.

China appears be the logical importer for Guinean iron ore. China is by far is the world’s largest producer of steel as it accounts for more than half of the world’s production which also makes it by far the world’s largest iron ore importer.

According to the Institute for Energy Economics and Financial Analysis, China currently imports about three-quarters of global traded ore with a heavy reliance on ores from Brazil and Australia with the later representing supply risks on the back of geopolitical tensions (e.g. the unofficial ban on coal imports from Australia). Accordingly, diversifying its suppliers is a necessity for China, and explains the strong presence of Chinese companies in both Simfer and WCS.

More interestingly for the shipping industry, if China was to import 120 mln mt from Guinea at the expense of Australia, there would be significant consequences for dry bulk shipping. Taking iron ore exporting port Hedland in Australia and Qingdao as discharging port for the Australian-China trade and Conakry to Qingdao for the Guinea-China trade, the distance is more than three times longer for cargo to come from Guinea (3,500 nautical miles against 11,000 nautical miles). Therefore, 120 mln mt of iron ore ex-Guinea will represent about 1,300 bln tonne-miles. Based on AXSMarine data showing iron ore ton-mile figures at 9,589 bln in 2023, 120 mln mt of additional iron ore shipment between Guinea and China will lead to a 13.5% increase in global iron ton-mile demand. Under the same assumptions, it could generate a 4.5% increase on global dry bulk tonne-mile demand which stood at 29,122 bln.

Iron ore is mainly carried by Capesizes as they accounted for 62.6% of iron ore ton-miles in 2023. Meanwhile over the same period VLOCs accounted for 28% of iron ore ton-miles. This suggests that an increase in both volumes and ton-mile demand will constitute good support for Capesize freight rates from 2025 onwards. This would be similar to how increasing bauxite shipments from Guinea to China have supported Capesize rates.

Nevertheless, there are indications that there may be problems ahead for China’s steel industry in the wake of the current turmoil in its construction and real estate sectors which are weighing on domestic demand for steel. This is leading to suggestions of overcapacity and that Chinese demand has already peaked.

In addition, to the Simandou projects, it is rumoured that the Brazilian giant Vale will bring on line another 50 mln mt of iron ore supply within the next two years, thereby threatening to send the global market further into oversupply. Accordingly, Macquarie Bank forecasts the iron ore market to suffer of a 200mln mt surplus across 2026-28, something which would heap downward pressure on ore prices.

Despite the above-mentioned threat, the biggest advantage of the Simandou project is the quality of the product which could help achieve decarbonisation commitments in the globe’s largest importers such as China.