With a Huge African Mine, China is Changing the Rules in the Iron Ore Market

At least $23 billion, six executives, three years in prison, and two African dictators summarize the current development of Simandou, the largest iron ore mine, which began operations on Tuesday. When it reaches full capacity, it will significantly reshape the current power dynamics in the global market for this raw material, which is crucial for steel production.

For the government of Guinea, a West African country with 15 million inhabitants, Simandou is a gift from heaven. A poor country with a GDP per capita slightly above $1,700 expects the mine to bring $200 billion in investments in roads, schools, industrial facilities, and agriculture by 2040.

Mining Minister Bouna Sylla claims that by 2040, the Guinean economy will quadruple, thanks to an expected annual growth rate of nearly 10 percent. The optimism of the Guinean government stems from the fact that the development of the mine has entered its final phase after nearly three decades filled with corruption scandals, political instability marked by two military coups, fierce rivalry among Western mining companies, and Chinese engineering capabilities that have pushed out Western firms.

Unbacked appetites

Simandou is a 110-kilometer-long mountain range in southwestern Guinea that hides 2.4 billion tons of ore with a high iron content of 65 percent beneath dense jungle. It is considered the largest iron ore deposit in the world, the exploitation of which has yet to begin. The rights to exploit it were granted in 1997 to the Australian-British mining giant Rio Tinto. In 2008, that company lost half of its rights, which were handed over to BSG Resources by then Guinean dictator Lansana Conté with a stroke of a pen.

That company was the mining arm of a conglomerate owned by Beny Steinmetz, an Israeli involved in diamond trading. Just two years later, in 2010, Steinmetz sold those rights to Brazilian Vale for $2.5 billion, but it soon became clear that Conté had granted him half of the stake. The Israeli was sentenced to five years in prison in Switzerland in 2015 for bribing Guinean officials.

Among them was Conté’s fourth wife, Mamadie Touré, to whom Steinmetz paid $8.5 million. In a second-instance ruling, his sentence was reduced to three years.

In the following years, the development of Simandou practically stagnated as Rio Tinto and Vale realized that there could be no exploitation of the mine without infrastructure to transport the extracted ore to end customers. First, a 650-kilometer-long railway had to be built, and then a port specifically constructed for receiving and loading iron ore. Construction progressed at a snail’s pace until 2019, when the Chinese entered the picture. The Singaporean-Chinese Winning Consortium Simandou (WCS) took over two of the four blocks from Rio and Vale.

Rio Tinto Retained Stake

WCS is owned by Baowu Steel Group, the largest steel mill in the world, and Winning International Group, a Singaporean mining and shipping conglomerate. Its founder, Sun Xiushun, a Chinese-born entrepreneur, is credited with making Guinea the largest exporter of bauxite in the world, a raw material for aluminum production.

In just a few years, all necessary infrastructure was completed, partly thanks to the current Guinean leader, Colonel Mamadie Doumbouya, who took power in a military coup in 2021. Doumbouya ‘friendlily’ convinced Westerners and Chinese to start cooperating on the construction of the railway and port by threatening them with the nationalization of Simandou.

Today, the division of the pie looks like this: WCS holds two blocks, while the other two blocks have multiple owners. The Guinean government has a 15 percent stake, while Rio Tinto/Vale holds 25 percent. The remainder of the stake in the joint venture with Rio Tinto is held by the Chinese aluminum producer Chinalco. When it reaches full capacity, Simandou will account for seven percent of total global iron ore production. This will certainly shift the balance in that market towards China, given that Chinese companies already control eight percent of global production of this raw material.

Indeed, as the world’s largest steel producer, China buys three-quarters of the ore traded globally. In previous years, it had to accept the price dictates of the four largest global producers – British BHP, Rio Tinto, Vale, and Australian Fortescue. Since the global market is already saturated, the influx of additional quantities from Simandou is likely to drive prices down. From today’s $100 per ton, analysts estimate that the price of iron ore could fall to between $70 and $80 in the next two years.

Australians in Trouble

Even without that, long-term forecasts for demand for ore indicate stagnation due to the slowdown of a 20-year Chinese construction boom that has consumed millions of tons of steel. A potential price drop will significantly slow the return on past investments by Chinese companies and Rio Tinto. A small glimmer of hope for Simandou lies in the green transition. To reduce carbon dioxide emissions, steel mills will increasingly seek ore with a high iron content to process it with less energy.

Whatever the price, Simandou under Chinese control poses a significant threat to the Australian economy, especially in Pilbara, a region known for its mining activity. In an interview with the Financial Times, Fortescue’s founder Andrew Forrest Twiggy stated that the very fact that Simandou has begun operations – despite the unstable political environment – is an indicator of China’s intention to secure its own sources of iron ore.

– We are standing in front of a speeding freight train – said Forrest.