Africa is currently the source of just 4-5% of the world’s iron ore production but possesses reserves substantially in excess of that proportion. Major projects such as Simandou in Guinea are regularly referred to as the next Pilbara – the iron ore-rich region of Western Australia that has been the backbone of the country’s economic success.
The continent’s vast deposits can enable it to play a much bigger role in this market and numerous projects are now edging closer to production. Mauritania, Guinea, Sierra Leone, Liberia, Cameroon, Republic of Congo, Gabon and Nigeria are all potential hot spots for the growing trade.
China imports around 80m tonnes of iron ore a month, more than two thirds of which comes from Australia and Brazil. At present, China sources some 8% of its iron ore from Africa.
Seaborne iron ore exports are forecast to grow around 10% to 1.3bn tonnes this year, with volumes growing around 100m tonnes this year and next – over 900m tonnes of this ore will be bought by China.
Africa’s share of global mining investment rose $4bn to $110bn accross 26 projects in 2013, remaining constant at 14%, as in 2012
However, with China currently enduring its slowest growth in a quarter of a decade, prices have fallen. Last year prices averaged around $135 per tonne. They are currently at $95 per tonne, up from a low of $90, having fallen below $100 since 19th May.
Nevertheless, the first four months of the year saw China import 305m tonnes, up 21% on last year. Chinese steel demand grew about 7-8% last year as its cities continue to grow, even as the economy as a whole increases at a reduced rate.
The Export-Import Bank of China estimates that by 2025, China will have injected some $1 trillion into Africa, as the resource hungry country seeks to ensure sustained supplied.
South Africa is forecast to export 56m tonnes this year, up 1.8% from last year. Mining output as a whole declined in the country by 4.7% year on year in March with the ongoing platinum strike a factor.
China is South Africa’s biggest trade partner – in 2013 bilateral trade was worth over $65bn or one quarter of all Sino-African trade.
In general, African iron ore has the advantages of high-grade deposits – particularly when compared with ore from China.
Additionally, Chinese pollution targets favour the imported, higher grade ore. It is also available at lower marginal cost than elsewhere (particularly compared to Australia but also to Brazil).
Investment is hampered to some extent by the high costs of building the requisite infrastructure (very long rail connections and deep sea ports) and the distance between the continent and key markets (US, Eurozone and China/Asia).
The business cases pits high capital expenditure (capex) against low operating costs. Once these African projects are over the hump, in terms of commissioning, and assuming there is sufficient demand (likely since present prices can fall 33% before miners start to really suffer), these projects will reshape the iron ore market in the continent’s favour.
Prices are still well above the $20 per tonne cost of production and may actually favour African producers, as margins elsewhere fall.
Meanwhile, Africa’s share of global mining investment remained constant in 2013, compared with 2012, at 14% (rising $4bn to $110bn, across 26 projects).