The existence of Simandou is a winning trump card for Chinese steel companies seeking to break the deadlock and shatter the monopoly of Australian and Brazilian mining giants over the iron ore trade.
Original by Zhengjieju
On September 5, a sudden coup broke out in Guinea, a small West African country.
A junior officer, Mamady Doumbouya, led special forces to capture and control the president, and announced the establishment of a military government.
When the news reached overseas, people lamented the turmoil in West Africa and worried about Guinea's situation, and at the same time could not help but pay close attention to the direction of the mineral market.
Because insiders all know that Guinea is not an insignificant player in the global mineral market.
Changes in Guinea's political situation affect mineral imports in many countries and also impact the development of China's steel industry.
Guinea is located on the western coast of West Africa.
Although its population has only just exceeded 13 million and its GDP is only US$14.6 billion, far lower than that of a top-100 county in China.
However, Guinea's abundant mineral resources are truly enviable.
The country boasts abundant resources of bauxite, iron ore, oil, gold, diamonds, and uranium. Most of the country's industrial workforce serves the mining industry, and its economic development is highly dependent on mineral exports.
In Guinea's export structure, gold and ores take up the largest share.
Among all these mineral economies, iron ore and bauxite attract the most attention, and the Simandou iron ore mine is the future pillar of the country's iron ore industry, earning the reputation of the 'Crown of Guinea.'
The Simandou iron ore mine is the world's largest undeveloped iron ore deposit, containing vast amounts of high-quality iron ore with grades exceeding 66%.
In recent years, the Guinean government has divided the Simandou iron ore deposit into four mining areas across the northern and southern sections, with proven reserves of over 2 billion tons in both sections.
If counting the periphery of the mining area and unexplored regions, Simandou's iron ore reserves could very well exceed 10 billion tons.
For context, the largest developed iron ore mine in the world is Brazil'sValecontrolled Carajás iron ore mine, whose reserves are only 7.5 billion tons.
This means that once the Simandou iron ore mine is developed, it will surely occupy an important position in the iron ore trade market.
After all, its scale is too massive.
The U.S. Geological Survey believes Guinea will become the world's fourth-largest iron ore producer.
Most of these iron ore deposits are distributed in the mountainous areas of southern Guinea, and the majority can be mined via open-pit mining.
However, despite such enormous reserves and high-grade ore, Simandou has remained largely undeveloped.
Guinea sits on a super deposit but has never made a name for itself in the iron ore trade market.
Why is that?
The answer lies in infrastructure.
In 2020, Guinea was absent from the list of major global iron ore exporters.
Developing a mine is not as simple as just having workers dig out ore; it also involves many factors such as mining technology, ore transportation, electricity supply, and even the ecological environment.
In other words, to mine Simandou, matching infrastructure must be in place.
Guinea is a poor country, lacking both the technology to mine on its own and sufficient funds for initial investment.
Moreover, the four mining areas of the Simandou mine cover a total area of more than 1,488 square kilometers, are located in a remote area, and do not have a single decent road.
Without even meeting transportation standards, developing Simandou naturally becomes impossible.
The Guinean government's plan for Simandou and the locations of the four mining blocks
Because of this, the Guinean government strongly demanded that foreign developers, while holding mining rights, must also assist with Guinea's infrastructure.
Guinea initially granted the mining rights to Australian mining giantRio Tinto, but Rio Tinto did nothing after obtaining the rights—neither mining nor building railways.
Instead, it became embroiled in a long-running dispute with Israel's BSGR Group and Brazil's Vale, leaving the mining project to fizzle out.
At Simandou, hematite is scattered across the red soil.
It was amid this fierce competition that Chinese enterprises rose abruptly at Simandou and seized the opportunity!
As we all know, China is the world's largest steel producer, and we consume huge amounts of steel for everything from national defense to economic construction.
China's iron ore resources cannot meet demand, so iron ore must be imported from overseas.
According to data released by the General Administration of Customs in July, in the first half of 2021 alone, China imported 561 million tons of iron ore, an increase of 2.6% year-on-year.
China has long been the world's largest buyer of iron ore, purchasing more than 65% of total traded volume every year.
China's main sources of iron ore imports in 2020 (Image source: Forward Industry Research Institute)
Most of the iron ore China imports comes from Australia and Brazil.
The global iron ore trade is almost dominated by mining giants such as Australia's Rio Tinto,BHP, FMG, and Brazil's Vale, forming a complex monopoly network.
Although China is the largest buyer of iron ore, the pricing power of iron ore is in the hands of foreign mining companies.
When facing these mining giants, Chinese steel companies are in a weak position and have no bargaining power.
Therefore, whenever overseas mining companies push up iron ore prices, Chinese steel companies can only passively accept it and watch their costs rise, which in turn affects the profits of Chinese steel companies.
To break this situation, the best way is to find a large iron mine and mine it ourselves.
The existence of Simandou is China's trump card for steel companies to find a way out and break the monopoly of Australian and Brazilian mining giants over iron ore trade.
Iron ore inventory trends at China's 45 major ports
In February 2019, the Guinean government recovered the mining rights for Blocks 1 and 2 in the northern section of Simandou, completely ending the conflict among Rio Tinto, BSGR, and other companies there.
In October of that year, the Guinean government publicly tendered the mining rights for the northern section.
In order to compete with the Australian giant FMG, Chinese companies led by Shandong Weiqiao, Yantai Port Group, andChina Hongqiaodecided to cooperate with French and Singaporean companies to jointly form a "Winning Consortium" and submit a bid to the Guinean government.
FMG's bid promised $9 billion for development, but it did not explicitly promise to improve transportation in the mining area.
The "Winning Consortium" bid not only promised to invest $14 billion, but also agreed to build a railway connecting the northern and southern mining areas to Matakong Port, as well as a deep-water port.
In this way, Simandou's ore can be transported by rail to Guinea's own port, without having to go through Liberia for export.
News report on the winning consortium's successful bid
Faced with such attractive conditions, the Guinean government ultimately awarded the mining rights to the winning consortium.
In the southern section of Simandou, Blocks 3 and 4, Rio Tinto has always been the absolute protagonist, with no external disputes.
It is difficult for Chinese companies to compete with Rio Tinto for this lucrative piece.
Following the principle of "if you can't beat them, join them," the state-ownedAluminum Corporation of China (02600)reached an agreement with Rio Tinto in 2010, investing in and jointly developing the southern mining area.
Currently, in the shareholding structure for the southern section of Simandou, Rio Tinto holds 45%, Chinalco holds 40%, and the Guinean government holds 15%.
As a result, Chinese companies have established a firm foothold in both the northern and southern sections of Simandou through bidding and equity participation.
Agreement reached between Aluminum Corporation of China and Rio Tinto of Australia in 2010
What remained was developing the mine and undertaking major infrastructure construction.
Developing Simandou is a profitable undertaking for both China and Guinea.
According to the plans of the Guinean government and related enterprises, the northern section of Simandou is expected to produce 100 million tons of iron ore annually in the future, while the southern open-pit mining area can also reach 100 million tons.
This will give Chinese steel companies more options in the future, potentially even lowering iron ore prices and strengthening their bargaining power with overseas mining giants.
For the Guinean government, the development of Simandou can drive the country's economic growth and improve its infrastructure level.
In particular, the deep-water port and railway built by the Winning Consortium will benefit Guineans for a long time and improve Guinea's transportation.
It can be said that the development of Simandou is another example of mutual benefit and win-win cooperation between Chinese enterprises and third-world countries.
Workers building the railway in the mining area
Now, Guinea has suddenly fallen into a coup, which is an unexpected complication.
In particular, just as China made a breakthrough in iron ore resources, Guinea had a military coup, which inevitably makes people suspect whether there is more to it behind the scenes.
The Chinese enterprises' established plans to participate in the development now face unpredictable risks.
The military junta that came to power in Guinea, like the Taliban in Afghanistan, faces the same problem:
It is easier to conquer the world than to rule it.
In today's world, to consolidate one's rule, one must develop the economy. In the end, it still comes down to making good use of the huge rich mineral deposit of Simandou.
To make good use of Simandou, one must first develop it, and then conduct trade.
The former requires capital and technology, and the latter requires channels and markets. China has certain advantages in all of these.
In particular, China is the world's largest consumer of iron ore. Only China can absorb such an enormous amount of mineral deposits as Simandou's.
On September 6, Doumbouya, the leader of the military junta that came to power through the coup, announced that the curfew in mining areas, including Simandou, would be lifted to ensure normal production in the mining areas.
It can be seen that the development of Simandou will not be affected by the political changes in Guinea.
How to safeguard China's interests requires national-level strategic interplay.
The development of Simandou also provides valuable experience for Chinese enterprises to actively explore overseas ore markets in the future.
It also reminds us that we still need to find more ore sources and mine independently to ensure the security of national resource supply.
