Simandou threat looms for Australia’s iron ore giants

Iron ore has played a central role in keeping the Australian share market rising even as the world tilts strongly towards investments in technology.

The big miners BHP (ASX: BHP), Rio Tinto (ASX: RIO) and Fortescue (ASX: FMG) have all seen fluctuating but consistently high rivers of cash flow on to their balance sheets as some of the world’s biggest suppliers of shipborne iron ore that feeds into steelmaking.

So, it is worth noting that the cosy world of iron ore will this year see the first moves of an external threat that will be music to the ears of the (mainly Chinese) steel mills but has the potential to cap the relatively easy profitability gains Australia has made due to high iron ore prices.

Simandou threat might soon eventuate

The threat is one that has been around for at least 30 years – the large and high-grade iron ore deposit known as Simandou in Guinea – although this time it looks like finally emerging from a welter of issues and setbacks.

Iron ore is a strange commodity because its supply is mainly governed by the scale and expense of transport rather than the rarity of the commodity itself.

The world has plenty of good iron deposits that are either too small, too low-grade or “stranded” without transport.

That has been the issue than needs to be overcome with Simandou, which will require the building of a 552-kilometre railway before its high-grade ore can be loaded on to ships and sent to steel mills.

Rio Tinto springing into action

This year holds promise to be the first in which concrete action is taken to bring Simandou into production – a development that could supply up to five per cent of world demand for shipped iron ore, which is enough to make a real impact.

However, there are still many hurdles in way of that happening – the most notable being political instability and resulting scandals.

Since Rio Tinto was first granted an exploration licence in Simandou in 1997, Guinea has had no fewer than two coups, four heads of state and three presidential elections.

Political issues still difficult

That is not a formula for the seamless introduction of a new mine and associated transport but this year promises to change all of that with Rio Tinto preparing to contribute its share of $11.6 billion towards the cost of project development.

Rio will be working with the Guinean government and at least seven other companies, five of them Chinese, as it works to turn the long awaited Simandou dream into a reality.

Once the Chinese partners get the thumbs up from Beijing, the highly complex project can get started, with a raft of parties all contributing to help to finance the mammoth railway project that will bring the iron ore to port.

Two projects starting up

Initially Rio is planning to build one iron ore mine at the Simfer project in partnership with a consortium led by Chinalco while a second mine known as the WCS project will be built by Baowu in partnership with a consortium led by the Singapore-based Winning International Group.

The project is being driven not just as a way to bring extra supply on to the market but also to supply specialised ore that can be used for direct reduction iron, which is part of the plan to decarbonise the production of steel, particularly within China.

First production from the two blocks co-owned by Rio Tinto is expected to ramp up over 30 months from 2025 to an annualized capacity of 60 million tonnes per year.

Rio Tinto’s share of that production will be 27 million tonnes.

Instability and quarrels could still stall Simandou

However, there will be no shortage of sceptics who have often seen hopeful plans to bring Simandou into production crumble before their eyes in the face of quarrelling partners and political instability.

In short, Simandou is worth keeping a watching brief on but it will still be some years down the track before it presents a threat to the fabulous profits still being made by the existing iron ore players.