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China Covets the Pilbara Killer

In July, China imported a record amount of iron ore – 10 Mn T more than the previous monthly record. For the first seven months of 2020, iron ore imports were up nearly 12%, adding 65 Mn T to the same period a year earlier to stand at around 650 Mn T. No wonder Capesize earnings put on weight in the year.

The imports increased even as steel production rose less than 2% for the first seven months of 2020 and even as iron ore import prices pushed up to around USD 128 per tonne by mid-August Much head-scratching has followed, but my guess is that domestic Chinese iron ore production and crucially domestic iron ore transport has become less economically viable during and after the Coronavirus outbreak, making imports the easier option for wholesale buyers and end users.

Last year China imported over 1.0 Bn T of iron ore and annualised data for this year suggest that imports will reach over 1.1. Bn T. China relies on just four producers for the majority of its iron ore and is understandably keen to expand its sources of supply. After the Brumadinho mine incident last year, China turned to second tier iron ore exporters such as Russia, Scandinavia, Iran and Saudi Arabia. Much of the product from those countries had to be shipped in geared bulkers, contributing to the late-cycle spike in earnings for Supramaxes and Ultramaxes in the second half of 2019.

Some Chinese mining officials have subsequently decided it is time to take greater control over some of their iron ore supplies. One way to achieve this is to buy or to develop mines overseas. China has not had much luck trying to invest in Australian or Brazilian mines. But other options exist.

For instance, Baowu Steel is looking at an investment in Simandou in Guinea, West Africa. This 60 mile-long range of hills is said to hold the world’s largest untapped iron ore deposits. But getting the iron ore to market will take investment on a massive scale as the mining region is getting on for 400 miles from a reasonable location for an as yet non existent deepwater port.

Developing Simandou would be Africa’s biggest ever infrastructure project. Step forward China’s Belt and Road Initiative, which is investing in all but a handful of African nations, building railways, roads and ports to give African commodities access to international (that is, China’s) markets. China’s Baowu Steel is proposing to invest up to USD 10 Bn in Simandou and wants other Chinese steel mills to partner it. Another problem is that Rio Tinto has a longstanding (and slow moving) interest in Simandou that would probably have to be bought out.

Tens of West African mining projects have been mooted, started, shelved and abandoned over the years. But China has pressing needs to widen its suppliers. Its deteriorating relationship with the US has led to a deteriorating relationship with Australia, though not yet any sign of an embargo on vital Australian iron ore exports. Still, the threat of switching suppliers could be enough to trouble Australian politicians (though we are sure they are made of stern Aussie mettle). Nonetheless, Simandou is sometimes referred to as the Pilbara Killer – a reference to Down Under’s own vast iron ore mining region.

With iron ore prices up (roughly) from USD 60 to USD 120 in the last year, China could end up spending (very roughly) an extra USD 60 on every single one of the 1.1 Bn T it will probably import this year. That’s a total of USD 60 Bn, a mind boggling sum. In 2019, China’s domestic steel industry was reported to have made around USD 24 Bn in profits. This year's input costs could wipe out those profits if manufacturers can't pass on costs to China's construction industry.

At that sort of annual expenditure, it makes sense for China to develop its own mines in places like Simandou. It is thought that Simandou output could quickly ramp up to 150 Mn T a year – though that number might be out of date. Still, that’s equivalent to over 800 standard Capesize cargoes.

If Baowu's Simandou project goes ahead, China most likely won't use it as a substitute for current Brazilian or Australian output, but as an alternative for meeting future demand. After all, the mooted 150 Mn T per year output from Simandou is only a little more than 2020's probable increase in Chinese iron ore imports.

Add 150 Mn T to current iron ore shipping demand and Capesize owners will be cock-a-hoop, given the tonne-mile demand from West Africa to China . But what if China built or bought its own fleet of ore carriers to ship the product? Such a move would be in line with securing its own supply lines of this vital construction material. It would also blow a hole in the Capesize freight markets, denying all the independent owners am opportunity to compete.

Who knows if Baowu’s brainwave will become reality? And even if it does, it could be a decade before the impacts on freight markets become visible. By then – the early 2030s – bulk carrier owners may be more worried about all sorts of other things, not least how they have met the IMO’s emission reduction targets. But unless and until iron ore prices start to fall again, Simandou and projects like it will look attractive and will attract continuing interest. And that should continue to interest bulk carrier owners.

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