Massive Simandou mine can end Australia’s golden iron ore age, or start new one: Russell

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LAUNCESTON, Australia, Feb 25 (Reuters) – The term gamechanger is often over used enough to be rendered meaningless, but the huge Simandou mine in the West African country of Guinea is going to be just that as its start up is set to rock the seaborne iron ore market.

The first cargoes from the project may arrive by the end of this year and it’s expected that it will ramp up to its full capacity of 120 million metric tons per annum fairly quickly.

The four blocks of Simandou are impressive in their scale and infrastructure challenges, boasting a 620 kilometre (384 mile) rail line, a new port with dedicated trans-shipment vessels that will load bulk carriers offshore.

But Simandou is more than a technical marvel, as it will meet around 10% of the annual seaborne imports of China, the world’s biggest buyer of the key steel raw material, taking about 75% of global seaborne iron ore.

Simandou is largely a Chinese venture, with 75% of the production controlled by Chinese companies including Baosteel , and 25% held by Rio Tinto, the world’s largest iron ore miner.

While in theory Simandou’s output could be sold to buyers across the globe, in practice virtually all of it is likely to head to China.

The project will also produce high-grade iron ore, around 65.3% iron content, which is better quality than most of what Rio and its competitors mine in Western Australia, the top iron ore producing region.

High grade iron ore may be in stronger demand in coming years as Chinese steel mills seek to decarbonise, an imperative given that steel production accounts for about 8% of total worldwide carbon emissions.

Simandou’s iron ore will be of sufficient quality to be fed directly into electric arc furnaces (EAFs), which produce steel with considerably lower emissions than through the more common process of using basic oxygen furnaces, which require substantial volumes of coal.

The question for the iron ore market is who gets pushed out of China when Simandou’s ore starts to arrive?

This of course assumes that China’s steel output remains constant at around the 1 billion ton per annum level it has been at since 2019.

There may be some loss of supply from major exporters Australia and Brazil as existing mines reach end of life and aren’t replaced, but even allowing for this it’s likely that some iron ore will be pushed out of the market.

The obvious candidates will be high-cost and lower-grade iron ores, and it’s likely that the producers of such iron ore will lower output over time by allowing mines to reach end of life earlier than planned.

This spells bad news for some of the miners in Western Australia as a combination of a switch to higher-grade iron ore, stagnant demand from China and increased supply from Guinea will likely put downward pressure on prices.

Australia’s miners and governments have enjoyed a strong run with iron ore for much of the past decade, reaping the benefits of building vast, efficient mines and logistic solutions.

Even at the current price of around $108 a ton, iron ore remains vastly profitable given the cost of producing a ton and getting it to a port in Western Australia is around $23.

With Simandou’s new high-grade iron ore coming and the need to decarbonise steel production, it could be argued that Australia’s golden age of iron ore is coming to an end.

But it could also provide the impetus for Australia to kick-start a new investment spree into adding value to its iron ore bounty.

If the assumption is that the world’s manufacturers will increasingly turn to green steel, then Australia is perhaps better placed than any other country.

To make green steel you need low-cost iron ore and massive volumes of cheap renewable energy.

Australia already has the low-cost iron ore and is more than capable of building sufficient renewable energy, chiefly solar backed up by battery storage.

The renewable energy is used to make green hydrogen, which in turn is used to turn iron ore into direct reduced iron (DRI) or hot briquetted iron (HBI).

DRI can be used to make steel in an EAF, while HBI can be shipped to customers in Asia to made into steel using EAFs.

However, it will likely take the support of both the federal and state governments to give momentum to any plans to beneficiate iron ore domestically.

A positive signal was the federal government’s recent announcement of an A$2.4 billion ($1.5 billion) package to support steel production in Whyalla in South Australia state.

Included in the funding is a $1 billion green iron investment fund to support new projects, as well as upgrading the existing steel works in Whyalla.

It’s a start, but much more will have to be done if Australia’s iron ore success story is going to write another chapter.

The views expressed here are those of the author, a columnist for Reuters. (Editing by Himani Sarkar)