The existence of Simandou is the winning trump card for Chinese steel enterprises seeking a breakthrough to end the monopoly of Australian and Brazilian mining giants over the iron ore trade.
Original by Zhengjieju
On September 5, a sudden military mutiny broke out in the small West African country of Guinea.
A junior officer, Mamady Doumbouya, led special forces to capture and control the president, announcing the establishment of a military government.
When the news spread overseas, while people lamented the chaos in West Africa and worried about the situation in Guinea, they could not help but pay close attention to the direction of the mineral market.
Because industry insiders 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 bear on the development of China's steel industry.
Guinea is located on the west coast of West Africa.
Although its population is just over 13 million and its GDP only 14.6 billion US dollars, far less than one of China's top hundred counties.
However, Guinea's rich mineral resources are truly enviable.
The country possesses abundant bauxite, iron ore, oil, gold, diamond and uranium resources. Most of the country's industrial population serves the mining industry, and economic development is highly dependent on mineral exports.
In Guinea's export product structure, gold and ore account for the bulk
Among all mineral economies, iron ore and bauxite attract the most attention, and the Simandou iron ore deposit is the future pillar of the country's iron ore industry, enjoying the reputation of the "Crown of Guinea".
The Simandou iron ore deposit is the world's largest undeveloped iron ore deposit, containing large quantities 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 in the northern and southern sections, and the iron ore reserves discovered in both the northern and southern sections exceed 2 billion tons.
If the peripheral areas and unexplored regions are included, Simandou's iron ore reserves very likely exceed 10 billion tons.
It should be noted that the largest developed iron ore mine in the world today is the Carajás mine controlled by Brazil's Vale, whose reserves are only 7.5 billion tons.
This means that once the Simandou iron ore deposit is developed in the future, it will certainly occupy an important position in the iron ore trade market.
After all, its scale is simply too large.
The United States Geological Survey believes that 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 most can be mined by open-pit methods.
However, despite such enormous reserves and high-grade ore, Simandou has never really been developed.
Guinea sits on a super-sized deposit yet has never made a name for itself in the iron ore trade market.
Why is that?
The answer lies in infrastructure.
In 2020, among the world's major iron ore exporting countries, Guinea was not on the list.
Developing a mine is not simply a matter of having workers dig ore; it also involves mining technology, ore transportation, power supply, and even ecological and environmental factors.
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 upfront investment.
Moreover, the four mining areas of the Simandou deposit cover a total area of more than 1,488 square kilometers, are remotely located, and have not a single decent road.
With even transportation failing to meet standards, developing Simandou is naturally out of the question.
The Guinean government's plan for Simandou and the locations of the four mining areas
Because of this, the Guinean government strongly requires foreign developers to support Guinea's infrastructure while holding mining rights.
Guinea initially granted mining rights to the Australian mining giant Rio Tinto, but Rio Tinto did nothing after obtaining the rights—neither mining nor building railways.
Instead, it became entangled in years-long disputes with Israel's BSGR Group and Brazil's Vale, leaving the mine development unresolved.
Simandou, where hematite is scattered throughout the red soil
It was amid this fierce scramble that Chinese companies rose to prominence at Simandou and seized the opportunity!
As is well known, China is the world's largest steel producer, and from national defense to all aspects of economic development, we consume vast quantities of steel.
China's iron ore resources cannot meet demand, so iron ore must be purchased 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, up 2.6% year on year.
China has long been the world's largest iron ore buyer, purchasing more than 65% of total trade volume each year.
Main sources of China's iron ore imports in 2020 (Image source: Qianzhan Industry Research Institute)
Most of the iron ore China imports comes from Australia and Brazil.
Global iron ore trade is also almost entirely controlled by a few mining giants—Australia's Rio Tinto, BHP, FMG, and Brazil's Vale—forming a complex monopoly network.
Although China is the largest iron ore buyer, pricing power rests in the hands of foreign mining companies.
When dealing with 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, watching costs rise and thereby affecting their profits.
To break this situation, the best approach is to find a large iron ore deposit and mine it ourselves.
The existence of Simandou is the winning weapon for Chinese steel companies seeking to break the deadlock and shatter the monopoly of Australian and Brazilian mining giants over iron ore trade.
Trend of iron ore stockpiles at China's 45 major ports
In February 2019, the Guinean government reclaimed 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 opened public bidding for the mining rights of the northern section.
To compete with Australian giant FMG, a consortium comprising Shandong Weiqiao, Yantai Port Group, China Hongqiao Chinese companies, as the majority, decided to cooperate with French and Singaporean companies to jointly form the "Winning Consortium Group" and submitted a bid to the Guinean government.
FMG's bid promised an investment of US$9 billion for development, but it did not explicitly commit to improving transportation in the mining area.
The "Winning Consortium Group" bid not only promised to invest US$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 ore could be transported by rail to Guinea's own port instead of being shipped out through Liberia.
News report on the Winning Consortium winning the bid
Faced with such attractive terms, the Guinean government ultimately awarded the mining rights to the Winning Consortium.
In Blocks 3 and 4 of the southern section of Simandou, Rio Tinto had always been the dominant player, with no external disputes.
It was difficult for Chinese companies to compete with Rio Tinto for this prized asset.
Following the principle of "if you can't beat them, join them," the state-owned enterprise Aluminum Corporation of China (02600)reached an agreement with Rio Tinto in 2010 to invest and take an equity stake, jointly developing the southern mining area.
At present, the shareholding ratio in the southern section of the Simandou mining area is 45% for Rio Tinto, 40% for Chinalco, and 15% for the Guinean government.
As a result, Chinese companies have established a firm foothold in both the northern and southern sections of Simandou through bidding and equity investment.
In 2010, Aluminum Corporation of China and Australia's Rio Tinto reached an agreement
What remained was to develop the mine and carry out major infrastructure construction.
Developing Simandou is a profitable major undertaking for both China and Guinea.
According to the plans of the Guinean government and relevant companies, the northern section of Simandou is expected to produce 100 million tons of iron ore annually in the future, and the open-pit mining area in the southern section can also reach 100 million tons.
This will give Chinese steel companies more options in the future, and may even help lower iron ore prices and strengthen their bargaining power with overseas mining giants.
For the Guinean government, the development of Simandou can drive the country's economic development and raise its infrastructure level.
In particular, the deep-water port and railway built by the Winning Consortium will benefit the Guinean people for a long time to come and improve transportation in Guinea.
It can be said that the development of Simandou is another model of mutual benefit between Chinese enterprises and Third World countries.
Workers building the railway in the mining area
Now Guinea has suddenly fallen into a coup, which can be described as an unexpected complication.
In particular, just as China's iron ore resources had made a breakthrough, a military mutiny broke out in Guinea, which inevitably makes people wonder whether there is something else behind it.
The plans Chinese enterprises had made to participate in the development face unpredictable risks.
The military government that came to power in Guinea, like the Taliban in Afghanistan, faces the same problem:
It is easy to win power, but hard to hold it.
In today's world, to hold power securely, one still has to pursue economic development, and in the end, still make good use of the huge rich deposit of Simandou.
To make good use of Simandou, development must come first, then buying and selling.
The former requires capital and technology, the latter requires channels and markets, and China has certain advantages in all of these.
In particular, China is the world's largest consumer of iron ore, and only China can absorb such a huge deposit as Simandou.
On September 6, Doumbouya, the head of the military government that came to power through the coup, announced the lifting of the curfew in mining areas including Simandou to ensure that production in the mining areas proceeds normally.
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 maneuvering.
The development of Simandou also provides valuable experience for Chinese enterprises to actively open up overseas ore markets in the future.
At the same time, it also reminds us that we still need to find more ore sources and mine them independently in order to safeguard the security of the country's resource supply
