Why Pilbara’s iron ore giants will grow faster than Simandou (2023)

To put it another way, the big incumbents will collectively add a Simandou to their export volumes by the time Simandou – under a best-case scenario – starts sending its first shipments to customers for trialling.

That should put Simandou into some context; as a competitor, it’s akin to the incremental growth ambitions that the big miners can deliver with a tweak here and some low-cost investment there.

It poses virtually no competition to the big miners’ existing businesses.

Unlikely to ship

The Simandou proponents have spoken of a first stage shipping of 60 million to 80 million tonnes a year before potential expansions beyond 100 million tonnes in the distant future.

Australian miners shipped 874 million tonnes in the year to June 2022 and the department of industry expects that will rise to 920 million tonnes a year by June 2024.

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Mining projects are not sports cars that go from a standing start to top speed in a matter of seconds.

Why Pilbara’s iron ore giants will grow faster than Simandou (1)

For example, BHP expects three years will separate first ore from its new South Flank mine in Western Australia and the date when the mine starts operating at full capacity.

So even if Simandou begins exporting in 2025, it is highly unlikely to ship anywhere near 60 million tonnes that year.

Macquarie analysts expect the Simandou consortium that Rio Tinto is part of to ship about 5 million tonnes in 2025, then 10 million and 20 million tonnes in 2026 and 2027 respectively.

The Rio consortium is one of two developing mines at Simandou and the two consortia will share the railway, so it’s reasonable to assume Rio’s Simandou rivals will ship similar volumes in those years.

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As Simandou was back in the headlines again on Monday, BHP was expanding its berths at Port Hedland and Fortescue was putting the finishing touches to its Iron Bridge magnetite project ahead of first exports this year.

Both Rio and BHP are coming to the end of a building phase that saw volumes (and product quality in Rio’s case) plateau or fall for several years in a row.

The next few years will likely see those companies deliver low-cost volume growth using export systems that are already built and require only minor works to clear supply chains.

Whatever your view of Mark McGowan, WA remains a parliamentary democracy in the traditions of the Westminster system with rule of law.

No sleep lost

Guinea is run by a military junta, so be prepared to be surprised.

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The most likely outcome from all this iron ore volume growth is that prices are headed lower from Friday’s Platts price of $US126.65 a tonne, regardless of whether Simandou enters the market.

Macquarie expects benchmark ore will average $US105 a tonne in 2025 and $US91 a tonne in 2028.

The big three Australian iron ore miners won’t lose any sleep about prices in that territory.

The Australian Financial Review estimates that Fortescue was still making about $US15 profit margin on each tonne when the “benchmark” iron ore price hit $US79.50 in October last year.

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So, will low iron ore prices make the Simandou partners waver in their commitment to the project?

Chinese involvement leads many to assume the project will keep running even if it is loss-making, particularly given the oft-stated strategic goal of diversifying China’s iron ore supply away from Australia.

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But not all the partners in Simandou are Chinese.

What about the rest of the Australian iron ore industry beyond the big three miners?

Gina Rinehart’s Roy Hill project has survived lower prices (it started exporting when the benchmark price was below $US50 a tonne) and sells the bulk of its product to the Korean, Taiwanese and Japanese steelmakers that are Mrs Rinehart’s partners in the mine.

Consider Roy Hill close to bulletproof.

Simandou’s volumes would make life difficult for tiny, opportunistic Australian iron ore miners like Cufe and Fenix Resources and poses some interesting questions about Mineral Resources’ plan to build a new iron ore export hub at Ashburton in the West Pilbara.

The ‘sleeping giant’

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That plan to unlock the “sleeping giant” of Australian iron ore got underway with a $3 billion final investment decision back in August, so it is out of the blocks faster than Simandou.

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Macquarie reckons more than 28 million tonnes will leave Ashburton in 2025, helping Mineral Resources raise its total exports from less than 20 million last year to more than 46 million in 2025.

One of the big foreign investors in the Ashburton plan is the same Chinese state-owned steelmaker that has become the driving force in Simandou in recent years, Baowu.

Ashburton isn’t Baowu’s only investment in Australian iron ore; back in September the company agreed to pump $US700 million ($1.03 billion) into Rio’s new Western Range iron ore project in WA.

Baowu also agreed to be Western Range’s biggest customer, buying 126.5 million tonnes over 13 years.

Would Baowu want to pump billions into Simandou to destroy the value of its investment in Australian iron ore?

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More likely, Baowu knows these projects can co-exist.

Rather than directly compete with Simandou, don’t be surprised if Baowu’s involvement in Ashburton results in the lower grade stuff from the West Pilbara (iron grades at 60 per cent and below) becoming blending stock with Simandou ores, which will have iron grades closer to 65 per cent.

For steel mills built to consume ore with 62 per cent iron, a blend of Simandou and Ashburton ore might be the Goldilocks mix.

Simandou is regularly held up as the big, bad bogeyman that will bring Australia’s biggest export industry to its knees, but the project is just one of many foreign aspirants trying to grab a small- to medium-sized niche in an industry that Australia will likely dominate for decades.

Iron ore wannabies

North American mining titan Robert Friedland is trying to bring Guinean iron ore to market via Liberia and Fortescue wants to develop an iron ore project in Gabon.

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The Republic of Congo would like to become an iron ore exporter and in 2020 it stripped two small Australian companies of their Congolese projects and handed them both to a rather opaque outfit that most people assume is backed by China.

In this world of iron ore wannabes, the foreign rival that matters most to the Australian industry in the decade ahead is Brazil.

Vale’s recovery from a catastrophic and deadly dam collapse in 2019 has been slower than the Brazilian company expected.

That’s why iron ore prices have been so high over the past four years, delivering to Australian miners the most unfortunate of fortunes.

But if we take Vale on its word – a luxury we are affording to the Simandou aspirants – then 17 million extra tonnes of iron ore fines, pellets and briquettes will hit the market in 2023 while the Simandou partners are still discussing who will pay for the railway and port.

By 2026, Vale will have 72 million tonnes of extra iron ore in the market.

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By the early 2030s Vale plans to have about 117 million tonnes more iron ore in the market than it did in 2022, pushing its annual output close to 460 million tonnes.

Vale is notoriously optimistic, so there is every chance the Brazilian giant will under-deliver on that growth strategy.

But Vale’s railways and ports are already built and the company can fund growth out of cashflows; so Vale’s volume growth must be considered more probable than Simandou’s.

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Investors concerned about the impact new supply will have on iron ore prices would be well advised to focus more on Brazil than Guinea.

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