Initially found in 1997, this new iron ore frontier is sort of ‘open for enterprise.’
In accordance with Rio Tinto, the principal investor within the area, the primary manufacturing from the Simfer mine is anticipated in 2025…Ramping up over 30 months to an annualised capability of 60 million tonnes yearly.
With that it’s all methods go for Simandou.
So, what does that imply for Australia’s financial crown jewel… The Pilbara?
On the floor, a wave of recent provide from Simandou looms as a substantial risk.
Simandou additionally hosts superior grades of round 65% ferrous content material in comparison with the Pilbara, which sits nearer to 60%.
Larger grades entice a premium within the iron ore market. That may have a big affect on working margins.
A couple of proportion positive factors might not seem to be a lot, however a better grade interprets to fewer impurities.
That has essential flow-on implications for metal makers.
You see, iron ore impurities like silica and alumina are blasted out in large furnaces, producing pig iron, an energy-intensive course of.
That makes low-grade ore costlier to course of, which is why some Pilbara ore is offered at a reduction within the iron ore market.
Only a few DSO (Direct Transport Ore) iron ore initiatives maintain the capability to export ore with a 65% ferrous content material… However Simandou is about to vary this panorama markedly.
But, Australia nonetheless holds benefits
Guinea, the West African nation internet hosting Simandou, is roughly 7,700 nautical miles farther from China than Australia.
Iron ore is a cumbersome commodity, making it costly to move.
Proximity to Asian markets stays a big benefit for Australia’s iron ore producers… Notably amid ongoing disruptions throughout main delivery routes.
However one other angle revolves round geopolitical danger.
You see, Guinea just isn’t the worst place to do enterprise, however it’s removed from a tier-one vacation spot.
Human rights abuses, many years of corruption, brutality and dictatorships are just some of the issues right here.
In September 2021, the nation’s long-term President, Alpha Condé, was captured by the nation’s armed forces in a coup d’état, the third in simply 40 years.
As a significant provider, the army coup precipitated world bauxite costs to soar on the London Steel Change, climbing as excessive as $2,782 per tonne.
Occasions like this may undoubtedly give Rio Tinto and its different Simandou growth companions sleepless nights.
And it wouldn’t be the primary time…
In 2008, the mining large misplaced nearly half of its mining concession at Simandou, which was on the again of the Guinea Minister of Mines all of a sudden relinquishing the corporate’s rights.
Geopolitical drama can erupt all of a sudden and with out warning on this a part of the world, posing an ongoing risk to Rio’s huge capital funding on this rising iron ore hub.
Nonetheless, none of those dangers exist in Australia.
A market able to bust?
Undoubtedly, there’s plenty of murkiness within the iron ore market… Rising manufacturing from Simandou looms as a key risk.
Nonetheless, on the demand aspect, a weakening Chinese language actual property market can be diminishing the long-term outlook.
In opposition to the gloom, it’s laborious to be bullish on this bulk industrial commodity.
However if in case you have a contrarian bent, this could possibly be a market value exploring…
On the massive finish of the city, Fortescue [ASX: FMG] has pulled again 25% since its February highs.
Whereas within the mid-tier area, Champion Iron [ASX: CHN] has shed the same quantity.
Each shares supply extremely leveraged publicity to a possible turnaround within the iron ore market.
However the place might that come from?
After peaking at round $130/tonne in early January, the steel (briefly) corrected just under $100/tonne.
That drove a wave of panic in mainstream media, commentators had been pretty daring of their predictions of a crash… Take this from a number of weeks in the past in Information.com.au:
But, regardless of the dramatic headlines, iron ore’s ‘free-fall’ in 2024 seems to be extra like a minor blip, small arrow under:
The commodity is consolidating properly, above $100/tonne, after posting a sequence of upper lows during the last 18 months.
Provided that we’re nonetheless early in a attainable restoration part, now could possibly be a good time to begin alternatives on this discounted sector.
Notably as China begins to rev up its butchered actual property market.
Final month, Beijing introduced it will scale back the price of shopping for a house by chopping mortgage rates of interest and the minimal down fee ratio from 30% to twenty%.
This is without doubt one of the nation’s most focused stimulus plans since reopening from lockdowns in early 2023.
Measures which can be immediately aimed toward propping up its weakened actual property market.
As well as, China’s newest GDP numbers confirmed 5.3% progress in Q1 2024, exceeding its 5% goal.
That is at odds with what we hear about China’s economic system within the West.
However look previous the unfavourable banter, and issues might not seem as doom and gloom within the iron ore market as most make out.
That’s excellent news for Australia’s iron ore miners.
James Cooper runs the commodities funding service Diggers and Drillers. You can too comply with him on X (Twitter) @JCooperGeo