Insight: Global glut threatens West African iron ore ambitions

African Minerals

14/05/2015 17:46

* Iron ore price fall hits West African mines 
    * Projects seen as risky due to high costs, infrastructure 
    * Long-term low prices could sound a death knell - analysts 
    * Chinese firms snap up deals, could rescue some projects 
 
    By Umaru Fofana 
    PEPEL, Sierra Leone, May 14 (Reuters) - Red piles of iron 
ore and rusting railway wagons in the deserted stockyard at the 
port of Pepel bear silent witness to a crisis engulfing Sierra 
Leone's mining industry and threatening others across West 
Africa. 
    The conveyor belt out to the jetty on the slow-moving Rokel 
river has remained idle for most of the past few months as only 
a handful of ships have anchored at the moribund port. 
    At the height of the commodities boom last decade, West 
African countries became magnets for miners seeking untapped 
iron ore, diamonds, gold, bauxite and other minerals. 
    In Pepel, locals anticipated an economic surge for their 
civil war-ravaged country when London-listed firm African 
Minerals  AMLZF.PK  started shipping ore four years ago from its 
Tonkolili mine.  
    Discovered in 2008 and lying some 200 km (124 miles) to the 
northeast, Tonkolili is one of the world's largest iron ore 
deposits. 
    But a 60 percent slump in iron ore prices  .IO62-CNI=SI  
over the past year, amid a slowdown in Chinese consumption, 
brought a bonanza that had been expected to last 60 years to a 
screeching halt. 
    The iron ore slump hit debt-strapped African Minerals hard. 
Prices fell below its high costs, forcing it to shut operations 
in November, and it went into administration in March after 
failing to repay its partner, China's Shandong Iron and Steel 
Group.  ID:nL5N0W83NH  
    "We were devastated when we heard that the company was 
closing down," said Pepel's chief Alhaji Bai Adam Kabbah. "We 
don't want this company to leave us, as we have started deriving 
some benefits."  
    Shandong acquired the 75 percent stake in Tonkolili it did 
not already own last month and has pledged to invest $600 
million and increase production by 25 percent.  ID:nL4N0XH5LB   
    Yet, despite an announcement by President Ernest Bai Koroma 
this month that production would restart soon, it was not clear 
when that will happen and if it would be profitable. 
    A spokesman for Shandong said the timing of the reopening 
and the expansion had not yet been defined.  
    Across the region, dozens of mining projects that attracted 
investors when iron ore hit $190 per tonne in 2011, have either 
stalled or been abandoned as prices hover around $60.  
    With analysts saying prices may stay low for years, it could 
sound a death knell for West Africa's iron ore industry. 
    BHP  BLT.L , the world's largest mining company, and rival 
Rio Tinto  RIO.L  RIO.AX  are locked in a battle to become the 
lowest-cost iron producer, cranking up output from mines in 
Australia as they seek to squeeze competitors out of the market. 
    Paul Gray, iron ore analyst at research firm Wood Mackenzie, 
said supply from West Africa could fall from 25 million tonnes 
this year to zero by 2017 if the market conditions persist. 
    Most West African projects require a long-term price well 
above $100 per tonne to achieve an acceptable return, he said. 
BHP and Rio have average iron ore costs of around $20 a tonne in 
Western Australia and are cutting that further.  ID:nL5N0Y31DF  
    In current market conditions, it looked unlikely that 
Australian firm Sundance Resources'  SDL.AX  Mbalam mine in 
Cameroon would get developed or even the massive Simandou 
project in Guinea, in which Rio Tinto holds a stake, Gray said. 
    "It is not looking good, it is looking worse by the day," 
Gray said. "Those projects which were looking shaky beforehand 
are now well and truly dead."  
     
    BLEAK OUTLOOK    
    On the back of the start of iron exports in 2011, Sierra 
Leone became one of Africa's fastest growing economies. Growth 
soared from 6 percent in 2011 to over 20 percent by 2013. 
    The government hoped that rising tax returns from mining 
would give it resources to tackle high unemployment and rebuild 
infrastructure devastated by Sierra Leone's 1991-2002 civil war. 
    Instead, the economy will contract by 12.8 percent this year 
as mining revenues dry up, according to the International 
Monetary Fund. 
    Iron ore exports have plummeted from 4.1 million tonnes in 
the first quarter of 2014 to 1.8 million in the same period this 
year, according to the International Steel Statistics Bureau.    
    London Mining, which operated Sierra Leone's Marampa mine, 
went into administration in October, citing debt, high costs, 
low iron ore prices and an outbreak of Ebola. 
    The worst epidemic on record of the deadly virus has killed 
over 10,000 people here and in neighbouring Guinea and Liberia - 
driving away many foreign contractors and investors.  
    "Life has never been the same for me since I was laid off," 
says Abdul Kanu who said he was a causal labourer at the mine.  
"We just went to work in November and we were told to go home! 
I've still not recovered from the shock".      
    The government of Sierra Leone - which like Guinea, Liberia, 
Cameroon, Congo and Gabon is relying on mining to drive its 
economy - has insisted that Tonkolili will reopen. 
    Government spokesman Alpha Kanu said workers at Tonkolili 
would be rehired. "Shandong Steel...will soon restart 
operations," he said, blaming Ebola for depressing the sector.  
         
    CHINA TO THE RESCUE? 
    Hunter Hillcoat, analyst at bank and asset manager Investec, 
 said there was scant incentive for Western companies to risk 
capital developing expensive and risky projects in West Africa 
given that the iron ore market remained in oversupply. 
    "I think it's is dead until the next decade or even longer," 
Hillcoat said, saying projects in Congo Republic, Cameroon and 
Gabon were likely to remain frozen. "There was a lot of 
potential in the area, just there wasn't the right 
infrastructure." 
    Outside Sierra Leone, other iron ore projects are also 
looking to the Chinese.  
    In its quarterly report, Sundance said it has been working 
with Chinese debt and equity providers to fund the costly rail 
and port infrastructure linked to its Mbalam mine in Cameroon in 
return for possible participation in construction activities. 
    The Shandong spokesperson said it would finance the 
Tonkolili expansion using debt. 
    But Colin Hamilton, head of commodity research at Macquarie, 
said he doubted whether Shandong would be able to convince 
Chinese banks to stump up the funds for Tonkolili. 
    He suggested Tonkolili needed an iron price of at least $70 
a tonne but forecast prices would remain below that for at least 
the next three years. 
    "In a world where Chinese steel production growth has slowed 
to low single digits there is no need for new iron ore supply," 
he said. "So why would you go to an infrastructure heavy project 
in a region that people view as risky?"  
 
 (Additional reporting by Bate Felix in Dakar and Silvia 
Antonioli in London; writing by Bate Felix; editing by Daniel 
Flynn and Philippa Fletcher) 
 ((daniel.flynn@thomsonreuters.com; +221 33 864 5076; Reuters 
Messaging: daniel.flynn.thomsonreuters.com@reuters.net)) 
 
Keywords: AFRICA IRON/