Simandou and other dark clouds


We once proclaimed that our wealth was derived by riding ‘on the sheep’s back’. More recently, we have ridden the iron ore train but all good rides come to an end and dark clouds are gathering on the horizon. The threat to our long-term prosperity is becoming clear.

Currently, China and Australia are bound together in a kind of mutual dependency. China takes around 85% of Australia’s iron ore exports which represents about 62% of China’s total iron ore imports. Australia’s iron ore exports to China are three times the size of those from next-ranked Brazil.

The $120 billion we received in iron ore export income from China in 2022/3 permeates every aspect of Australia through employment, company shareholder dividends including super fund growth and a myriad of government services that could not be afforded otherwise. In short, Australia’s living standards are supported by China’s need for our iron ore and a large drop in that income cannot be absorbed as a mere economic ripple.

Thus, we are mutually dependent – although China doesn’t like being so bound to Australia and certainly resents our criticism and repeating of American anti-Chinese talking points. Those criticisms of China are almost always valid but don’t sit well with the Chinese authorities. The Chinese think we should be more ‘grateful’ for helping Australia avoid the worst of the economic storms that ricochet around the world from time to time.

Now, after two decades of haggling, corruption, legal disputes and substantial development cost, the Simandou iron ore mine is nearing completion. According to Rio Tinto media releases, it will begin exporting its product to global markets from 2025. The Simandou mine in the Republic of Guinea contains the world’s largest untapped reserves of high-grade iron ore, estimated at 2.6 billion tonnes at grades of around 65%. Initially, 60 million tonnes will be shipped per year with rapid ramp-up to 100m/t then 150m/t per annum. For comparison, Australia’s Pilbara region iron ore is around 65-70% grade with 500m/t shipped to China annually.

So what?

The primary market for the Simandou mine will be China who, by the way, own 41.3% of blocks 1 & 2 (of 4 blocks) through Chinalco, in partnership with Rio Tinto.

We can realistically presume that the bulk of that initial 60m/t will be exported to China with a corresponding lessening in Australian iron ore demand. When Simandou production reaches 150m/t per annum by 2028, that could represent an export loss of at least $45 billion a year for Australia (at current prices).

But sadly for us, that’s not even half of it. New mines, depressed Chinese requirements and increased production by existing mines in Australia and overseas are having a big impact on the price per tonne. Moderating prices for the period of 2024-2028 are forecast to lead to lower earnings for iron ore, with total Australian export value falling to around $75 billion by 2027–28 (in real terms).

The most recent Resources and Energy publication forecasts that many mined resources will see price reductions between now and 2028. Australian gold, metallurgical and thermal coal, zinc, bauxite, nickel, oil and LNG are all forecast to fall in price. Only lithium, copper and uranium are predicted to see modest increases in volume and value.

The icing on the cake, if any were needed, is we recall in 2021 the Chinese government specifically pledged to reduce their reliance on Australian iron ore through diversification by boosting domestic iron ore production, significantly ramping up investment in overseas mines and, strengthen scrap steel recycling. At the time, Australian mining executives and government were sceptical. Now, not quite so much.

To be fair, it will take years for the Chinese to make good on their supply diversification plans. Their domestic iron ore is poor quality, new mines (anywhere) take years to develop and recycling is not always cost efficient.

However, China continues to take incremental steps towards reducing their reliance on our iron ore and, coupled with increased production and reducing export prices across numerous other mined products, Australia appears to be heading into dangerous economic waters.

I would like to think that Albo and Co are all over this. I would like to think that Resources Minister Madeleine King, Industry and Science Minister Ed Husic and Treasurer Jim Chalmers are in frequent meetings with each other and the private sector. But, I’m not confident.

Perhaps they have been lured into the siren song of Chris Bowen and think that Australia can become a global hydrogen hub or some other mystical industry.

Meanwhile, we amble towards an economic cliff that will impact every Australian.

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Roger
Roger
March 8, 2024 3:30 pm

I would like to think that Albo and Co are all over this.

I’d like to think this is the shock we need to force a rethink of our economic base (and I don’t mean green hydrogen).

Bill From The Bush
Bill From The Bush
March 8, 2024 3:52 pm

Albo and Co are incapable of being all over it as that would require an understanding of how the world actually works, rather than the fantasy world their union and green bosses live in.
The only thing they are all over is destroying the fabric of society, whats left of it.

Roger
Roger
March 8, 2024 4:14 pm

The only thing they are all over is destroying the fabric of society, whats left of it.

Actually, they’re all over destroying the economy.

The fabric of society comes next. What’s left of it.

Adelagado
Adelagado
March 8, 2024 5:28 pm

Public servants will be just fine.

Vicki
Vicki
March 8, 2024 5:37 pm

Congratulations, Speedbox – on a thoughtful & informative commentary on yet another potential debacle for Australia.

The Chinese have a much longer game than us. They are wise to source other countries for their requirements. Meantime, we just wallow in the temporary largesse.
I feel for the so-called “man in the street” who has little understanding of the cogs in the wheel turning to his longterm detriment. And more fool the rest of us who have enjoyed the party while it lasted.

Rabz
March 8, 2024 9:03 pm

The middle kingdom is a stinking communo-fascist sh*thole, currently angling for a massive military style adventure that establishes a “Grater East Asian Co-Prosperity Sphere” across Australasia.

This statement of the bleeding obvious brought to you by the Ozzie labore pardee and the corrupt incompetent quisling parasites within, bought off as they all are, by the CCP.

Rabz
March 8, 2024 9:06 pm

I tells ya. 🙂

Duc de Normandie
Duc de Normandie
March 8, 2024 9:30 pm

Very good post/article. Australia is wealthy from exports of raw commodities, especially coal and iron ore and other minerals. Some wheat and lamb, wool and wine. And that’s about it. Much of this does not involve added value. If these industries are shut down, poverty awaits.

Brisbane is a shiny modern city whose prosperity is built on mining. There’s the royalties to Queensland State for one thing, but also offices built from mining wealth reinvested. And many of these offices are occupied by mining companies, and professionals – lawyers, accountants, planners, brokers, engineers and so on – who provide services to mining. Other mining profits support other industries such as hospitality, hotels and retailing. If – when – this starts to unravel it will begin slowly and then very quickly.

A version of this is playing out in Aberdeen, once the wealthiest city in Scotland, but losing businesses, jobs and people because the government is shutting down North Sea Oil and Gas.

Stupid is as stupid does.

Siltstone
Siltstone
March 8, 2024 10:27 pm

Pilbara average grade is now well less than 65%, so Simandou is superior in that regard. But starting from scratch with 600km rail to an awful port location, capex and opex will be high. But of course the Chinese don’t concern themselves much with NPV calculations and want to see Pilbara prices dive. And the greenies now cease worrying about chimpanzees and other notables that will be bulldozed (why, because the Chinese are now in control, not nasty Westerners).

Fair Shake
Fair Shake
March 9, 2024 6:28 am

The SFLs were aware if this when in Government yet both sides of the arse cheeks nonchalantly carried on in a never ending spendathon. I am not worried about the loss of monkeys as we are overrun with baboons here.

Delta A
Delta A
March 9, 2024 9:50 am

A very thoughtful and informative post. Thanks, Speedbox.

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