Feeding China's Iron Ore Frenzy

West Africa is becoming a strategic player in global iron ore markets, emerging as a significant alternative source of iron ore and competing with Brazil and Australia's Pilbara region. West Africa is endowed with significant deposits of high-quality iron ore that are suitable for export to steel markets, including China, the world's largest iron ore consumer. Iron ore production in West Africa is expected to increase in the near future with new mines coming into production as a result of large scale iron ore development projects in the region. According to current exploration initiatives, it is estimated that proven reserves in the region will reach 400 million tons by 2020.

It is expected that increased demand on China's iron ore markets created by steel end-user sectors, such as construction and auto manufacturers, will drive the growth of West Africa's iron ore industry. In addition, China's planned infrastructure spending is estimated to have reached $1 trillion in 2012 and is expected to reach $1.8 trillion by 2017. As a result, China will require new sources of iron ore to meet its high demand. China has already invested significantly in the West African mining industry by financing mining and infrastructure projects, and also making off-take agreements to allow iron ore entities in the region to get the funds necessary to make projects operational.

The Hanlong Group, a privately-owned Chinese company, is planning to take over Sundance Resources, an Australian mining company, in 2013. According to Xinhua News Agency, Hanlong executives stated the acquisition process was slated to commence in February after the submission of documents to Australian authorities. In 2012, Sundance Resources said it had accepted a revised takeover offer from Hanlong in a deal worth about $1.45 billion. As part of the deal, Hanlong will gain control over Mbalam, a key iron ore project in central West Africa, which straddles the border between Cameroon and the Republic of Congo.

China's Iron and Steel Association (CISA) projects that China's steel demand will increase to approximately 800 million tons by 2015. It is expected that approximately two thirds of African iron ore will be exported to China. South Africa has already become the third largest supplier of iron ore to China as rival exporter India struggles to overcome troubles in its mining sector. Exports of iron ore from South Africa to China jumped to 40.6 million tons in 2012, a 12 percent increase over 2011 exports.

Although African iron ore exports are expected to increase in the coming years, the region has yet to establish the road and rail infrastructure needed to transport iron ore to ports, making the ore accessible to international markets. Nevertheless, iron ore development projects in West Africa are boosting investment in infrastructure. An estimated 5,000 km of rail and 11 new ports are expected to be developed. China is also playing a role in this area. In December 2012, China Merchants Holdings entered into a $185 million agreement with Djibouti Ports and Free Zones Authority to acquire a 23.5-percent stake in Port de Djibouti SA (PDSA). PDSA is strategically located for Chinese shipping activities in the region, and includes a multi-purpose terminal, a container terminal and a dry port.

With the increasing global demand for steel products, and increasing infrastructure development projects, the African continent will play a larger role in the global iron ore trade in the coming years and decades.

 

 

The ChinAfrica Econometer is produced by The Beijing Axis, a China-focused international advisory firm operating in four principal areas: Commodities, Capital, Procurement, and Strategy.

For more information, please contact:

Daniel Galvez, danielgalvez@thebeijingaxis.com

www.thebeijingaxis.com