Tuesday, July 10, 2012

559 Resources Boom will end as Chinese mines in West Africa come onstream

Resources Boom will end as Chinese mines in West Africa come onstream

(1) Michael Pettis: by 2015 hard commodity prices will have collapsed
(2) Ross Garnaut: Australia's miners will soon have to compete with
Chinese-funded mines in West Africa
(3) West Africa to supply Chinese iron demand
(4) West Africa: The New Iron-ore Frontier
(5) The Pros and Cons of Mining in West Africa

(1) Michael Pettis: by 2015 hard commodity prices will have collapsed


By 2015 hard commodity prices will have collapsed

Michael Pettis

September 16, 2012

For the past two years, as regular readers know, I have been bearish on
hard commodities. Prices may have dropped substantially from their peaks
during this time, but I don't think the bear market is over. I think we
still have a very long way to go.

There are four reasons why I expect prices to drop a lot more.

First, during the last decade commodity producers were caught by
surprise by the surge in demand. Their belated response was to ramp up
production dramatically, but since there is a long lead-time between
intention and supply, for the next several years we will continue to
experience rapid growth in supply. As an aside, in my many talks to
different groups of investors and boards of directors it has been my
impression that commodity producers have been the slowest at
understanding the full implications of a Chinese rebalancing, and I
would suggest that in many cases they still have not caught on.

Second, almost all the increase in demand in the past twenty years,
which in practice occurred mostly in the past decade, can be explained
as the consequence of the incredibly unbalanced growth process in China.
But as even the most exuberant of China bulls now recognize, China's
economic growth is slowing and I expect it to decline a lot more in the
next few years.

Third, and more importantly, as China's economy rebalances towards a
much more sustainable form of growth, this will automatically make
Chinese growth much less commodity intensive. It doesn't matter whether
you agree or disagree with my expectations of further economic slowing.
Even if China is miraculously able to regain growth rates of 10-11%
annually, a rebalancing economy will demand much less in the way of hard

And fourth, surging Chinese hard commodity purchases in the past few
years supplied not just growing domestic needs but also rapidly growing
inventory. The result is that inventory levels in China are much too
high to support what growth in demand there will be over the next few
years, and I expect Chinese in some cases to be net sellers, not net
buyers, of a number of commodities.

This combination of factors – rising supply, dropping demand, and lots
of inventory to work off – all but guarantee that the prices of hard
commodities will collapse. I expect that certain commodities, like
copper, will drop by 50% or more in the next two to three years.

Not everyone agrees. In the July 17 blog entry I made a reference to a
book by Dambisa Moyo, a former investment banker turned economic writer,
called Winner Take All, in which the author argues that the world is
facing a crisis in the form of a commodity shortage, and she expects
prices to surge. Unlike her, however, I expect the price of hard
commodities and certain industry-related soft commodities (like rubber)
to drop sharply in the next three years, and to stay low for many years

To address the first of the four reasons I expect hard commodity prices
to drop, excess growth in supply, one month ago I spoke at a conference
in Sydney, after which Gerard Minack, chief economist at Morgan Stanley
Australia, gave a presentation on the world economy and, more
specifically, on commodities. His presentation was an eye-opener for me.

Based on my many trips in recent years to places like Australia, Peru
and Brazil, I had plenty of anecdotal reasons to believe that commodity
producers had significantly overestimated the sustainability of the
Chinese growth model (or, perhaps more accurately, had not really
thought about whether or not it was sustainable). I was worried that
they were expanding production very quickly. Everywhere I went I heard
stories of large-scale investments to expand production.

Many producers have acknowledged recent price declines, but they seem to
believe that these are likely to be short-lived and that prices will
soon rebound when Chinese demand returns. For example the Financial
Times' Alphaville quotes Nev Power, chief executive of Fortescue Metals,
discussing iron ore at a recent meeting:

Iron ore prices have slumped to $US104 a tonne in recent days, yet Mr
Power said it could soon rebound as high as $US150. "As soon as
restocking and production returns to normal we expect to see prices back
in the $US120 to $US150 per tonne range," he said.

Production capacity has grown

He will almost certainly be wrong. But whereas my evidence for claiming
continued high growth rates in production was conceptual and anecdotal,
Minack has actually gone out and tried to measure the potential increase
in supply. Minacks' argument is that because of twenty years of stable
or falling prices, until the early part of the last decade there had
been a minimal amount of investment globally into commodity producing
facilities. Commodities seemed to be in a permanent slump and no one was
interested in expanding supply.

The surge in Chinese demand at the beginning of the last decade
consequently caught everyone by surprise. Minack shows, for example,
that in the past twenty years, global demand for steel grew by roughly
6% a year, with most of that coming in the past decade. If you exclude
China, however, global demand for steel grew by only 2% a year in the
past twenty years, implying that China accounted for almost all the
increase in global demand in the last twenty years – and almost all of
that occurred in the past decade. In the past ten years Chinese demand
for iron ore has grown by 16% a year on average.

The initial surge in demand caught commodity producers off-guard.
Because they were unable to ramp up production quickly enough, prices
surged. After a few years of high prices, however, commodity producers
responded to the huge new increase in demand by planning major
expansions in production facilities.

Changing production requires years of exploration, investment, and
upgrading, however, so the decision to increase production could only
result in higher production many years later. This is shown by a set of
cost curves, which are at the heart of Minack's presentations, and these
curves graph the short-term relationship between price and volume. For
any given amount of demand, in other words, the graph showed the
corresponding price.

The supply curves, of course, are positively sloped – the higher the
price of copper, for example, the more copper will be produced and sold.
The slopes of the curves, furthermore, are very sensitive to existing
production capacity, and Minack lists curves for several points in time
as production capacity changes. As one would expect, when demand for
copper is less than production capacity the curves slope gently upwards,
implying that small increases in copper prices correspond to very large
increases in copper supply.

But this curve slopes gently upwards only up to a point, representing
the limits of normal production capacity, after which the slope of the
curve is almost vertical. Beyond this point – of maximum capacity – no
matter how high the price of copper, in the short term supply cannot be
substantially increased. Or to put it another way, beyond that point
small increases in demand translate into large increases in price.

In 2001, according to Minack's numbers, this transition point for copper
was roughly 12 million tons, above which it would be extremely difficult
for copper producers to supply demand except at extremely high prices.
There was some improvement in capacity during this time but not much. By
2004 this same inflection point had increased only slightly, to roughly
13 million tons. This, as Minack pointed out, reinforces the argument
that copper producers were not expecting any significant increase in
demand and so had not prepared for it.

But by 2004-5 it was increasingly evident that demand was rising
quickly. Copper producers responded, and thanks to increased investment
in countries like Peru and Chile, among others, production capacity
surged. By 2018 the inflection point is projected to be at roughly 21
million tons, suggesting that between 2004 and 2018 an enormous amount
of additional copper production has become or is going to become
available. In his July 17 "Down Under" note, Minack goes on to say:

What's notable, in my view, is the forecast increase in supply versus
the actual supply increases seen over the past decade. For copper, the
increase in global supply in each of the next seven years will be
roughly equal to the increase in supply over the decade to 2011.
Consequently, it would require a material acceleration in demand to keep
prices at current levels in the face of this supply increase.

The same story is more or less true for iron ore, although the expansion
is supply has been more dramatic. In 2006, according to Minack's
numbers, the inflection point was at roughly 900 million tons, above
which iron ore producers would have difficulty supplying demand. By 2011
it was at 1,300 million tons and by 2014 and 2020 it is expected to be
1,900 million and 2,600 million tons respectively. In just over ten
years, in other words, production capacity will have nearly tripled.
This is a lot of iron that has to be absorbed by someone.

The supply considerations are exacerbated by the amount of stockpiling
taking place in China. I won't rehash all my arguments from earlier
newsletters about stockpiling but it is enough, I think, simply to list
some of the articles I found in my daily readings last week.


The first article came on Tuesday from Bloomberg:

Cotton consumption in China, the world's largest user, may shrink 11
percent this year as a deteriorating economy hurts demand and causes a
buildup in commodities, according to Weiqiao Textile Co.

…Coal inventories at Qinhuangdao port rose to 9.33 million tons on June
17, the highest since 2008, data from the China Coal Transport and
Distribution Association showed. Stockpiles were at 6.69 million tons as
of Aug. 19. While steel-product stockpiles at the nation's 26 major
markets have dropped for five months as the end of July, they're still
19 percent higher this year, according to the China Iron & Steel

Commodity-related companies have flagged their concern. Noble Group Ltd.
(NOBL), Asia's biggest listed commodity supplier, expects a tough
environment for the next 12 to 24 months, Chief Executive Officer Yusuf
Alireza said yesterday. Vale SA (VALE5), the world's largest iron-ore
producer, said this month that China's so-called golden years are gone
as economic growth slows.

The article in Tuesday's Financial Times talks about excess inventory of
a wide variety of products and refers to an earlier article, from July,
that claims that China's coal inventory is up 50% from last year:

Memories of the London Olympics are already beginning to fade. Li Ning,
a Chinese sportswear maker, had better hope that they last a while
longer. Like thousands of Chinese companies from property developers to
car manufacturers, Li Ning is sitting on a mountain of unsold products.
Whether they can whittle down these bulging inventories is the single
most important question facing corporate China and arguably the economy
as a whole.

…The problems of Li Ning and the sportswear industry are just the tip of
the iceberg in China. Across virtually all corporate sectors,
inventories are excessive. The stock of unsold homes is the most
worrying, because property plays such a dominant role in the economy.
Vanke, the country's biggest developer, estimates that it would take
about 10 months to absorb all the unsold homes in China, which is
reasonably quick. The snag is that this figure doesn't count the
millions of homes that have been sold but are sitting empty.

Then there is the auto sector. Car sales have been remarkably resilient
despite the economic slowdown. But manufacturers have been more bullish
than consumers. The inventory index (inventories divided by sales) was
1.98 at the end of June, according to industry data. More than 1.5 is
seen as critically high.

The unsold mountains of electronics and white goods are also looking
Himalayan in scale. Over the past week, the country's main retailers
descended into a price war. It began when online retailer 360buy.com
vowed that it would sell home appliances at a zero profit margin.

The commodities sector is also dealing with a huge inventory overhang,
most graphically in the piles of coal that have built up at ports across
the country.

In an article one day later from the South China Morning Post, the
concern is about copper:

At first glance, China's copper demand is soaring. According to Ross
Strachan, commodities analyst at independent research house Capital
Economics, if you add domestic production of refined copper to China's
imports and changes to official stockpiles, then it appears that copper
consumption leapt 22 per cent in the first seven months of 2012 compared
with the same period last year.

But if you look at the volume of copper products actually turned out by
China's factories – pipes for air conditioners, windings for electrical
transformers, foil for circuit boards and the like – then output was
flat in July compared with a year earlier (see the second chart). Weak
output makes sense. Together, manufacturing industries, home appliances
and the construction sector accounted for half of China's copper
consumption last year.

With economic growth now slowing and property investment weak, demand is
bound to be soft. Analysts at Credit Suisse expect China's copper usage
to grow by just 2 per cent this year and 1 per cent in 2013, in contrast
to the 26 per cent growth seen at the height of China's stimulus effort
in 2009.

This gaping discrepancy between apparent demand and actual consumption
implies there has been a massive build-up in unreported stocks of
refined copper held in bonded warehouses and elsewhere.

Strachan at Capital economics believes these stockpiles have climbed by
900,000 tonnes since the middle of last year. Standard Chartered puts
the total amount held in bonded warehouses at 600,000 tonnes, together
with another 400,000 held elsewhere.

To put these figures into perspective, the LME's worldwide network of
warehouses reports copper stocks of just 231,000 tonnes. In other words,
China is sitting on a huge overhang of refined copper.

This partly reflects state corporations' efforts to build strategic
reserves of the metal. But it is also the result of massive speculation
in copper. The details of the trade are complex. But in a nutshell,
companies buy copper on margin, then use the metal as collateral to
obtain low-cost loans, using the proceeds to bet on higher-yielding assets.

Not just the raw stuff

And just one day later I saw this article in Bloomberg:

Rubber is poised to drop as sustained supplies from Southeast Asia and
falling demand from China's tiremakers push stockpiles to match their
record at Qingdao port, the main shipment hub, an industry executive
said. Futures fell for the first time in four days.

Inventories in the bonded zone, where traders store deliveries before
paying duties, will probably climb to 250,000 metric tons by end-August
from 240,000 tons last week, Li Xiangou, chairman at the Qingdao
International Rubber Exchange Market, said in an Aug. 17 interview.
China accounts for 33 percent of global demand and tires represent 70
percent of natural-rubber consumption in the country. Reserves last
reached 250,000 tons in mid-January, he said.

The article goes on to quote one Chinese rubber trader as saying "Many
Chinese tire makers are mired in high inventories of end-products right

I can easily cite many more articles, but as this short roundup
suggests, finding articles about huge stockpiles in China is a pretty
easy game to play. This shouldn't come as a surprise and indeed I have
been discussing this for the past three or four years. When financing
costs are low or even negative in any economy, there is a tendency to
accumulate inventory since it is not only easy to finance but, thanks to
low or negative financing costs, it can also be extremely profitable. If
prices just keep up with inflation, inventory earns a profit, and the
greater the pile, the greater the profit.

In addition in the past decade as China's trade relationship with the
rest of the world has expanded and as China's economy has grown, most
Chinese businesses have only experienced rising prices – both for
commodities and many kinds of goods. As a result firms that tended to
hold high inventory have outperformed firms that haven't.

This has created a selection process that favors accumulation. Companies
that prefer to hold more, rather than less, inventory of commodities and
goods in which commodities are a high cost component have outperformed
their rivals, and so the whole market has moved towards a preference for
stockpiling, much in the same way that, according to Hyman Minsky,
periods of stable or rising asset prices force the financial system into
taking on excessive risk. Since overstocking has always been a winning
strategy until very recently, it is a pretty safe bet to assume that
Chinese traders, speculators, end-users and investors have a built-in
prejudice towards being long or longer inventory.

The overstocking problem in part has also had to do with financing
constraints. In late 2010 and early 2011 in this newsletter I wrote
often about commodity inventory financing as a popular tactic among
Chinese businesses and banks aimed at getting around regulatory
constraints on lending.

By importing commodities that were funded through trade financing and
then using inventory receipts to borrow domestically, banks and
borrowers could get around lending restrictions. We have never been able
to figure out exactly how much of this was going on, but there was
plenty of anecdotal evidence to suggest that this was a pretty
wide-spread scheme and it involved a variety of commodities – copper,
most famously, but also soy, magnesium, cotton, rubber and several others.

Finally, I should add that in China there is, more than in any other
country I know, a sense that physical ownership of commodities or of
commodity producing facilities creates substantial intangible benefits.
This may be a legacy of Maoist perceptions of self-sufficiency, or it
may have to do with a history of unstable political and monetary
arrangements, but whatever the reason Chinese are often obsessed with
the need for physical control of commodities.

The result has been a tendency to hold much larger commodity inventories
than can be justified by business needs and risk management concerns. By
the way when economists try to calculate the amount of unsold inventory
of commodities they typically focus on the raw commodity, but it is
important to remember that inventories of finished goods are also forms
of raw inventory.

An empty apartment, for example, contains lots of copper wiring, and
although it is extremely unlikely that the copper will ever be melted
down and sold, it nonetheless has the same price effect as unsold copper
inventory. Why? Because an empty apartment today is one less apartment
that will be built tomorrow to fill real demand, and so it represents a
reduction in the future amount of copper that will be purchased to make
copper wire. The same is true of other finished goods.

What about demand?

China currently is the leading consumer of a wide variety of commodities
wholly disproportionate to its share of global GDP. The country
represents roughly 11% of global GDP if you accept the stated numbers,
and substantially less if you believe, as I do, that growth has been
overstated because of the difference over many years between reported
investment, i.e. its input value, and the actual economic value of
output. China nonetheless accounts for between 30% and 40% of total
global demand for commodities like copper and nearly 60% of total global
demand for commodities like cement and iron ore.

The only reason China has provided such an extraordinarily
disproportionate share of global demand for hard commodities has been
the nature of China's growth model. While China may represent only 11%
or less of the global economy, it represents a far, far greater share of
the world's building of bridges, railroad lines, subway systems,
skyscrapers, port facilities, dams, shipbuilding facilities, highways,
and so on.

Over the next decade, two things are going to change. The first is
increasingly recognized, and that is that Chinese growth rates will drop
sharply. The second is that China will rebalance its economic growth
away from its appetite for commodities.

The consensus on expected economic growth among Chinese and foreign
economist living in China has already declined sharply in the past few
years. From 8-10% just two years ago, the consensus for average growth
rates in China over the next decade has dropped to 5-7%. But the
historical precedents suggest we should be wary even of these lower
estimates. Throughout the last 100 years countries that have enjoyed
investment-driven growth miracles have always had much more difficult
adjustments than even the greatest skeptics had predicted.

After all, there were many Brazilians in the late 1970s who worried that
Brazil's growth miracle was unsustainable and would end badly, but none
expected negative growth for a decade, which is what happened during the
terrible Lost Decade of the 1980s. Towards the end of the 1980s, to take
another example, a few brave skeptics proclaimed that the Japanese
miracle was dead and predicted that for the next five or ten years
average Japanese growth rates would slow to 3 or 4% (in 1994 the IMF
belatedly proclaimed that Japan's long-term growth rate had dropped to
4%), but no one, even the most skeptical, predicted twenty years of
growth below 1 percent. Finally when the USSR's economy was hurtling
forward in the 1950s and 1960s, and expected to overtake the US within a
few decades, even the most die-hard anti-communists did not expect the
virtual collapse of the economy in the 1970s and 1980s.

Similarly, the current consensus for Chinese growth over the next decade
is almost certainly too high. Even if Beijing is able to keep household
income growing at the same pace it has grown during the past decade,
when Chinese and global conditions were as good as they ever could be,
it will prove almost impossible for the economy to rebalance at average
GDP growth rates over the next decade of much above 3 percent.

This 3% average will not be distributed evenly, of course, and we should
expect higher growth rates at the beginning of the period (perhaps 5-6
percent over the next two years) and lower growth rates towards the end.
But as this happens, over the next two years the consensus on China's
long-term growth rate will continue to drop sharply, and this will
further affect commodity prices.

But even this underestimates the change in demand for commodities. For
thirty years, and especially for the past ten years, China's
extraordinary GDP growth was driven by even higher rates of investment
growth – generating for China the highest investment rates and
investment growth rates in history. Consumption growth failed to keep
pace during this time.

But rebalancing means, by definition, that for the next few years
consumption growth must outpace GDP growth, and so also by definition
investment growth must be less than GDP growth. Even if China is able to
achieve 5-7% growth rates over the next decade, which I think is almost
impossible, this implies that consumption growth will rise to 7-10%
annually, and so from 25% growth in the last few years Beijing will be
able to allow investment to grow no more than 2-4% annually, and much
less if GDP growth rates are as low as I expect.

Which way can prices go?

For these reasons I am very pessimistic about hard commodity prices and
expect them to drop substantially further in the next two to three years.

Production capacity for hard commodities is rising much too quickly, in
a belated response to the unexpected surge in demand just under a decade
ago. Expected economic growth rates in the country that has been biggest
source of new demand – virtually the only source – have fallen sharply
and commodity prices have fallen with them. Historical precedents and
the arithmetic of rebalancing suggest, however, that the current
consensus for medium-term Chinese growth is still too optimistic.
Expected growth rates will almost certainly fall further in the next two
years. Beijing has finally become serious about rebalancing China's
economy, and rebalancing means shifting Chinese growth away from being
disproportionately commodity intensive. Instead of representing 30-60%
of global demand for most hard commodities, Chinese demand will shift to
a more "normal" level. Remember that even a very limited shift – from
50% of global demand, for example, to a still high 40% of global demand
– represents a sharp drop in global demand. There has been so much
stockpiling of commodities and finished goods with implicit commodity
content in China that the country could well become a net seller, and
not net a buyer, of a wide variety of commodities in the next few years.
This is going to come as a shock to many people. In my discussions with
senior officials in the commodity sectors in Brazil, Australia, Peru,
Chile and even Indonesia, it seems to me that many analysts have been
insufficiently skeptical about the Chinese growth model and are unaware
of how dramatically the consensus has changed in the past two years.
They have failed to understand how deep China's structural problems are
and how worried Beijing has become (this worry may be best exemplified
by the extraordinary growth in flight capital from China since early 2010).

Under these conditions I don't see how we can avoid a very nasty two or
three years ahead for commodity producers. This isn't all bad news, of
course. What will be a disaster for hard commodity producers will be
great news for companies and countries that are commodity users or
importers. One way or the other, however, we are going see a big change
in the distribution of winners and losers.

(2) Ross Garnaut: Australia's miners will soon have to compete with
Chinese-funded mines in West Africa


'Blind belief' in China misplaced

Date: November 02 2012

Peter Martin

CLIMATE change adviser Ross Garnaut has lambasted Australian executives
for destroying shareholders' funds in the blind belief that China's
demand for Australia's big three mining exports would keep climbing.

While they had splurged on "wasteful overinvestment", China had been
making good on its promise to cut its emissions intensity and had been
sourcing iron ore from elsewhere.

"It happens that the Chinese structural change has had its most severe
effect precisely on the three commodities which have been at the centre
of the Australian resources boom - iron ore, metallurgical coal and
thermal coal," he told a Melbourne Institute conference.

"The awful reality is that parts of corporate Australia have dissipated
shareholders' funds by underestimating the seriousness of Chinese
commitments to reduce the emissions intensity of economic growth."

Speaking at the same conference, Treasurer Wayne Swan warned of a
"savage blow" to the global recovery unless Republicans and Democrats in
the US could agree on a way to prevent a crisis in December when large
numbers of tax cuts would automatically expire.

Professor Garnaut said China had exceeded its ambitious emissions
targets, cutting coal-fired generation by more than 7 per cent in the
past year. A rapid expansion in hydroelectricity, wind, biomass, solar
and nuclear power had pushed down coal's share of energy production from
85 to 73 per cent.

Australia's iron ore exporters would soon have to compete with massive
new Chinese-funded mines in West Africa created in part by Australia's
decision to block Chinese investment at home.

The forecasts for iron ore and coal exports in the government's Asian
century white paper were barely believable, their credibility protected
only by the presence of "low" projections along with so-called medium
and high projections.

Gas and uranium would be far more important to Australia's prosperity
than the "diminished prospects for the staples of the early 21st
century". ...

(3) West Africa to supply Chinese iron demand


29th August 2012

PERTH (miningweekly.com) - Central and West Africa will be the world’s
next major supplier of iron-ore as traditional iron-ore regions
struggled to fill Chinese demand, iron-ore developer Equatorial
Resources said on Wednesday.

Speaking on the first day of this year's Africa Downunder conference,
Equatorial MD John Welborn said that by 2015, China would import some
50% of its iron-ore from Chinese-owned mines elsewhere in the world,
which meant resolving the issue of alternative sources of supply.

“China remains by far the dominant buyer of seaborne iron-ore, importing
more than 650-million tons last calendar year, or 63% of total global
seaborne iron-ore demand,” Welborn said.

“Historically, more than 75% of China’s seaborne iron-ore supply has
come from Australia, Brazil and India where China has relied heavily on
the big three producers,” he said.

“Chinese steels mills are suffering from high input costs and low
profitability and need to find new sources of supply.

“Global demand is forecast to be more than 3.5-billion tons by 2030 and
with current annual production figures showing approximately 500-million
tons coming from Australia, 240-million tons from India, 390-million
tons from South America, and 55-million tons from South Africa, it poses
the question of where the extra supply will come from.”

Welborn said that increased production from the traditional iron-ore
regions would not fill the gap, creating a certainty that projects in
Central and West Africa would be developed to fill the demand gap.

He noted that this had generated a “race to production” along the West
African coastline, with companies from all over world racing to develop
a range of iron projects in that province, both as standalone projects
or as part of iron-ore clusters.

“Central and West African iron-ore offers the upside of massive scale,
high-quality resources, coarse-grained orebodies and low cost of
production,” Welborn said.

“The challenge is the infrastructure reality, as the area needs the
development of railways, ports and mines amid many regional
opportunities. New iron-ore production is only coming on stream in
Africa where two conditions exist – the presence of high-grade,
near-surface iron orebodies in close proximity to existing rail

He added that the near-term focus from the region would, therefore,
continue to be growing output from mines close to infrastructure ports
needed to get ore to market. In the medium to longer term, new rail
infrastructure development would drive large-scale production.

Equatorial Resiources was focused on developing two iron-ore projects in
the Republic of Congo, including the Mayoko-Moussondji and Badondo iron

The company is mid-way through a 70 000 m drilling programme at
Mayoko-Moussondji targeting high-grade direct shipping ore hematite over
a 12 km strike length.

It has also defined an exploration target of 1.3-billion to 2.2-billion
tons at between 30% and 65% iron for its Badondo iron project.

(4) West Africa: The New Iron-ore Frontier


Published: 22 Aug 2012 By Frost & Sullivan's Mining Research Analyst,
Christy Tawii

West Africa is increasingly developing into a strategic player in the
global iron-ore markets. The region is emerging as a significant
alternative iron-ore source to Brazil and Australia's Pilbara region.
West Africa is endowed with significant deposits of high-quality
iron-ore which are suitable for export to steel markets, writes Mining
Research Analyst Christy Tawii at global consulting and research firm,
Frost & Sullivan.

The Mount Nimba iron ore deposits that stretch from the Ivory Coast into
Liberia host approximately 6 billion tonnes of high grade iron-ore.
Iron-ore production is expected to increase in the near term with new
mines coming on-stream from the large scale iron ore development
projects in West Africa. Approximately 20 mining companies, including
the Big Three; namely Vale, Rio Tinto plc and BHP Billiton, amongst
others, have embarked on iron-ore projects in the region. With these
current exploration initiatives, proven reserves in the region are
estimated to reach 400 million tonnes by 2020.

Demand from steel end-user sectors, such as infrastructure, construction
and automotive, in China's iron and steel market is expected to drive
growth in West Africa's iron-ore industry. In addition, China's planned
infrastructure spending is projected to reach $1 trillion in 2012 and
$1.8 trillion by 2017; which will require new sources of iron-ore supply
to meet the demand. China has already committed significant investments
into the West African mining industry through financing mining and
infrastructure projects, as well as off-take agreements to assist
iron-ore entities in the region to translate projects into operation.

Global steelmakers are shifting from reliance on iron-ore from the Big
Three who control 71.1 %% of global seaborne iron-ore market, to owning
iron-ore assets. Steel producers, such as Tata Steel, ArcelorMittal and
Severstal are benefitting from the rise in regional growth in iron-ore
mining by investing in developing large scale iron projects.
ArcelorMittal owns two tenements in Senegal and Sierra Leone that are
collectively worth approximately U$3 billion. Africa is forecasted to
supply approximately 10 %% of the world's iron-ore needs by 2025. In
2011, African countries produced approximately 3.4 %% of global iron-ore
production output. China's Iron and Steel Association (CISA) projects
that China's steel demands will increase to approximately 800 million
tonnes by 2015. The steel market increasing iron-ore consumption
provides excellent opportunities to develop West Africa iron-ore assets,
with approximately two thirds of African iron-ore expected to be
exported to China.

Moreover, three new mines have been commissioned into production in the
region in the last year, with a combined production output of 1.5
million tonnes. Spurred by abundant high-grade iron-ore resources, a
total of 15 green-fields and brown-field expansion projects are planned
for region's iron-ore mining industry, at a capital expenditure value of
U$36.93 billion between 2012 and 2017. Capital investment in the
region's iron-ore mining sector has increased significantly, with the
majority of iron ore projects located in Guinea.

Developments of iron-ore assets within the region include the
development of Rio Tinto's Simandou, Vale's Zogota, Bellzone Mining's
Kalia, London Mining's Marampa, Sable Mining Africa Limited's Mount
Nimba project, Cape Lambert ‘s Sandeina and West African Iron-ore
Corporations' Forécariah, Wondima and Kérouané exploration projects.

In Sierra Leone, Iron-ore exports from the London Mining Plc's Marampa
mine commenced in January 2012, producing 57,000 tonnes of iron-ore
notes Frost & Sullivan. The company is currently developing Phase II of
the Marampa mine. Production in Sierra Leone's iron-ore mining sector is
projected to increase to 30 million in the 2017, when the Marampa and
African Minerals Limited's Tonkolili iron-ore projects become fully
operational. Going forward, the value of mining export and tax revenues
in Sierra Leone is expected to increase, accelerating GDP growth to 6 %,
from the current 4.5 %.

Africa's largest oil economy, Nigeria, is also investing in iron-ore
mining. The country's mining sector has the capacity to rival the oil
sector and diversify its natural resources industry by exploiting the
huge unexploited mineral reserves. With the iron-ore boom in the West
Africa region, Nigeria is well placed to contribute to the growth of the
region's mining industry. International companies from Indonesia, United
Kingdom, Australia and South Africa, such as Bakrie Group, Savannah
Mining, and VML Resources have collectively invested approximately $2
billion towards the development of Nigeria mining sector. Australian
Energio Limited is currently developing the Agbaja Plateau 2 billion
tonnes resource asset. ...

Certain factors such as corruption, political instability, energy
capacity constraints, increasing fiscal demands, shortages of mining
equipment and consumables, represent significant challenges to the
development of long term investment in the region.

Only 10 % of the West Africa's population has access to electricity. The
region will require a total of 25,000 MW additional electricity
generation capacity by 2020, in order to meet the growing demand for
power that is growing at over 10 % per annum. The industrial demand for
electricity from the emerging mining industry is largely unmet by
current supplies. Therefore, demand for power is expected to continue in
the long term due to the booming mining industry.

The surge of increasing taxes recorded in Southern Africa has also been
documented across the West African region, as governments aim to gain a
greater share of revenues from the mining sector. These evolving fiscal
policies are likely to affect the certainty and predictability of
investment in the region's mining sector. However, the Economic
Community of West African States (ECOWAS) is expected to implement a
unified mining code to promote a harmonised mineral resources sector in
the region. ...

(5) The Pros and Cons of Mining in West Africa

by Tony D’Altorio, Investment U Research

Wednesday, August 4, 2010

Western Africa seems like the place to be for large mining and steel
businesses, such as:
Rio Tinto ADR (NYSE: RTP)
BHP Billiton ADR (NYSE: BHP)
ArcelorMittal ADR (NYSE: MT)
Aluminum Corp of China or Chinalco ADR (NYSE: ACH)
Russian steel company, Severstal

These six companies plan to spend billions of dollars in Guinea, Liberia
and Sierra Leone – where some of the world’s richest deposits of iron
ore and bauxite have been found. ...

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