15 April 2021
China’s Guinea mine is about security, not economics
Beijing’s investment in a greenfield project in Guinea is intended not so much to slash prices for Chinese steelmakers, but to guarantee the supply of a vital resource by diversifying its sources. Originally published in The Australian Financial Review.
If you were a Chinese official tasked with bringing down the price of iron ore, would your first thought be to build a greenfield mine far inland in west Africa?
A mine, by the way, which the host government says must be connected to the distant coast through its own territory, which requires the construction of a 650-kilometre double-track railway with dozens of bridges and purpose-built tunnels, and then a huge wharf to reach waters deep enough for bulk carriers to dock, in readiness for the 41-odd-day sail back to China? (It takes about 12 days from Australia.)
Once the proposed Simandou mine in Guinea comes online, possibly as early as 2025, there is little doubt its high-quality ores could take market share from Australia and provide enough new supply to bring down prices.
But anyone who thinks the much-touted Guinea project, and indeed China’s evolving steel industry strategy generally, is all about making iron ore a little cheaper for local industry is missing the point.
The prospect of China finding alternatives to Australian iron ore naturally causes palpitations in Perth and Canberra, and everywhere in between.
As Tony Boyd calculated in the Chanticleer column, with iron ore at about US$160 a tonne, Australian exports are bringing about $585 million a day into the country from China, a windfall for the miners, and the Treasury through tax receipts. The price is now about US$170.
Just as the Japanese did in the 1970s and ’80s, Beijing has long wanted to inflate global sources of minerals such as iron ore, copper and coal, to give it greater leverage over dominant suppliers in places such as Australia.
One lesson of the breakdown in our relations with China is that national security drives economics. The same applies to China, in spades.
The success of Chinese direct investments in copper in central Africa and South America has shown the way for doing the same with iron ore. On top of that, Simandou has the right kind of ore for modern blast furnaces and even for hydrogen steel production, unlike much of the Pilbara.
None of that means, however, that the project is all about drastically reducing prices.
For starters, that Chinese-led consortium taking on the challenging task of building the mine isn’t doing so as welfare for Chinese steel makers.
In ways that few outsiders recognise, China Inc can be fragmented and tribal, and the Chinese and other investors in the project will want to make money, a lot of it, just as Australian miners are now making.
The same goes for the Guinea government. If it thinks its resources are being sold cheaply to subsidise Chinese industry, it retains the option of nationalising the project and selling the ore on the open market.
Which brings us to what might be increasingly the real driver of renewed urgency to get the mine up and running, and that is geopolitics and the collapse in bilateral relations between China and Australia.
Properly viewed through that lens, Simandou is more about guaranteeing the supply of a vital resource rather than slashing its price.
For years, the Chinese have raised in private with their Australian counterparts concerns about what might happen to iron ore shipments in the event of a military conflict in the region, usually citing Taiwan.
Such a conflict used to be academic. It isn’t any more, at least in the medium term.
The Morrison government has studiously steered clear of raising in public the idea that Canberra would use the supply of iron ore and other minerals as diplomatic bargaining chips.
Coalition backbenchers have not been so shy. Matt Canavan, the former resources minister who fashions himself as the miners’ friend, suggested in December that China be made to “pay a price” for its trade sanctions against Australia, by imposing a levy on iron ore exports.
Dangers of overdependence
With Australia now providing about 60 per cent of the iron ore used to make steel in China, any rational Chinese official would worry about the dangers of overdependence not just on a single country, but on one of America’s closest regional allies.
If those same Chinese officials had a granular appreciation for Australian history, they would have also paid attention to Scott Morrison’s speech in July 2020, when he talked about how the 1930s hovered over Canberra’s diplomatic calculations.
In the ’30s, Australia sold pig iron, another ingredient for making steel, to Japan, only to regret it later when it was used to rebuild the Imperial Japanese Army’s arsenal.
One lesson of the breakdown in Australia’s relations with China is that national security drives economics, not the other way round. The same applies to China, in spades.
None of this is to say that Beijing wouldn’t appreciate cheaper prices for iron ore.
At the very moment when Beijing is trying to punish Australia over political disagreements, with trade sanctions across multiple sectors, the iron ore boom is infuriating for the Chinese leadership. Simandou won’t change that for some years.
In the short term, the Chinese might adopt another lesson from the old Japanese playbook to take the froth out of prices, by appointing a single negotiator for Chinese state-owned steel makers to buy ore from Australia.
Such a move would be difficult to organise in a steel industry that has yet to be consolidated. But in ways that Simandou won’t do, that could really hit Australian miners where it hurts, and cut sharply into the Treasury’s tax receipts too.