....iron ore contributes 5-10% of Australia's GDP.
....we have to find appropriate replacement soon. Its not lithium. Its not solar.
Beware the triple threat to Australia’s China riches
Approvals for Rio Tinto’s new $34 billion Simandou mine are a reminder that the next 30 years for the iron ore sector will look much different to the last.
Jul 16, 2024 – 3.50pm
There is no question that Rio Tinto is doing the right thing by pushing ahead with its $US23.2 billion ($34.3 billion) iron ore mine at Simandou, which received approvals from the Guinean and Chinese governments on Tuesday.
Rio would be crazy not to take up its option to be part of the China-backed Simandou project – even if the tonnes from this new mining province will inevitably compete with the tonnes produced by Rio’s Pilbara mines.
It knows that Simandou will be built with or without its involvement. But Rio also sees an opportunity to offer customers iron ore from its operations in Africa, the Pilbara and Canada, creating geographic and quality optionality that will only become more valuable over time.
But the receipt of government approvals for Simandou is a reminder that Australia’s status as the iron ore lucky country will not last forever. While it may take some years for the Simandou mines in southern Guinea to reach their full potential, the 120 million tonnes of iron ore they eventually produce – about 5 per cent of the 1.9 billion tonne global seaborne market – arrive at a tricky time for the sector.
Chinese steel production has plateaued and will gradually decline, while the increased use of recycled scrap in steel production will also change the market in the coming decades.
Australia’s world-class iron ore miners are not under any type of existential threat given their low-cost status. But pressure on pricing will be inevitable – and that will flow through to both investor returns and government tax revenue.
Rio considers capital allocation decisions over decades rather than quarters or even years, and so it is not viewing decisions around Simandou in the context of the current iron ore market, described on Tuesday by company insiders as decidedly soft.
That’s fair enough. But the fact the government approvals for Simandou arrived just a day after China’s June quarter GDP data came in softer than pessimistic expectations is a reminder of just how weak the Chinese economy really is.
The question whether this is a cyclical or structural problem is now a live one. Macquarie strategist Viktor Shvets says China seems unwilling or unable to deliver the economic restructuring – including, in his view “the transfer of local- and state-owned enterprise debt to central government, comprehensive elimination of risk in the real estate sector, changes in taxation system” – needed to address the country’s “deep-seated challenges”.
“Not only is China a long-term derating asset, but it is not even clear how it can be traded, as this requires a degree of predictability of macro, micro and policy signals that no longer exist,” he says.
The government’s third plenum, being held this week, seems unlikely to announce the sorts of major economic reform Shvets advocates; certainly those inside Rio aren’t pinning their hopes on major stimulus (which would probably just exacerbate the problems created by previous spending cycles) and expect the iron ore price to keep testing its current level of cost support, around $US100 a tonne.
The threats posed to Australia’s iron ore riches from the arrival of African iron ore and China’s sick economy may pale in comparison with what’s to come if Donald Trump follows through on his plan to hit China with massive tariffs. The damage to an already struggling Chinese economy is difficult to estimate, but it’s unlikely to be good news for Australia.
With iron ore still above $US100 a tonne, our miners remain fabulously profitable – the dividends, taxes and royalties that investors and governments have come to rely on will keep rolling in for a long time yet.
But it’s also important to realise that the next three decades for the iron ore sector won’t look like the past 30 years.
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