With the rise of the iron price, African producers are rubbing their hands

par Jacques Leroueil

Driven by a rising iron price, African producing countries are seeing a growing number of promising projects. But beware of structural constraints and the (cyclical) return of the crank handle!

Kumba Iron Ore shareholders can smile: with an ore price of around $130 per tonne, a five-year high, the continent’s leading producer (45 million tonnes in 2018, or nearly half of Africa’s iron mined each year) has rarely done so well. In a press release issued in May in advance of the upcoming July interim results, the company’s management indicated that overall earnings would « increase by at least 160% » compared to the same quarter of the previous year! As for the share price - listed in Johannesburg - it has multiplied by… 18 since its lowest levels in January 2016, in line with the (strong) rise in iron prices recorded over the period.

Good economic situation

A soaring price that is of course the happiness of African producing countries. Because « while the rise in iron prices translates into greater benefits for private operators in the sector, it also contributes to filling state coffers (taxes and miscellaneous charges) and boosting the local economic fabric, » say the teams of the African Alliance investment bank in Kigali. As a result, while the supply of the world’s leading iron producer, the Brazilian Vale - caught up in legal and environmental problems - has been shrinking steadily in recent months and some Australian sites of the BHP Billiton and Rio Tinto groups have been affected by a recent cyclone, mining companies operating on the continent have at the same time increased their project announcements.

In Guinea-Conakry, the Indian company Ashapura took over the Yomboyéli mine in early June, while the British company Niron Metals plans to develop an iron mining project in Zogota, in the south-east of the country. A region located not far from the Simandou iron ore deposit - the largest on the continent - which, with the resumption of prices, could see its current operators (Rio Tinto and its Chinese partner Chinalco) reactivate this colossal project. In Sierra Leone, it was the newcomer, SL Mining, who restarted ore shipments by bulk carriers at the end of June with the objective of rapidly increasing their output. Further north, in Mauritania - the continent’s second largest iron producer (11.09 million tonnes in 2018) after South Africa (74.64 million tonnes in 2017) - the Société nationale industrielle et minière de Mauritanie (SNIM) has announced its intention to seek partners to increase its yields and develop its adjacent logistics.
Not surprisingly, under these conditions, global African iron production is expected to increase in the coming years. The research firm BMI Research, a subsidiary of the Fitch financial rating group, estimates that iron ore mined in sub-Saharan Africa should increase from 93 million tonnes in 2017 to 103 million tonnes in 2021. An increase of more than 10%, driven primarily by West African producers such as Guinea, Liberia and Sierra Leone, who « will be more efficient in terms of growth » than the traditional large suppliers (South Africa and Mauritania in particular).

Challenges

Nevertheless, despite the current good economic situation, many structural challenges remain. Endemic corruption, political instability, poor infrastructure… The list of pitfalls facing the continent is well known and African mining sectors must also deal with these risks. BMI also points out that « national regulations are often poor or even unfavourable to foreign investors ». The adoption, in September 2018, of the new South African Mining Charter, which maintains the obligation to further extend the capital of the companies concerned to blacks - often without financial compensation - is a good illustration of this. Faced with this additional turn of events, the reaction of the major operators did not take long: in the wake of these regulatory provisions, Anglo American announced its intention to sell its (South African) iron-related activities, while the Australian Ferrum Crescent announced its exit from the Moonlight project in the Limpopo province (north of the country). Another drawback is that « the cyclical nature of commodity prices means that periods of bubbles are inevitably followed by painful aftershocks, » warns Léonard Mutabazi, a financial analyst at African Alliance. A timeless lesson on the ephemeral nature of things and the need to anticipate. « La Cigale, having sung all summer, found herself very deprived when the kiss came […] », recalled already in the 17th century the French poet La Fontaine in his fable of La Cigale and la Fourmi. Since then, it seems that nothing has changed. In the end, for our interlocutor, the real challenge for African producers will be to « succeed in smoothing over time the erratic nature of the income generated by these extractive activities ». An objective that is certainly easier to formulate than to achieve.

*In a decision issued in early July, the Brazilian courts held the group responsible for the damage caused by the breach of a dike on a mining operation, which killed at least 240 people in January 2019.

**The group expects a reduced production capacity of 75 million tonnes in 2019, due to the closure of several of its units.