October 29, 2018 / 5:16 AM / 23 days ago

Breakingviews - China's Guinea snub sends bearish iron ore signal

A security guard stands in position in the headquarters of Aluminum Corp of China (Chinalco) in Beijing March 19, 2010. REUTERS/Christina Hu

SINGAPORE (Reuters Breakingviews) - A rare mining snub from China sends a bearish signal on iron ore. State-run giant Chinalco has stepped back from a 2016 deal to take control of the $23 billion-plus Simandou project in Guinea from partner Rio Tinto. That’s a headache for the Anglo-Australian heavyweight and a blow to West Africa’s mining ambitions. It’s also a hint that even Beijing sees cooler long-term demand ahead for the steel ingredient.

    Simandou is perhaps the world’s largest untapped deposit of iron ore. Rio’s portion alone could potentially satisfy nearly 10 percent of Chinese import demand, and it is top-quality material to boot. But it is also the most troubled. The Guinean government confiscated part of the reserve in 2008. Since 2016, there are corruption probes too, after Rio notified authorities of unexplained payments and fired top executives. And developing the remote site will require a mammoth investment in infrastructure.

    Under Chief Executive Jean-Sébastien Jacques, Rio has been clear that the mine, where its own investment has largely been written off, is more trouble than it is worth. Even if it was built, it would deliver too much iron ore too late for a market that looks increasingly sated, even in China.

    Unfortunately for the Guinean government, Chinalco seems to concur with Rio. The Chinese giant will still have its minority stake in the project, but it let the control bid lapse, so far without comment. It had sought last year to take an even larger share of the whole deposit, meeting government resistance which officials in Conakry may now regret.

   Yet it may well have been the scale that killed China’s appetite. Simandou needs 650km of rail, 35 bridges, a deepwater seaport and more. Only aggressive production could offset such an expense.

   West African governments, which hoped their region would become a new version of Australia’s Pilbara, are certain to be disappointed. Investors have reason to fret too. Chinalco is a deep-pocketed strategic buyer used to messy jurisdictions, well-connected in a market which produces half the world’s steel. And of course Simandou is a top-quality morsel. Newfound caution here is a warning best heeded.

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