The Simandou saga started in 1997. Located in the Eastern part of Guinea, it is the world’s largest untapped iron ore deposit, with an iron content of about 65%, equivalent to Vale’s Carajas mine. After 27 years of licencing and legal disputes, government turmoil and coups, can Simandou be finally developed?

The story reflects political challenges and infrastructure complexity. The exploitation of Simandou requires the construction of a 550km railway as well as port facilities for an estimated CAPEX of about US$20Bn. The Simandou complex is expected to have two iron ore mines. One of them, known as Simfer, would be developed by Rio Tinto, owning 53%, with a Chinalco-led consortium owning the remaining 47%. The second iron ore mine of the complex, known as the WCS project, is owned by a consortium of Singaporean companies led by Winning International Group, with China’s Baowu expected to be a joint operator, owning 49% of the project. The development of the infrastructure will be shared by the two entities. The Simfer project is expected to be fully operational by 2028 with a production capacity of 60Mtpy.

After nearly three decades of blockades, the odds of a Simandou development have never been so high. What changed? And why now? Especially given that China’s steel production has reached its peak.

One of the reasons is the global de-carbonisation trend, a feature which will dominate the steel industry this decade and next. An easy way to reduce carbon emissions at the steelmaking level is to use higher grade, low impurities ore. With an iron content exceeding 65%, Simandou’s proven reserves also have low alumina (Al203), silica (SiO2) and phosphorus (P) contents of 1.2%, 1% and 0.07% respectively. The high-grade direct shipping ore (DSO) is currently largely dominated by Brazil’s Vale at its Northern System mines, which produces about 165Mtpy with another 20Mtpy coming on stream by 2026.

Iron ore mines in the Pilbara (Western Australia) have an iron content ranging from 56%-62%. Simandou could, therefore, provide Rio Tinto with a competitive advantage compared to its peers in the de-carbonisation race. Although the project is not without risks -as evidenced by Simandou’s troubled history, the timing is not necessarily bad for Rio Tinto. In the past, Rio showed little enthusiasm at developing a project which could compete with its Australian production. But the group has been recently facing issues with replacing its depleted assets in Western Australia and production growth will remain challenging. Simandou offers the opportunity of higher volumes with high-quality ore. Also, the game has changed from quantity to quality. Moreover, higher grade ore could be more efficient in direct reduced iron (DRI) production used as a metallic enhancement in electric furnaces (EAFs).

The other main reason is China’s decision to diversify its iron ore sourcing. Over the past decade, China has been openly complaining about ‘an iron ore market controlled by the large mining companies’ primarily targeting the Australian miners. Developing an iron ore supply source ‘independent’ from the large mining companies is, regardless of economics, a political goal. However, the lack of large, undeveloped, iron ore assets has been, until now, a major impediment. Simandou is the opportunity.

Project Blue remains sceptical about Simandou production starting in 2025 as the railway construction is challenging, given the nature of the terrain. Nonetheless, our base case assumes that production at Simandou starts ramping up later this decade, with a 60Mtpy output.

What would be the impact on the iron ore market? One of the first consequences would be the displacement of lower grade, higher cost seaborne supply but also a reduction in China’s domestic iron ore production. Therefore, Project Blue does not believe that the arrival of the Simandou material on the market will cause a major price decline, given its expected higher value in use (VIU).

It could, however, put some pressure on higher grade ore premia, and possibly on lump and pellet premia, due to the increased supply, although demand could also increase faster depending on the de-carbonisation pace at the steel mills. Using higher grade, low impurities ore allows steel mills to cut their emissions without making drastic changes in their operations.

It should also increase the discount of lower-grade ore. However, there will always be some demand for low-grade ores as Chinese mills blend material and adjust their blast furnace burden depending on the prevailing steel margins.

Producing DRI with high-grade, low-impurities ore will also facilitate the development of EAFs, given the short supply of good-quality scrap, especially in China.

To summarize, it looks like the steel industry de-carbonisation has been the trigger that the project has been waiting for nearly three decades, possibly marking the development of the world’s last major untapped iron ore deposit.

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