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Douala, Cameroon – Low prices and high supplies are driving iron ore prices down. Analysts say large companies will survive the crunch but many smaller producers and explorers may be faced with tough decisions.
In a red and muddy clearing along Cameroon’s densely forested border with the Republic of Congo, a fleet of diggers stands idle. High above the canopy of trees, dark clouds start to gather. It is an ominous portent for an iron ore project billed as transformative for the country.
Three years ago, the Mbalam mining project, spearheaded by Australian explorer Sundance Resources, was hailed by Cameroon’s President Paul Biya as a potential game changer for the Central African country. Now, as Sundance courts fresh investors to shore up its dwindling cash reserves while iron prices fall, the prospects look bad for the construction of a $5bn railway needed to make the mine economical.
Across the continent, a similar pattern emerges. From Guinea to Angola, mining projects set up to feed China’s seemingly insatiable appetite for raw materials face an uncertain future.
Demand from the world’s largest consumer of iron ore is now cooling, and the determination of the three biggest producers – Rio Tinto, Vale and BHP Billiton – to plough ahead with expansion plans is bad news for smaller rivals, many of whom have chosen Central and West Africa’s undeveloped – and thus higher cost – deposits as their way into the mix.
The combination of reduced demand and oversupply is pushing prices down. Since the beginning of the year, the price of seaborne iron ore has fallen 37% to just over $84/tn in September.
The sharp fall in prices evident this year is in some ways the corollary to the boom years between 2004 and 2010. Prices jumped from $25/tn to $170/tn by the end of the decade as China built the skyscrapers, roads and bridges needed to serve its rapidly expanding economy.
In response, iron ore producers invested in new mines, thus ensuring a supply shortfall would be replaced with a glut. Now, with inventories at Chinese ports close to record levels, coupled with a seasonal fall in demand, prices have headed south. So much so, in fact, that Goldman Sachs, the New York-based investment bank, said 2014 would come to be seen as “the end of the iron age”.
Minnows get caught
This may not be too big a problem for companies like BHP Billiton and Rio Tinto, which benefit from vast economies of scale that allow them to remain profitable even at iron prices of around $30/tn.
For smaller companies like African Minerals, London Mining and Bellzone, which operate a comparatively tiny portfolio of mines at much higher cost, a sustained fall in the iron ore price is a far harder squall to surmount.
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