In 2012 South Africa overtook India and became China’s third-biggest iron ore supplier. We had the chance to speak to Andrew Hodge, Analyst – Iron Ore Cost Research at Wood Mackenzie about what’s in store for the iron ore market in Africa.
IMM Events: A recent article in the Economist has described Africa as the “hottest frontier” for investments. Would you make a similar prediction for the iron market in the region? Why?
Andrew Hodge: Africa is fortuitous in having a vast undeveloped iron ore resource, which our estimates put at roughly 8.3 billion tonnes of marketable reserves. Monetising all this is the challenge. In terms of capital expenditure, our analysis shows that almost US$28.5 billion could be spent on iron ore over the next five years, second only to Australia. I believe that iron ore from Africa will play a part in future seaborne supply, but the timing of its development remains uncertain.
IMM Events: What factors do currently have the biggest impact on iron ore production in Africa?
Andrew Hodge: We’ve just completed our update for the second quarter, and the biggest factor impacting iron ore production globally, not just Africa, is the ability of the existing majors to supply additional tonnage into the seaborne market. At a time when demand and pricing has waned, companies are increasingly focused on value and return on capital. With that in mind, the decision to commit capital to project investments will be weighted towards those in the portfolio that have the highest returns and less effort to establish. This would naturally favour expansions and projects in established regions.
Andrew Hodge: To me, a project is exciting when it has highest net present value (NPV). When evaluating an asset we take into account a variety of factors; capital required, operating costs, target market and product qualities, just to name a few. Using Wood Mackenzie’s Global Economic Model, the two projects that have the highest NPV in our dataset are Rio Tinto’s Simandou with US$16.2 billion and Bellzone’s Kalia with US$2.2 billion.
IMM Events: The 3rd annual Africa Iron Ore conference runs under the headline “Unlocking Africa’s iron ore resources”. What future developments will be crucial to make the most of the continents potential?
Andrew Hodge: The next step needed to capitalise on Africa’s iron resources is primarily infrastructure. There are many projects all across Africa that are sitting on those 8.3 billion tonnes of reserves, but without an infrastructure solution, their development will be pushed out.
Andrew Hodge will be a presenter at the 3rd annual Africa Iron Ore conference, held on the 4th and 5th June 2013 in Cape Town.