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How a changing steel market is forcing iron ore supply to adapt

Falling demand and a bigger price premium for higher grades

05 October 2023

Simon Flowers

Chairman, Chief Analyst and author of The Edge

The iron ore boom, one of the great commodity runs of the 21st century, is coming to an end. Demand has more than doubled since 2000, but the industry is bracing for structural change as China’s demand tails off and global steel makers transition to greener feedstocks.

What does this mean for future investment? Who will deliver high-grade supply? And how will this impact prices? David Cachot, research director in our Metals & Mining team, provides the answers.

Why is demand for iron ore set to fall?

China is the headline story. The country’s monumental transformation over the past four decades was built with steel. But the boom couldn’t last forever. Slower economic growth and the shift to a service economy are already tempering China’s steel demand.

Declining iron ore demand at China’s steel mills is inevitable. A combination of falling hot-metal production from blast furnaces and the increased use of scrap will cut around 270 Mt of Chinese iron ore demand over the next decade, equal to 20% of the country’s current consumption.

With China accounting for over 60% of the global iron ore market, this is a big deal. We now expect total iron ore demand to contract by 62 Mt, or 3%, over the next 10 years.

Weakening Chinese consumption leads global iron demand into decline this decade

Are there demand bright spots?

It’s certainly not all doom and gloom, with India and Southeast Asia set for robust growth in iron ore consumption well into the future. For major producers, this good news is offset to some extent by India’s demand being largely met from domestic mines. The country will only become a net importer by the mid-2030s, with imports reaching around 35 Mt by 2050, a tiny fraction of China’s current level of over one billion tonnes.

What does this mean for investment in supply?

Massive investment in new supply between 2011 and 2014 had already ensured ample iron ore output for decades to come. Combine this with weaker demand and investment in iron ore projects is set to drop significantly. We now expect mine investment to fall by 35% through to 2033 compared to the past 10 years.

As China’s demand falls, its domestic iron ore production is expected to halve over the next 10 years due to rising costs and lower-grade resources. And while existing supply capacity will be sufficient to meet this shortfall, buyers will be turning from quantity to quality.

What’s fundamentally changing investment in iron ore projects is the push for greener steel.....

Continued......

Or (double perish the thought) they're keeping the placeholder in case the endgame (whatever it is) doesn't deliver the rewards they've pencilled in so far....

;-

Not sure, tbh.

I flagged at the time that .." fees previously deferred would be reviewed. As of today, discussions with management continue and a resolution is expected to be reached imminently through the issue of shares in consideration of PART of this deferred consideration..."

This reads as though the shares just awarded are part of what folk are owed, it doesn't say how any remaining deferred consideration is to be paid eg cash or (perish the thought) 'tag-along' rights IF there wasn't an outright sale...

Maybe they don't know yet, so they've just left a 'placeholder' ?

HTH

Hi Driving

.."Ex-Nothing 4 Nothing..."

I am a bear of very little brain.

Are you saying ZIOC simply issues and delivers (nil cost) shares to GLEN in settlement of the loan, as a non-cash entry ?

If so, I get it.

Cheers.

Hi Driving,

Thanks for this intriguing interpretation of the resolution of 'awards' issue ... and forecast re handling of GLEN loan.

I take under advisement the first, on the basis that it appeals to the conspiracy theorist in me...but 'correlation isn't causation' , maybe it's just coincidence? OTOH, there's the Sherlock Holmes adage about 'whatever remains, however improbable...etc.

My quibble re the second, where the s/p issue is different, I think : if the share price is 'allowed' (assumes control, of course) , then wouldn't it now be in everyone's interest to start 'manipulating the price up ?

-That would require issuance of MUCH FEWER shares (which GLEN is 45% effectively 'paying for' anyway ?), possibly even out of the Shard facility.

- Minimising further dilution is NOW surely in everybody's interest (GLEN; award recipients; the rest of us) : we're all on the same page...

- Maximising the reference price for any negotiation starting point is ALSO in everyone's interest, esp for dealing with the 'StarBright pricing formula' issue (patent applied for).

What am I missing ?

Abergele.......

....And the UAE will be very aware of this:

They (Mubadala / Dubai Investment Corp) have been invested in Guinea since 2007, initially as purchasers of bauxite for their UAE smelters, under the Emirates Global Aluminium label

https://en.wikipedia.org/wiki/Emirates_Global_Aluminium,

and latterly through their incountry investment in mining , Guinea Alumina Corp

https://www.gacguinee.com/en/about-us/our-history

including a USD 1.4 Bn project started in 2014, which included a Project financing in 2019

.."GAC secures the largest ever project financing for a greenfield mining project in Guinea – a US$ 750 million loan extended by development finance institutions, export credit agencies and international commercial banks..."

Any attempt at read-across Guinea > Congo-B is facile, IMO unless the very considerable credit risk differential is factored in, IMO

Chalk and cheese.

And - thinking more about the other big negative - Congo country risk - that hasn't gone away - and is still the elephant in the room .

The nearest comparative is Simandou, which has (eventually) successfully closed a deal that provides some benchmark :

-SMB Winning bid was $ 15Bn for its tranche of Simandou (including its estimated share of the associated infrastructure), outbidding Fortescue, which offered $ 9Bn (excluding same).

See https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/metals/111319-chinese-backed-smb-winning-wins-rights-to-guineas-simandou-iron-ore-deposit

However, the article also makes the crucial point that Guinea is a completely different credit risk and has a credible track record for investors generally and the winning (!) bidder in particular :

.."Since its creation in 2014, SMB -- a consortium formed by the Singaporean shipowner Winning Shipping, the Chinese aluminium producer Shandong Weiqiao, the Yantai Port group and the Guinean transport and logistics company United Mining Supply (UMS) -- has become Guinea's leading bauxite exporter, with 42 million mt in 2018, SMB said in a statement..."

and that within the context of a long, successful mining history :

.."Guinea possesses a third of the best bauxite reserves in the world, or about 20 billion tons, with a high content (45-62 %) of alumina and a low silica content (0.8-2 %). Despite being ranked second after Australia in terms of production, it was, in 1993, the largest exporter in the world, having benefited from the relocation in the world aluminum industry in the 1970s.."

Congo-Brazzaville, by contrast, mainly hits the headlines (when it does) for dubious expropriation of mining concessions and other chicanery ...and a complete absence of track record (other than Sapro Mayoko derailments..;-

Some good (for me fresh) insights here, guys, thanks for the inputs.

Jiving prompted this thought, when he wrote about.." the free float - most of which were then placed with major institutions (who largely held UNTIL[my bold] the GLEN takeover of Xstrata)..."

Maybe the GLEN = Glasenberg factor has been (even) more of a negative than we (I ) thought? Not just his perceived 'anti-greenfield' stance, but also the 'baggage' surrounding GLEN ? Looking back at the press at the time (I wasn't a shareholder then), the v different cultures ('trader/marketer of commodities' vs 'strong operator of difficult assets') were seen as a problem when the discussion was 'merger of equals'. When Ivan basically double-crossed Mick Davis (with Qatari help) to spring a take-over instead, that appears to have eroded a lot of trust.

Perhaps this is what Elphick was obliquely/diplomatically alluding to when he referenced 'new ZIOC' having ' a single entity and management strategy', which the Company expects ...'will enhance the attractiveness of the Project as a potential investment for large strategic investors.'

Basically (1) there's a single point of contact and (2) PS it isn't GLEN.

AFAICS

ATB

Hi Jiving,

I think we’re on the same page, you expressed it better than me…;->

ATB

Fair point, I was obv even more fortunate with ASC than I thought!

But surely you’re not comparing like with like?

Your examples - and multiples - apply to established, working companies, not to a company in ZIOC’s position.

The way I think of it ( maybe I’m over-simplifying) is that ZIOC IPO’d just before the iron ore market collapsed and it’s been in almost suspended animation ever since, for a combination of reasons, some external (product demand, ‘easier ‘opportunities elsewhere), some ZIOC- specific (Congo risk, GLEN ambivalence, etc)

In other words, the ‘ causes and conditions’ were never right….and the market recognised that….and priced the company accordingly.

Fast forward a decade and we’ve recently seen, in pretty short order

-Glasenberg departure/ arrival of new GLEN management and attitude;

- rise of resource dependency concerns (China/ Australia);

- accelerated move to de-dollarize and acquire ‘real’ assets;

- rise of ‘next generation’ leadership in Oman, Saudi and UAE, with ambitious development goals and a greater willingness to use its political and financial clout;

- the climate change thesis and rising importance attached to premium quality ore.

The one - maybe unchanged - ZIOC-specific issue is country risk. Big Den has survived a decade of scandal…. but is also a decade older, with no clear orderly succession in sight, AFAICS…..And the world could be about to tip into recession, in which case all bets are off.

I think there’s a good case for arguing that ZIOC needs to be looked at as though it were a ‘freshly-minted’ IPO……and priced accordingly.

With any luck, we’ll find out soon enough.

ATB

Hi StarBright,

Many thanks for this insight into pricing strategies that are way outside my ken : I'd just about worked my way around the 'game theory' ? idea of naming a price and then requiring the counterpart to either buy for the countervalue or sell for the resultant amount (depending on who held the asset): another way of forcing people towards genuine price discovery.

The range 75-150p will certainly be a corrective to expectations, which is probably a Good Thing : as we always say about company management, better to underpromise and overdeliver than v-v.....

OTOH, I'd maybe take issue with your multibag qualification : I was fortunate enough to buy into ASC in the early days, 100,000 shares @ 4.9p. Sadly, as the books advise , I regularly topsliced and eventually let the tax tail (imminent loss of AIM relief) wag the investment dog ....and sold out completely waaaay too early, for what seemed at the time a ' very respectable' 30x......or £ 150K approx.

Well, yes, very nice : it paid for my kids' education and a few baubles.

But, but , but... at the peak, the holding would've been worth £ 7.5 million.

Ho hum.

So forgive me for hoping that on this occasion you're wrong...and that lightning sometimes does strike twice !

If/when and however this ends, I hope we can (all) meet up for a drink.

ATB

AFAIAA, HELD hasn't started cultivation yet, so a crop would be pretty impressive.

Up front and centre, first item on the 29 Sept RNS :

Business Highlights and Updates

-- Effective completion of Phase One development of its cultivation facility

-- Cultivation, in Partnership with Elgo Dimitra, READY TO COMMENCE [my bold].

ATB

High for ZIOC, where 500K is the norm and the last few days 6-8m is significant.

A propos your comment, what 's your stab at a realistic price for the end-game ? (So we can prepare ourselves for the pain !)

Cheers.

.."the 50% of the Zanaga mine that was listed in the IPO in November 2010, was for an exploration asset that was in a far less developed state than it is currently. That was listed at 156p a share.."

50% of the mine wasn't listed , about 15 % (of the 50%)was - 20m shares IPO and 20m shares sold by the founder promotors ( to get their investment back).

And the wider market was 'hot'.

So there was both a 'scarcity' premium and a generous 'read-across' implied value for the whole : I don't think this meets StarBright's 'both sides must suffer pain for the price to be realistic' criterion.

The subsequent Xstrata spend will - granted - have added value, but that's not something successor GLEN arguably paid for. They were certainly quick to write it down...and maybe even off, for tax purposes.

Not quibbling the conclusion, just the basis on which it was apparently made.

ATB

Hi StarBright,

I take on board your general point that a fair deal is likely to be one that leaves both sides unhappy. You've doubtless now seen Jiving's comments re ZIOC management's plausible expectations - even if this is only 'anchoring'; I believe MM is on record as arguing for £5-10 on NPV basis (I stand to be corrected).

Where do you personally see the likely range for 'shared unhappiness' ?

On a related matter, I also feel that the awards outcome reflects well on Elphick's wish to get the best deal for ALL participants - himself, obviously; his team; his early supporters; and the regular PI's , who have, for once been treated for what they - we - are : OWNERS (however small our stake) of the business...

I'm pretty certain that he'll do what's best for himself and - given the straight bat played so far - by extension that'll be the best - all things considered (which he'll know and we never shall) - for us.

"No pressure there, then, Cliff!"

ATB

Excellent posts today, guys!

I fully take on board StarBright's cautionary comments re valuations and Jiving's observation in mitigation re earlier expectations, when the Project wasn't even 'half-baked'.

And then StarBright asks, very pertinently - given a likely chasm between bid and offer :

.."Typically this requires a true deal-maker, motivated and capable of getting both parties to accept reality. I’m not sure who that deal-maker is here"

Coincidentally, the clue may be in MM's post, where- inter alia - he reminds us of RusAtom's interest in hydropower provision.

The local agent for RusAtom is Jean-Yves Ollivier, as previously flagged.

See https://en.wikipedia.org/wiki/Jean-Yves_Ollivier

Ollivier is a wheeler-dealer, active in commodities (grain, coal, oil), based in Congo, with a sideline in mediation, founder of the eponymous Brazzaville Foundation.

https://en.wikipedia.org/wiki/Brazzaville_Foundation

sponsor, back in 2015, of the Congo Basin Blue Fund ('sustainable ecosystems'), subsequently - ahem! - adopted by Big Den.

Amongst other things, .."In December 1988, Jean-Yves Ollivier helped facilitate the Brazzaville Protocol, which brought an end to the South African Border War and provided for the withdrawal of Cuban troops from Angola and South African troops from Namibia, respectively.

Ollivier helped set up the negotiations in the Republic of the Congo and persuaded Congolese president Denis Sassou Nguesso to mediate...

....In 1987, Jean-Yves Ollivier received the Order of Good Hope from Foreign minister Roelf “Pik” Botha. In 1995, he was elevated to the grade of Grand Officer of the Order of Good Hope by South African president Nelson Mandela for his role in the ending of Apartheid..."

Ollivier is also well in with the Chinese and their co-operation with....Rusatom

https://nationalsecuritynews.com/2023/06/ramaphosas-peace-initiative-with-ukraine-is-organized-by-a-french-businessman-partnered-with-rosatom/

.."Ollivier’s business interest is closely tied to largesse from the Russian and Chinese states and their security apparatus. Ollivier is the self acknowledged deal maker for Russia’s state owned nuclear company, Rosatom, in Africa, having previously represented the interest of the French nuclear company Areva..."

Means, motive and opportunity. Plus, connections with (and, presumably, trust of) Big Den, most recently seen in arranging the African delegation (all Rusatom clients) for Russia/Ukraine peace talks - which Big Den only dropped out of in order to sign the AD Ports contract.

A case, perhaps of 'Cometh the hour, cometh the man ?'

AFAICS

PPS An elegant - and to my mind satisfactory outcome , once a deal has been negotiated by Elphick and co - would be for a GLEN vehicle to buy out ‘new ZIOC’ - using some of its 2 (?) billion Treasury shares - and then either on-sell that vehicle to the Project or use it as part of GLEN’s ‘contribution in kind’ to the Project, if it (GLEN) were to be involved…..

But I see I’m getting a bit ahead of myself here.

I need to lie down in a dark room.

PS and I would imagine that many of ‘old Zioc’s’ seed capital shareholders, Elphick’s and Howarth’s buddies , lurking patiently there below the disclosable level, will be pressing for a ‘monetisation’ event.

Just my (biased !) opinion…..

Guys, surely that scenario - distant ‘jam’ - is / was only likely under a small- scale ‘ proving up’ EPP project?

The reality , as i see it, is that - apart from any ‘connections’ that the Board and management may bring…..and the capital/ expertise that GLEN may wish to provide - we humble shareholders bring nothing to the party .

If anything, we’re a drain, an inconvenience and a possible complication : some of us might want to know ( and then be upset by) how ‘ the sausage’ is actually made….

And, that being the case, why share the upside with us?

I see ZIOC as in some ways analogous to an oil explo tiddler : we might end up being sold for shares in a major, international oil co - in which case, fair enough - but far more likely is that we’re bought out for cash.

That’s how I see it. But I recognise that that may just be my preference talking : I’d like the opportunity to spend my grand-children’s inheritance !

$$$$$$

;->

GLA

Hi Sidneysideline,

I certainly hope to be there, family commitments permitting!

And an opportunity to put faces to names is always welcome - even where there've been disagreements.

Speaking of MM, what's up with him ? AWOL /MIA ?

He's not graced the boards with his presence since the news broke...What's up with that?

Whilst you're at it, I'd be interested in your (and other regulars - or new arrivals!) joining the share-price sweep.....

ATB