Ebola Virus Threatens Iron Ore in West Africa

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The 24-hour news channels and papers have been understandably busy with reporting of the ISIS murder of James Foley, the earthquake in Napa and Russia’s incursions into Ukraine’s eastern provinces, so most of us could be forgiven for not closely following the deadly Ebola virus spreading across west Africa.

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The Washington Post reports the virus has infected at least 3,069 people so far, and resulted in 1,552 deaths, although according to the World Health Organization, those figures are almost certainly an underestimate. Quoted by the paper, the WHO states the virus is certain to claim more lives than all of the previous Ebola outbreaks combined and could top 20,000 by the time it is brought under control, an objective that looks less and less likely by the day.

The human tragedy is quite naturally the focus of relief efforts, but a quiet tragedy is going on in the background. The economies of these countries are impacted as foreign firms move contractors and workers out of west Africa and investment is drying up fast, nowhere more so than in the iron ore industry. On the back of $190 per ton benchmark iron ore prices a few years ago, new mines were started and existing operations were expanded by western firms, often junior miners but also large players like ArcelorMittal which owns mines in Liberia, according to the FT.

As the iron price has fallen, those operations, lacking the huge economies of scale enjoyed by Rio Tinto and BHP Billiton in Australia and Vale in Brazil, have struggled to cover operating costs. For them, the Ebola virus may be the final straw. ArcelorMittal has already called force majeure on its Liberian mines and with operating costs over $100 per ton, other miners such as London Mining and African Minerals in Sierra Leone and Bellzone in Guinea could face bankruptcy or takeover by their (often Chinese) financial partners.

Indeed, it would be in China’s wider interest to keep these mines going if they can. As the iron price has sunk below $100/ton (benchmark price for 62% iron ore as assessed by the Steel Index has just fallen below the $89 per ton level for the first time since September 2012, according to Reuters), the only miners that can compete are those enjoying the largest economies of scale.

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Australian exports have risen to account for more than 60 percent of China’s total draw from the rest of the world in the past couple of months. Brazilian shipments are holding steady at just under 20 percent, but China’s imports from everywhere else have been shrinking, from over 30 percent last year to 22 percent in June and July.

At this rate when, or if, prices do rise again, China will find itself in the grip once more of the big three with all of the loss of pricing power that will entail. Even domestic Chinese miners are closing due to low prices. Macquarie Bank estimates Chinese domestic ore production fell by 6 percent in the first half of this year, with the trend accelerating in the most recent months. Production in the second-quarter is estimated to have fallen by 18 percent year-on-year. Meanwhile, Chinese steel production growth is slowing and demand growth has shrunk to almost zero with only exports showing strong growth, not a development the rest of the world is likely to tolerate for long.

So far the west African iron ore industry is one of the highest profile casualties of the spreading Ebola epidemic but as the virus spreads into Nigeria the oil industry there could be impacted. Just this week copper exports from the Democratic Republic of Congo into Botswana were blocked due to the possibility of importers spreading the Ebola epidemic. It also threatens to potentially shut down aluminum supply chains for Rio, Rusal and Alcoa in Guinea. The timing could not be worse for iron ore producers in the region and with India withdrawing from iron ore exports it will leave the seaborne market increasingly at the mercy of the big three.

 

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