The extra volumes will result in a significant disruption in the matrix of global iron ore supply, writes Will Fray, director, Maritime Strategies International, but there remain reasons to be cautious.

The numbers around the Simandou iron ore project in Guinea approach the hyperbolic. Rio Tinto, as a lead investor in one half of the deposit (blocks 3 & 4), expects that portion to contribute around 10m tonnes of high grade ore by 2026 with a gradual ramp-up to about 60m tonnes over the next three years. 

With production capacity of the whole system (including blocks 1 & 2) potentially peaking at 120m tonnes, Simandou has the potential to reshape global seaborne iron ore trade.

Examining the impact in a shipping context, it is unlikely that global iron ore consumption (in China or anywhere else) can expand sufficiently to absorb the 120m tonnes of new supply from the Simandou mine in Guinea. The key question, therefore, is where production will be displaced. 

Clearly, if domestic production in China is displaced then this would be most positive for bulker markets, but since China currently produces around 200m tonnes of iron ore (in equivalent iron-content to seaborne supply), this implies a 60% decline in output in the space of three years, a challenging task.

The next most positive outcome would be for Guinea to displace Australian material due to the tonne-mile impact. Also to be added to the mix is the leveraging impact of long port waiting times off Guinea’s coast compared with Australian load port times.

The replacement of Australian supply with Guinean ore is justifiable on a number of fronts, one of which is the drive by China to diversify its raw material sources (particularly from countries that may be seen to be more US-leaning) – the fact that tensions in the recent pricing negotiations between China and BHP helps to support the case that Australian material is looking at most risk.

It must be remembered though, that China has large investments in Australian mining and has recently agreed to price a third of its spot-market supply from BHP in Yuan, so a move away from Australia is not a clear cut assumption. 

Nonetheless, if we assume 120m tonnes of iron ore from Australia to China switches to Guinea then, taking into account the difference in distance and port waiting times and all else being equal, this would absorb an additional 18.7m dwt of capesize supply in the space of three years – about 100 ships. 

At this point it should be noted that more than double this amount of capesize ships (around 45m dwt) is scheduled to be delivered by 2028, so in itself this is not really a very positive scenario for the market.

In practice, Simandou’s extra volumes will not displace a single provider but instead result in a significant disruption in the matrix of global iron ore supply. 

Iron ore prices will come under pressure and some of the more expensive producers around the world will be impacted – not just China and Australia, although these latter two will bear most of the brunt. 

There are also other factors that will change, like consumption changes in China and additional supply from Brazil. At MSI, we forecast China’s domestic iron ore output to drop by a third over the next three years, and Australian exports to drop by 8% – combined this represents a 140m tonne decline, offset by rising exports from Guinea and elsewhere. 

But China’s ore imports in 2028 will still be only 20m tonnes higher than in 2025 and will be on the cusp of a longer term decline, based on changes to China’s steel markets. All told, we estimate that the demand to ship iron ore globally will only increase by 13m dwt between now and 2028 – equivalent to 72 more capesize ships required. 

With an orderbook of 45m dwt and incremental demand of only 13m dwt of iron ore, where else could these capesize ships be absorbed? 

Coal demand is under pressure, and China’s bauxite imports are already running ahead of consumption (aluminium output is capped and stockpiles are building). This is undoubtedly a bearish case for the fundamentals of capesize markets, therefore, even considering Simandou’s extra capacity. 

Where could the upside come from? One plausible scenario is that China revises its approach to iron ore stockpiling, adopting a strategy similar to coal – using US dollars to build strategic reserves of foreign-sourced material as a way to mitigate dollar exposure. Such a move would align well with expansion plans among Australian miners and represents a scenario with credible weight.

This seems a more likely scenario than the second – an upside to China’s steel production, given China’s re-focusing of economic output away from building infrastructure and manufacturing capacity. Could demand come from elsewhere? 

Whilst India is likely to see significant expansion in infrastructure development, this will probably be at a slower pace to China and would more likely support domestic mining activity in the medium term rather than importing in large quantities. 

Perhaps the most convincing case for an upside may just simply be disruption itself – whilst difficult to quantify, this tends to reduce the efficiencies of the trading fleet and lead to volatility and more positive sentiment.