Guinea: Simandou Is China’s Poisoned Chalice – Analysis

By Luke Hurst and Peter Cai*

In September 2021, Alpha Conde — the octogenarian president of Guinea — was toppled by the special forces he created. It is the latest episode of political instability in the West African state with not only rich resources but also a history of military coups.

A Chinese foreign ministry spokesperson, in an unusual move, spoke against the military coup and urged the immediate release of the former president. This is a departure from Beijing’s cardinal foreign policy dictate of non-interference in other countries’ domestic affairs.

China has a big stake in the country. Guinea is China’s biggest supplier of bauxite, a key raw material for the aluminium industry. But perhaps more importantly, Guinea is home to the world’s largest untapped iron ore deposit, Simandou.

With an estimated 2.4 billion tons of high-grade iron ore reserves, Simandou is widely seen as China’s best hope of reducing dependency on Australia, which is by far the largest supplier of iron ore to the country. Beijing’s relationship with Canberra has sunk to new lows during the last two years over a range of bitter disputes from the South China Sea to the decision to exclude Huawei from Australia’s 5G network.

Guinea was mentioned as an option for China to develop a large-scale iron ore mine in its five-year plan for the steel industry released by the Ministry of Information Technology and Industry in early 2021. It is a key piece in China’s strategy of achieving a higher degree of resource security.

Two Chinese companies already have strategic stakes in the Simandou project — the state-owned Chinaclo and the privately controlled Weiqiao. In 2020, China’s largest steelmaker, Baowu Steel Group, was reportedly exploring the possibility of establishing a US$6 billion consortium to develop Simandou in partnership with other steelmakers, engineering companies and sovereign wealth funds. 

The ouster of Alpha Condo could derail Beijing’s ambition to reduce its dependency on Australia for iron ore, highlighting one of Simandou’s biggest risk factors: political instability in a country ravaged by civil war and tribal conflicts.

China is cognisant of political risk and is not afraid of airing it publicly. China Geological Survey published a report in 2020 highlighting the Guinea government’s lack of respect for contractual arrangements, political instability and rising African resource nationalism. 

The report is critical of industrial relations in the country and cites increasingly frequent strikes as a ‘negative’ for investment. It concludes by saying that while the Simandou project’s advantages are clear, the risks are also significant, including huge investment outlay, a long investment cycle, and uncertainty. Chinese firms have acquired mining rights, but there is significant uncertainty about the profitability of the project. The report notes, ‘Chinese companies will face significant challenges during implementation and operation stages of this project’.

The Chinese government’s geology services further warn about the Guinean government’s desire to extract as much as US$15.5 billion in tax. A non-Chinese mining executive who was heavily involved in the early development of the Simandou project noted: ‘the biggest [issue] is that Simandou is a national crown jewel and in any country … resources of that scale come with very big political strings … this is far bigger than anything they’ve ever had to deal with before’.

Australian miner and Chinalco’s partner in the project, Rio Tinto, understood the risk too well as the victim of Guinea’s past expropriations after winning the exclusive development rights in 1997. Today, Rio Tinto’s share in the Simandou project has been whittled down to 44.05 per cent.

In Simandou, Beijing faces a huge dilemma. It is a significant opportunity to reduce its dependency on a supplier that it no longer trusts. But geography, price fluctuations and political instability also present significant risks.

Despite Beijing’s established ties in Africa, its large cheque book and ability to deliver massive infrastructure projects quickly, there are things even the Chinese Communist Party find beyond their control.

*About the author:

• Luke Hurst is Managing Director at Lydekker, an Australian-based Asia strategy and market advisory firm. 
• Peter Cai is Research Fellow and Director of China-Australia relations at the Lowy Institute.

Source: This article was published by East Asia Forum