Africa, and many of the so-called emerging nations that are largely resource exporting countries, need to carefully review which mine, rail and port projects involving greenfield construction may lose out when times are tough.
Warning signs have been cropping up in the back pages of remote business news reports for about 12 months, yet grand plans for new mines and railways continue to be broadcast as if the old game rules still apply.
The eye of the now five-year-old economic storm may now be directly above emerging markets. During the last seven months, an estimated $US 156bn of investors' cash went into developed market equity exchange-traded products, says a Bloomberg report, while there was a net outflow of $US 7.6bn from new emerging nations' market funds. Compare this seven-month trend with the almost $US 4 trillion equivalent that flowed into emerging markets during the past four years.
Rio Tinto announced during the last week of August that it has delayed targeted production from the $US 20bn Simandou iron-ore project in Guinea by three years. The project includes a massive railway and port project as the supply chain to sell the ore to China and India.
The multiple investors in Simandou - Rio Tinto, China's Chalco and the World Bank - have just signed a draft agreement with the Guinea government that now says that the first export ore movements are not expected until the end of 2018, whereas the original target was 2015. The agreement signals the intent of the partners to work towards a binding agreement by the end of the year that will be focused on terms and conditions for funding the construction of the 650km railway through Guinea to a port south of the capital, Conakry.
Even with the delayed agreement, it is not yet clear whether this railway or a new line following a more direct route to the coast will be built. The mining companies would probably prefer a far less capital expensive route south to a Liberian port, whereas Guinea naturally prefers a Guinea port.
Rio has also spread its project risk by reducing its share in the Simandou project to 50% with a dilution to Chalco and other potential infrastructure builders. If and when it moves forward with construction, Simandou would be Africa's biggest mining project.
This is one example of African development plans hatched during the boom years of 2002 - 2008 which are now somewhat adrift. Simandou was one of three projects in emerging nations that Mr Tom Albanese the former chief executive of Rio Tinto invested in while following the projected China market expansion expectations prior to 2009. Albanese lost his job following a vote by the Rio Tinto board. The other two include the $US 6bn and climbing Oyu Tolgoi copper and gold mine in Mongolia and a $US 4bn acquisition of the Riverdale Mining coke coal project in Mozambique.
Expansion of the Mongolia project to a second stage has been reportedly mothballed because secured investment agreements with the Mongolian government have not yet been signed. The Mozambique assets were written down by $US 2.9bn earlier this year and the project delayed. Both the Mongolian and the Mozambique projects had expensive and now delayed rail construction requirements.
Other African rail projects that could be delayed because of the uncertainty of export ore and coal market demand from China or India include:
- a project to modernise the Dakar to Bamako metre-gauge rail link at a cost of at least $US 700m or $US 1.6bn if it is converted to standard gauge
- a $US 1bn plus new line in Namibia
- a $US 250m rail project in the southern Democratic Republic of Congo to reach Angola, and
- a $US 3bn new standard-gauge line in northern Mozambique.
In all, more than half of a projected $US 50bn investment in African rail projects could be in jeopardy. Yet others remain equally optimistic about the African rail market. One report suggests that the strongest annual growth rates in excess of 11% are expected in Sub-Saharan Africa, where several new routes and even networks are currently planned and will most probably be realised.
The counterintuitive evidence suggest that in the face of new market forecasts of a surplus of mine resource supply by some investment houses that have significantly downward revisions of demand forecasts, many rail projects will be delayed for quite a period. A Goldman Sachs report entitled Iron Ore Gluts Seen Through 2017 suggests that the ocean route iron-ore market is poised for at least four years of over-supply.
This multiple source back page reporting leaves open the question of which African rail projects will move forward first? Put bluntly, which schemes have the strongest business prospects?