URSABLOG: A Cast Iron Argument For Investment In Shipping

Much has been written in recent weeks – including by myself – of supply chain disruption as the Panama Canal dries up (or doesn’t) and the Houthi rebels attack shipping in the Red Sea. This is financially good for shipowners, but not necessarily for others in the supply chain, as freight rates increase and goods take longer to arrive. But it is not just climate change and war that cause these changes, it is also the desire to accelerate decarbonisation and promote development that has the potential to shift trade routes.

Stop reading this for a minute – but only for a minute – and look around you. Think about the amount of steel around you, in plain sight or hidden. If you – like I do – live in an apartment block, it is likely that a lot of steel was used to reinforce the concrete used to build it. Go into the kitchen and look at all the utensils and appliances you use (and those that are forgotten hidden in cupboards). Think about going for a drive in your car (lots of steel) along the roads and across bridges and through tunnels (lots of steel) past signs and other road furniture (lots of steel). Even if you go by bus (lots of steel) or the metro (a hell of a lot of steel), the structure of our cities and the transport links in between is held together and supported by steel. Think also about ships.

Traditional steel making is extremely energy – and therefore carbon – intensive. It uses coking coal mixed with iron ore and limestone in the blast furnace to get the temperatures up to sufficient temperatures so that the pig iron can flow out in liquid form and then be taken to be further treated and create the various products needed to build and maintain our modern lives. Steel making produces 7.5% of the total emissions of greenhouse gas – three times the amount of shipping. So steel making  too is in the spotlight for emission reduction. China is by far the largest steel producer in the world.

How to reduce steel making emissions? New technology can help. Direct reduced iron is the process of getting rid of oxygen from iron ore or other iron bearing materials in the solid state, i.e. without melting them as what happens with coking coal in the blast furnace. Then, the refined ore can be melted in arc furnaces powered by electricity (from renewable sources we hope) and therefore the carbon footprint is greatly produced.

There is a nice little paradox here – like many new ‘breakthroughs’ on the road to net zero. The agents used to reduce the iron ore are carbon monoxide and hydrogen, which usually come from reformed natural gas, synthetic gases or coal. Anyway, I digress.

This process is already being applied to iron ore in Brazil and elsewhere prior to shipment – mostly to China, but also to Japan, India, South Korea and Germany – but it requires high quality iron ore. Ed Conway, in his book Material World (2023), writes “In 2019 we mined, dug and blasted more materials from the earth’s surface than the sum total of everything we extracted from the dawn of humanity all the way through to 1950.” This is partly because of ever growing demand, but also because the more easily accessible sources have already been mined and depleted. Most of the good quality low hanging fruit has already been plucked.

So where will the better quality iron ore be found? In what seems to be a case of déjà vu all over again, it was announced this week that finally, honestly, really, the world’s biggest mining project – in the Simandou mountains in south-eastern Guinea – will start this year, after 27 years of setbacks, scandals and more than a few false dawns. Rio Tinto – the project lead and licence holder – once their Chinese state-owned partners get the final sign-off from Being, will finally start developing the massive US$ 20 bill project.

Rio Tinto has a lot of partners in the deal: the Guinean government, five Chinese companies and at least two more, not to mention the members of various consortia. Rio Tinto will build the Simfer iron ore mine in partnership with a consortium led by the world’s largest aluminium producer Chilanco. A second iron ore mine will be built by Baowu, China’s and the world’s largest steel producer in partnership with a consortium led by Singapore’s Winning International Group.

This is not all. A 552 km railway has to be built through the mountains to Morebaya, close to Conakry, where a newly built deepwater port – deep enough for capesizes at least – will be constructed on the Atlantic coast. A lot of steel will be needed for the construction of these too.

Rio Tinto first got the licence in 1997. So why has it taken so long to get to the starting line? Well firstly the project is too big for just one company to handle. Secondly – as is usual for projects like this – corruption and scandal has interrupted the process. Thirdly, the search for better quality iron ore is on again. Iron ore from Simandou is of a very high quality, with an iron content of greater than 65%.

However I doubt that this mega-project will start mining – let alone exporting – iron ore any time soon. If the project has taken this long to get off the drawing board – and out of the courts and the boardrooms – how much longer will it be until the first cargo is loaded onto a capesize in Morebaya port? And geopolitical risk will always hover these multinational projects.

And the main customer of this iron ore, China, has its own issues. In a communique issued on Wednesday, the Central Commission for Discipline Inspection said it would prioritise investigations into state-owned enterprises – as well as the finance, agricultural and pharmaceutical sectors – which play a central role in China’s economy. This warning followed a speech by President Xi Jinping on Monday where he called for “tenacity, perseverance and precision” in the fight against corruption. “It is essential to make it our top priority to crack down on any collusion between officials and businesspeople, combat profit-seeking activities with the help of power, and resolutely prevent interest groups and power groups from infiltrating the political sphere,” state media quoted Xi as saying. I cannot imagine that a major project like this was not achieved without the necessary unofficial incentives to various Chinese interests that have plagued the project so far in other parts of the world.

But let us say for now that the desire for low carbon steel is greater than the Party’s desire for control. This project has the potential to fundamentally reshape capesize trade routes. And even now the tonne-mile demand map is changing. Bauxite – the raw material for aluminium, also a very important metal for our low carbon world – is now as important as coal for capesizes. Most of this comes from Port Kamsar in Guinea which is further up the coast from the new port. The late and vigorous spike in capesize freight rates in 2023 was in part due to increasing demand for capesizes from Guinea.

Now imagine a country that becomes as important as Brazil and Australia to capesizes: Guinea. Add to the bauxite cargoes the fresh supply of high-quality iron ore from Simadou. The balance of supply of the cargo will definitively shift to the Atlantic, whilst the majority of demand will be in far eastern Asia. The demand for cargoes from new places is changing as the world changes towards a less carbon intensive direction. And with it the supply and demand of ships.

The benefit of shipping – as has been seen many times in the past, not least during Covid – is that it is flexible, has plenty of ocean space to move around in, and can adapt to changes – commercial, industrial, technogical, geopolitical – that other land-based forms of transport cannot. And despite the breathless commentary of less-informed commentators, freight rates are such a low proportion to the cost of the cargo, let alone the final finished product, that even a stratospheric rise will not lead to a reduction in demand for the cargo, let alone feed into inflation numbers.

But the balance between an excess of demand and an excess of supply in shipping is waver thin, and the road to a boom or bust can happen gradually, unseen, until the effects are upon us. This is not necessarily an argument to buy – or order – dry bulk carriers at the moment. I am just stating an opinion that the world’s shipping markets are multi-dimensional and have to be understood not just from a spreadsheet of numbers but also geographically and geopolitically. There are enough unknowns in all that to be cautious enough, but also ever vigilant. The next big boom in the dry market – just as it happened for containers through the pandemic, and for tankers following the invasion of Ukraine – will also be unexpected. And – as in love, comedy and war – timing is everything.

Simon Ward