West Africa Rising: the makings of an iron ore boom?

Major multinational mining companies have been flocking to West Africa over the past few years, as iron ore's soaring price and Africa's cheap labor have offset concerns about regional instability.

West Africa Rising is a weekly look at business, investment, and development trends.

West Africa – a region known for its poverty, civil wars, and flimsy governments – looks set to become one of the world’s most important sources of iron ore, the primary ingredient in steelmaking.

Major multinational mining companies have been flocking to the volatile region over the past few years as the price of iron ore has soared, more than tripling between 2007 and 2010. Demand for the commodity is also booming, thanks largely to the growing appetites of steelmakers in China, which is the world’s biggest iron ore importer.

The latest West African investment was announced last week, when Vedanta, India’s largest exporter of iron ore, revealed that it was buying a majority stake in Western Cluster Ltd., a network of iron ore deposits in the West African nation of Liberia. The investment marks Vedanta’s first foray into iron ore outside of its home country.

In coming to West Africa, Vedanta joins a veritable who’s-who of the iron ore industry. Brazilian mining giant Vale and Anglo-Australian company Rio Tinto have recently acquired concessions in Guinea, while BHP Billiton and ArcelorMittal are investing heavily in Liberia. Iron ore deposits elsewhere in the region – including Mauritania, Senegal, Sierra Leone, Ivory Coast, and Cameroon – have also lured investors from overseas, and even more projects could be in the works.

“A huge percentage of West Africa is still unexplored,” says Guy Duport, the CEO of Vancouver-based West African Iron Ore Corp.

“Historically, production of iron ore has been dominated by China, Australia, and Brazil,” Mr. Duport says. “However, as demand has increased in recent years, supply is coming from more diverse sources,” he says, noting that West Africa is “particularly well placed” in that regard given the cheap costs of freight in the region.

Total production in the region could reach 500 million metric tons per annum over the next four or five years, Duport adds. That figure represents almost a quarter of the current global output, which hit 2.2 billion metric tons in 2009, with China being the number one producer at nearly 900 million metric tons.

But investing in West Africa comes with its own particular set of risks, namely in the form of political instability. Civil unrest has roiled both Ivory Coast and Guinea in the past twelve months, although both countries are now at peace. Upcoming elections in Liberia, which are set for October, and Sierra Leone, which are due next year, could further test the region’s stability.

And while labor is relatively cheap in West Africa, industrial infrastructure in many places is either weak or non-existent. That means that mining companies have to build their own power plants, train lines, and roads if they want to access – and export – the iron ore that lies below the surface. But with prices rising and steelmakers ever hungrier for their primary ingredient, such obstacles will likely seem less formidable than they were in the past.

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