NEW YORK – There was a time when Japan, like China today, was a revival of power in the East that kept military planners in the West awake at night.
“It is certain that no other country today spends so much of its revenue on naval preparation,” military writer Hector Bywater wrote in the 1921 book “Sea-Power in the Pacific – A Study of the American – The Problem of the Japanese Navy. . “
But Japan has a critical weakness: a shortage of steel.
“Since the end of the Great War, shipbuilding in Japan has been severely hampered by the difficulty of obtaining steel,” Bywater said in his book, which accurately predicted a naval conflict between the Japanese Empire and the United States two decades later.
Japan had imported large quantities of American steel under a special agreement between the two governments before 1917, when the US imposed a steel embargo that stemmed the flow to the Asian country.
“So serious are the recent shortages that tonnage production in Japan during 1920 was 25% less than the estimated 800,000 tonnes made in January of that year,” wrote Bywater. “This steel scarcity reacts to the naval program, delaying the launch and completion of ships.”
Chinese state planners eager to learn from history will soon realize that a striking vulnerability for Beijing today is its reliance on iron ore from Australia. While Beijing has tried to pressure and punish Canberra for proposing an international probe into the roots of COVID-19, it cannot escape Australian iron ore, which accounts for more than 60% of China’s imports.
As Australia deepens its ties with the Quad grouping with the US, Japan and India, forming a de facto anti-China tagged team in the Indo-Pacific, Beijing finds it increasingly uncomfortable to rely so much on Canberra for iron ore – the basic ingredient behind its own military build-up. .
But that dependency may turn out very well in 2025, said Peter O’Connor, senior metals and mining analyst at Australian investment firm Shaw and Partners.
“They are very serious” about diversifying supply and flattening the iron ore cost curve, O’Connor told Nikkei Asia.
The main focus for China’s diversification push is Guinea, West Africa’s poorest country, said O’Connor. The 110 km long hills called Simandou are said to hold the world’s largest untapped reserves of high-quality iron ore.
Commodity observers have known Guinea’s potential for years, but a lack of infrastructure has hindered such development efforts. A 650 km long railway will need to be built from scratch, as well as a modern port where iron ore will be shipped.
Cost calculations always discourage potential newcomers, such as Rio Tinto. But Beijing has more incentive to implement the project than simply calculating the return on investment, because China needs to avoid the fate of Japan in the early 20th century.
“Infrastructure is a function of time, money, willingness to invest and, more importantly, capability,” said O’Connor.
China is building railroads around the world through the Belt and Road Initiative and has never been short of experience.
But what about the funding?
China currently buys 1 billion to 1.1 billion tonnes of iron ore annually from third parties, O’Connor said.
“For every $ 1 the Chinese can lower the long-term iron ore price … that’s $ 1 per tonne times one billion, so a savings of one billion dollars a year,” he said. “It’s not just about diversity, it’s about lowering prices. It’s not about the return on equity or the return on capital from an actual investment, it’s more about the benefits of a long-term pricing structure.”
The long-term trajectory envisages iron ore prices dropping to around $ 60 an ounce from around $ 160 currently, according to a market view.
The project to develop Simandou has been divided into four blocks, and China has a direct or indirect stake in each of these blocks. The area contains about 2.4 billion tonnes of ore grading more than 65.5%.
“The extraction of Simandou’s iron ore reserves will transform the global market and catapult Guinea into an iron ore export powerhouse with Australia and Brazil,” Lauren Johnston, a researcher at the SOAS China Institute of the University of London, told Nikkei.
If China opens up Simandou reserves and pushes down international iron ore prices, “it could see selective commodity markets increasingly being driven by intra-developing country dynamics,” said Johnston.
China will find such waters easier to navigate than having to do business with members of the Australian Quad.
Guinea is this year’s chair of the United Nations “Group of 77 plus China”, a group of 134 developing countries that make up the large voting bloc that China can count on. Guinea has been actively making statements on behalf of the group since taking office in January.
Johnston predicted that China would be pleased if Simandou’s progress was made ahead of the Forum for Sino-African Cooperation to be held in neighboring Senegal this year, the first time a Beijing-led meeting – held every three years – will be held. by the West African country.
As if to reflect Beijing’s determination to complete the project, China was quick to congratulate Guinean President Alpha Conde on his re-election in October, despite allegations of fraud. The election came after Conde changed the constitution, allowing him to run for a third term.
On March 4, the first batch of COVID-19 inoculations donated by China arrived in Conakry, the capital of Guinea, making the country one of the first to receive vaccine aid from China. Foreign Minister Ibrahima Khalil Kaba was at the airport to receive the gift, with Chinese Ambassador Huang Wei by his side.
“I believe that with China’s support, Guinea will definitely overcome the epidemic,” said Kaba, according to the Xinhua News Agency.
The website of the Chinese Embassy in Conakry shows that Huang was a regular visitor to the Kaba office.
“This is no coincidence,” said O’Connor. China is “preparing the way” to develop Simandou, with a rapid 2025 schedule, he said. “It would seem redundant if you were talking about Western producers in Australia or Brazil, but it makes a lot of sense if China can produce within that time frame.”