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Evergrande is not the only threat to the big iron ore players. In a few years, one of the world’s greatest untapped reserves of iron ore, in the Simandou mountain range of Guinea, is expected to deliver a flood of fresh supplies to the global market.ALY SONG/Reuters

A 40-second video made in August in the southern Chinese city of Kunming provides a graphic account of the country’s housing bubble. It shows controlled explosions turning 15 apartment towers into rubble. They were built seven years ago and never occupied.

Since then, China’s housing woes have been exposed by the liquidity crisis at Evergrande, the world’s most indebted housing developer. The company’s shares are in freefall – they are down more than 85 per cent in the past year – and S&P Global Ratings said a default on bond payments is “likely.”

While Evergrande indicated Wednesday that it had struck a deal with creditors to make a relatively small payment on domestic bonds, the collapse of the company, barring a government bailout, is not being ruled out as Beijing cracks down on the excessive leverage that fuelled the building orgy of Chinese developers.

It was China’s urbanization drive, coupled with a relentless demand for steel to cover the landscape with apartment and office towers and infrastructure, that turned the world’s iron ore producers into fabulous wealth-creation machines. The slowdown in the Chinese property market threatens to end the party.

Iron ore is the main ingredient in steel. Companies such as BHP, Rio Tinto, Anglo American, Vale and Fortescue Metals were happy to gouge great holes into the planet to extract the ore and ship it to China’s voracious steel mills. Canada’s Teck Resources, one of the main suppliers of the coking coal used in the mills’ blast furnaces, rode the profit wave, too.

Even before the Evergrande debacle, steel prices were falling as steel production slowed in China. The global market was in oversupply, and huge stockpiles were building up in Australia – it and Brazil are the world’s biggest iron ore producers.

Iron ore prices peaked at US$233 a tonne in mid-May. It has been downhill ever since, and the news of Evergrande’s possible default helped push the price down to US$94 earlier this week – a 60-per-cent drop in four months. While the big companies can still make money at that price, their cash flows will suffer.

Certainly their share prices are suffering. Rio, Anglo and BHP are well off their spring and summer peaks and took another tumble last week, when Evergrande’s woes hit the news. Rio, one of the mining companies most exposed to iron ore, has lost about a quarter of its value in recent months. On Sept. 17, UBS downgraded Anglo to a “sell.” The Swiss bank said “iron ore fundamentals [are] deteriorating faster than expected,” and it expects Anglo’s cash returns to shareholders to fall sharply in 2022.

Evergrande is not the only threat to the big iron ore players. In a few years, one of the world’s greatest untapped reserves of iron ore, in the Simandou mountain range of Guinea, is expected to deliver a flood of fresh supplies to the global market.

The Simandou project was stalled for years by engineering and financing obstacles and a series of epic corruption cases. But it is now pushing ahead under the control of Rio and Aluminum Corp. of China, known as Chinalco. Some mining company bosses think the Simandou iron ore gusher could push prices down to US$60 a tonne.

The other big threat is climate change, with mining companies pushing to reach net-zero emissions by 2040 or 2050. Their plight is made worse by the extreme difficulty of reducing, and eventually eliminating, Scope 3 emissions. These are the indirect emissions in a mining company’s value chain, notably from the use of the commodities processed by their customers.

Scope 3 emissions account for about 95 per cent of the mining industry’s overall emissions (the rest are Scope 1 and 2 emissions, such as the diesel fuel used by mining trucks, over which the companies have ample control). The mining companies that produce coal and iron face the toughest hurdle in trying to bring down Scope 3 emissions. Investors governed by environmental, social and governance (ESG) criteria are increasingly focused on that category of emissions.

The big, diversified mining companies are already getting rid of their coal operations by direct sale or spinoff in order to reduce their carbon footprints and make themselves more appealing to ESG funds (among them, Glencore is the only one without iron ore operations and is depleting its coal reserves, making its pledge to reach net-zero Scope 3 emissions by 2050 relatively easy). Their idea is to focus on the “green” metals – copper, cobalt, zinc, nickel and ferroalloys, among them – needed to make electric vehicles, batteries and wind turbines.

The big mining companies focused on iron ore had a good run for the past 15 years as China bought everything they could produce. Today, iron ore isn’t looking so good. The price is collapsing, and the Evergrande mess could accelerate the fall. The difficulty in killing off iron ore’s Scope 3 emissions makes the product even harder to love.

The mining companies laden with iron ore may decide it’s time to get out, just as they are getting out of coal. Expect a round of deal-making and restructurings designed to lighten their iron ore load, if not eliminate it. The product that glittered like gold for them for so long is suddenly looking a bit less shiny.

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