According to Fitch-affiliated market analyst BMI Research, the intended investment of US$700 million in an iron ore processing plant in Sierra Leone by Chinese state-owned mining company Shandong Iron and Steel signals the country‘s long-term commitment to mining in Africa.

Chinese state-owned mining company Shandong Iron and Steel announced on 4 November 2016 that it intends to invest $700 million in an iron ore processing plant in Sierra Leone. The investment will take place at its Tonkolili mine and will amount to the largest industrial investment in the country’s history.

Shandong initially bought a 25% stake in Tonkolili from UK’s African Minerals in 2012 and then purchased the remaining equity at only $170 million in April 2015 as African Minerals had to stop operating the mine, according to BMI, due to the ebola crisis and debt issues.

This follows a growing trend of western miners pulling out of the region owing to rising costs and debt loads being replaced by risk-tolerant, government backed Chinese investors. More generally, the incentive to invest in the sector stems from a very positive year for iron ore, with global prices rising 81% over 2016, in line with BMI’s view that China has been providing additional infrastructure stimulus measures that have propped up prices.

The announced investment is another sign of China’s long-term strategic vision of Africa for the supply of ores. China has a structural deficit in iron ore, and the Tonkolili mine is considered to have access to some of the largest iron ore resources in Africa. The mine’s current production capacity is 20 Mtpa and it was initially planned that the mine would eventually produce up to 35 Mt of iron ore per year. All of the iron ore mined at Tonkolili will be shipped to China, according to Shandong Iron and Steel.

Added-value mining will have muted effects on sector

While production at the mine is set to increase, this recent investment project is focused on the processing of iron ore and will therefore not have a significant impact on the country’s output. As such, BMI’s current projections that iron ore production growth will slow down from 15% in 2017 to just 4.2% in 2021, remain on course.

Furthermore, the total contribution of Sierra Leone’s mining industry as a percentage of GDP is no longer as signifi cant as it once was, and will continue to decrease in the coming years, even as GDP growth increases. Despite this, Sierra Leone’s iron ore production will perform well relative to the other key African exporters, and BMI expects it to surpass Mauritania as the second largest iron producer in the continent by 2019.

The added-value of processing commodities domestically can certainly be beneficial to the labour market and knowledge-base of any economy. But it is yet to be seen whether local workers will be used for the processing of iron ore at the Tonkolili site. Finally, BMI’s view that iron ore prices will moderate towards the end of 2017 and in 2018 could even put the whole investment at risk, which would be a big blow to an economy that has only recently started recovering from the ebola crisis. With all this in mind the company reaffirms its view that GDP growth in the country will average less than 7% over the next decade. MRA