Mega-Iron ore producers are under pressure to reform an industry that accounts for at least 7% of global CO2 emissions, a shift that will require fresh and clean methods, and higher-quality raw materials.
Demand for steel in China, the world’s second biggest economy, is forecast to decline by the end of the decade as a result of the country’s year-long property crisis, which normally consumed more than a third of the country’s steel output.
Rio Tinto, BHP Group Ltd., and Fortescue Metals Group Ltd., produce almost two-thirds of the world’s seaborne iron ore from Western Australia (WA). Rio, the world’s largest iron ore producer, shipped its first load of the material from WA’s Parker Point in 1966, generating A$1.3T over the last two decades.
Iron ore shipping accounted for approximately 5% of Australia’s gross domestic product last year. Now, much of the 200,000t of iron ore piled in the Pilbara Region may not meet the grade for Asia’s steel mills. For the first time in a generation, the threat to Australian mining’s most reliable profit generator is apparent.
“Australia’s ore industry is now at the start of a long-term structural decline.” Said Liberum Capital Ltd. analyst, Tom Price to the Economic Times. “It’s a fundamental shift that will resonate across the Australian economy.”
The long-term challenge for iron ore powerhouses is whether they can reinvent themselves to align with the decarbonizing global economy.
Currently, the majority of steel is produced using an energy intensive process—coal is heated and used in a blast furnace to melt iron ore at temperatures above 1800°C.
To meet climate goals, CO2 emissions from steel production must halve by 2030, according to the International Energy Agency. There is also increasing pressure from consumers and investors who are positioning renewable energy requirements at the forefront of their decisions. Governments are starting to act too, with policies like the European Union’s carbon border adjustment mechanism, which restricts carbon-heavy imports.
Existing lower-emissions options include the use of electric arc furnaces, a method that replaces iron ore with recycled steel scrap, forgoing coal, a challenging alternative according to steel producers, requiring huge amounts of capital and infrastructure.
Another potential solution is to combine a renewable energy powered electric furnace with direct reduced iron (DRI), a material that is produced by deploying natural gas to remove oxygen from high quality ores. Replacing gas with green hydrogen, created using solar or wind energy, would slash steel emissions.
Still, the iron ore grades from the Pilbara normally range from 56% and 62% iron, making it unsuitable for DRI production which requires iron ore of 66%. According to Wood Mackenzie Ltd., for the material to be apt for DRI, it would require processing that would increase costs by up to 25%.
“The premium for higher grade material is going to increase significantly,” said David Cataford, CEO of Champion Iron Ltd. in a quote for the Economic Times, a competitor to Australian producers which supplies higher-grade iron ore from Canada. “If you’re producing lower grade, we do feel it’s going to be more complicated in the medium-term.”
The deficit in higher grade iron ore could rise to 200Mt a year by 2050, Wood Mackenzie estimated in a report this month — a volume roughly equivalent to about a fifth of China’s current annual imports.
However, Australia’s iron ore executives believe they have enough time to achieve the technology breakthroughs or strategy shifts they need to salvage their market position.
“The transition away from coal-based steel making is a reality, but it will take some time and there remain significant uncertainties,” said Simon Farry, Rio’s head of steel decarbonization.
