China, decarbonisation present Australia's iron ore miners with costly options: Russell

Australia's large iron ore mining sector is facing stark options as its biggest consumer China has likely hit a peak in its steel production and global pressures install to decarbonise one the world's most contaminating markets.

The scale of these difficulties are enormous, but they are far from insurmountable, and there are a selection of choices that Australia's iron ore miners can pursue.

The trick is selecting a path that increases earnings, or at least reduces expenses, while ensuring that the market continues to flourish.

Australia is the world's biggest exporter of iron ore, the crucial basic material utilized to make steel, and it shipped about 930 million metric tons last year, which at current rates would be worth about $93 billion.

Australia is likewise the world's largest exporter of metallurgical coal, used to make steel, ranks 2nd in thermal coal and in melted natural gas, while likewise being the greatest exporter of lithium and the biggest net exporter of gold.

The exports of all these commodities together hardly go beyond the worth of iron ore deliveries, highlighting the outsized role of the ore, which is primarily produced in the state of Western Australia.

Just over 80% of iron ore exports head to China, which purchases about 70% of the total worldwide seaborne volumes and produces about half of the world's total steel.

Putting these numbers together gives an image of a dominant manufacturer and a dominant buyer in the iron ore market.

The rise of China since the late nineties allowed Australia's iron ore miners to massively increase output, reap economies of scale and end up being hugely profitable.

The nature of both China's demand and the procedure of making steel are likely to change in the next few years, threatening the present model where Australia produces huge amounts of iron ore that is developed into steel in blast furnaces and standard oxygen heating systems, procedures that need the use of coking coal.

China's steel output has actually flatlined for the past 5 years around the 1 billion lot per year level, and many analysts presenting at today's Global Iron Ore and Steel Outlook Conference in Perth forecasted that production will slowly decrease in the next couple of years.

Due to the fact that China's facilities and housing, this is partially building will ease, but likewise because China will increasingly usage scrap steel in electrical arc heaters to produce new steel items.

While Australia's iron ore miners might be able to balance out the loss of a few of China's demand by selling to more recent steel manufacturers in Southeast Asia, it's most likely that the general market for iron ore will quickly decrease.

It's also likely to alter in structure, with higher grades of iron ore chosen as these can be more easily utilized as a feedstock together with scrap in electrical arc furnaces.

Greater grades of iron ore can also more quickly be upgraded into direct decrease iron (DRI), which in turn can be turned into steel without utilizing coal as a fuel.

Making steel utilizing DRI produced with green hydrogen and renewable resource is among the methods the market is thinking of decreasing carbon emissions.

Even using gas to make DRI can minimize emissions by up to 75%.

The issue is that DRI is challenging to export offered it can be volatile, so it tends to be made at the exact same area as the steel heaters.

VALUE CHAINS

So, if Australia's iron ore miners are thinking about moving up the steel value chain, they would have to find ways of producing DRI and turning it into steel in Australia, using sustainable energy.

Another path is upgrading the iron ore into hot briquetted iron (HBI), which is an updated type of DRI, where the DRI is converted into a compact form utilizing heat.

HBI can be shipped, and can be used in either an electrical arc heating system or a fundamental oxygen unit.

Should Australia's iron ore miners transfer to upgrade their item, they will need considerable financial investment, and there is no certainty that the updated products will deliver sufficiently higher margins.

For instance, if an iron ore miner concurred with its customers in China, Japan and South Korea to provide HBI instead of iron ore fines, this would need substantial investment in a clean energy system.

The iron ore miners have been successful in running complex operations at low expenses, however establishing a wind/solar power plants, a green hydrogen electrolyser and potentially battery storage also would be a completely various difficulty.

There is likewise the possibility of exporting iron ore to a. third nation for processing into HBI, with Gulf nations such. as Saudi Arabia a prospective location.

These countries have large quantities of gas which. could be used to turn iron ore into HBI in a procedure that would. still be more environmentally friendly than utilizing coking coal.

The HBI could then be shipped from the Middle East to. consumers in Asia.

However, there are a number of other elements that would come. into play, such as steel nationalism.

Lots of countries see steel as a key product and wish to. maintain their own markets. It's not likely Japan would want to. purchase green steel from Australia, however it may be prepared to purchase. HBI and keep the last procedure of making steel inside its. borders.

The problem for Australia's iron ore sector is that it has actually a. plethora of choices in adapting to decarbonisation and peak. steel in China.

But all involve dangers and expenses, and this is difficulty for an. industry that has invested the last years de-risking itself and. concentrating on improving shareholder returns.

The viewpoints expressed here are those of the author, a columnist. .

(source: Reuters)