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

The opinions revealed here are those of the author, a writer .

Australia's vast iron ore mining sector is dealing with stark choices as its greatest customer China has actually likely hit a peak in its steel production and global pressures mount to decarbonise one the world's most polluting industries.

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

The technique is choosing a path that maximises earnings, or at least minimises costs, while ensuring that the market continues to succeed.

Australia is the world's biggest exporter of iron ore, the key raw material used to make steel, and it shipped about 930 million metric tons last year, which at current costs would deserve about $93 billion.

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

The exports of all these commodities together barely exceed the worth of iron ore deliveries, underscoring 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 buys about 70% of the overall global seaborne volumes and produces about half of the world's overall steel.

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

The increase of China because the late nineties allowed Australia's iron ore miners to enormously increase output, enjoy economies of scale and end up being extremely lucrative.

However the nature of both China's need and the procedure of making steel are likely to change in the next couple of years, threatening the present model where Australia produces vast quantities of iron ore that is developed into steel in blast heaters and basic oxygen heating systems, processes that need the use of coking coal.

China's steel output has flatlined for the past 5 years around the 1 billion load per annum level, and the majority of analysts providing at today's Global Iron Ore and Steel Outlook Conference in Perth predicted that production will gradually decline in the next couple of years.

This is partly since China's infrastructure and real estate building will ease, but also since China will progressively usage scrap steel in electric arc furnaces to produce brand-new steel products.

While Australia's iron ore miners might have the ability to balance out the loss of some of China's demand by selling to newer steel manufacturers in Southeast Asia, it's likely that the total market for iron ore will soon decrease.

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

Higher 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 one of the ways the industry is thinking about decreasing carbon emissions.

Even utilizing gas to make DRI can decrease emissions by approximately 75%.

The issue is that DRI is difficult to export offered it can be unstable, so it tends to be made at the same location as the steel furnaces.

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So, if Australia's iron ore miners are thinking about going up the steel worth chain, they would need 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 kind of DRI, where the DRI is converted into a compact form using heat.

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

Should Australia's iron ore miners relocate to update their product, they will require substantial investment, and there is no certainty that the updated items will provide adequately greater margins.

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

The iron ore miners have actually succeeded in running complex operations at low expenses, however setting up a wind/solar power plants, a green hydrogen electrolyser and perhaps battery storage too would be an absolutely different difficulty.

There is likewise the possibility of exporting iron ore to a. third country for processing into HBI, with Gulf countries such. as Saudi Arabia a possible destination.

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

The HBI might then be shipped from the Middle East to. clients in Asia.

There are several other aspects that would come. into play, such as steel nationalism.

Many countries see steel as a crucial commodity and want to. keep their own markets. It's not likely Japan would want to. buy green steel from Australia, but 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 options in adapting to decarbonisation and peak. steel in China.

But all include expenses and dangers, and this is difficulty for an. market that has actually spent the last years de-risking itself and. concentrating on improving investor returns.

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

(source: Reuters)