Australia’s iron ore miners face falling Chinese demand
Australia’s vast iron ore mining sector is facing stark choices as its biggest customer China has likely hit a peak in its steel production and global pressures mount to decarbonise one the world’s most polluting industries.
The scale of the challenges are huge but not insurmountable and there are options Australia’s iron ore miners can pursue.
The trick is choosing a path that maximises profits, and minimises costs, while ensuring the industry continues to prosper.
Australia is the world’s largest exporter of iron ore, the key raw material used to make steel, and it shipped about 930 million metric tons in 2023, which at current prices would be worth about $93 billion.
Australia is also the world’s largest exporter of metallurgical coal, used to make steel, ranks second in thermal coal and in liquefied natural gas, while also being the biggest exporter of lithium and largest net exporter of gold.
But the exports of all these commodities together barely exceed the value of iron ore shipments, underscoring the outsized role of the ore, which is mainly produced in the state of Western Australia.
More than 80% of iron ore exports are to China, which buys 70% of the global seaborne volumes and produces about half of the world’s total steel.
Putting these numbers together gives a picture of a dominant producer and a dominant buyer in the iron ore market.
China’s rise since the late 90s allowed Australia’s iron ore miners to massively ramp up output, reap economies of scale and become hugely profitable.
But the nature of both China’s demand and the process of making steel are likely to change soon, threatening the current model whereby Australia produces vast quantities of iron ore that is turned into steel in blast furnaces and basic oxygen furnaces, processes that require the use of coking coal.
China steel output
China’s steel output has flattened in the past five years to around 1 billion tonne a year, and most analysts presenting at this week’s Global Iron Ore and Steel Outlook Conference in Perth predicted that production will gradually decline in the next few years.
This is partly because China’s infrastructure and housing construction will ease, but also because China will increasingly use scrap steel in electric arc furnaces to produce new steel products.
While Australia’s iron ore miners may be able to offset the loss of some of China’s demand by selling to newer steel producers in Southeast Asia, it’s likely that the overall market for iron ore will soon decline.
It’s also likely to change in composition, with higher grades of iron ore preferred as these can be more easily used as a feedstock along with scrap in electric arc furnaces.
Higher grades of iron ore can also easily be upgraded into direct reduction iron (DRI), which in turn can be turned into steel without using coal.
Making steel using DRI produced with green hydrogen and renewable energy is one way the industry is thinking of reducing carbon emissions.
Even using natural gas to make DRI can cut emissions by up to 75%. The problem is DRI is tricky to export given it can be volatile, so it tends to be made at the same location as the steel furnaces. So, if the miners wish to move up the steel value chain, they would must find ways to produce DRI and turn it into steel in Australia, using renewable energy.
Another path is upgrading the iron ore into hot briquetted iron (HBI)), an upgraded form of DRI, whereby the DRI is converted into a compact form using heat.
HBI can be shipped and used in either an electric arc furnace or a basic oxygen unit.
(The writer is a columnist for Reuters)