Australia's Coal and Iron Ore Exports: A Tipping Point
Australia’s coal and iron ore industries have long been cornerstones of the nation’s economy, driving both export revenue and job creation in mining and manufacturing sectors. However, as 2024 unfolded, these industries began to show signs of strain. The government’s decision to approve four new metallurgical coal projects in the face of declining demand signals a response to immediate economic pressures but may not be a sustainable strategy in the longer term. This expansion is occurring as the world, especially in major markets like China, faces an economic slowdown that is directly impacting steel demand and, consequently, coal consumption.
In a bid to address the imminent challenges posed by the global downturn, the Australian government continues to double down on coal exports. Still, this decision conflicts with broader, global trends that suggest metallurgical coal, a key ingredient in traditional steelmaking, is on a slow decline due to shifting technological trends and a push towards decarbonizing the steel industry.
Falling Demand and Rising Competition in Steelmaking
A significant driver of change in Australia’s coal and iron ore industries is the decline in steel demand, primarily due to a slowdown in China, the world's largest steel producer and consumer. Chinese demand for steel has weakened as the country’s construction and manufacturing sectors, which are heavy consumers of steel, slow down. This decline in demand, coupled with increased supply from competitors like Brazil, is expected to further reduce iron ore prices. According to the Australian government’s resources reports, iron ore earnings will decline by approximately A$42 billion over the next two years. The country’s projected decline in export earnings reflects the challenges in meeting the rapidly changing global demand landscape.
At the same time, increasing international competition presents a significant challenge for Australia. Brazil, the second-largest exporter of iron ore, continues to ramp up production, while countries like Guinea in West Africa are bringing new large-scale projects, such as the Simandou project, to the market. These developments are expected to put even more pressure on Australia’s share of the global iron ore market in the near future, which could lead to even lower prices.
Shifting to Higher-Grade Iron Ore for Green Steelmaking
While iron ore demand has softened in the short term, the larger issue is a growing trend towards higher-quality iron ore, specifically Direct Reduced grade ore, which is essential for producing low-carbon steel. The DR process uses hydrogen as the reductant, significantly reducing the carbon footprint of steelmaking. This shift is critical as the global steel industry moves toward a net-zero future. Countries like Sweden are already building large-scale green steel plants, with companies like SSAB preparing to start commercial-scale production using green hydrogen.
Unfortunately, Australia’s iron ore is largely of a lower grade, unsuitable for use in DR-based steelmaking. This has prompted companies like Rio Tinto, BHP, and BlueScope to work on technologies that could make Australia’s iron ore more viable for DR steelmaking. Despite this effort, the transformation of Australia’s iron ore industry is not moving fast enough to meet the impending demand for higher-grade iron ore that will be crucial in the low-emission steel future.
The risk is that Australia’s iron ore, particularly its lower-grade supplies, will become less competitive as global steelmakers turn to DR-grade ore, primarily found in countries like Brazil. Moreover, new iron ore projects in Africa, particularly the Simandou mines, are expected to flood the market with higher-quality iron ore, further undermining Australia’s competitive advantage in the global steel supply chain.
Green Hydrogen and Australia’s Long-Term Steelmaking Strategy
The future of steel production lies in the transition to green steel, which uses green hydrogen to replace traditional fossil-fuel-based methods. Globally, companies are investing heavily in technologies that allow the reduction of iron ore with hydrogen, a clean energy alternative. This process, known as Direct Reduced Iron, promises to significantly lower the carbon emissions associated with traditional blast furnace steelmaking.
Australia has an opportunity to position itself as a leader in green hydrogen production, which could become a key enabler for its iron ore industry. With abundant renewable energy resources, particularly solar and wind, Australia is uniquely placed to produce green hydrogen competitively. South Australia, for instance, is leading the country’s transition to renewable energy with plans to achieve 100% renewable energy by 2027. However, the Australian government’s commitment to supporting gas as a transition fuel, notably in projects like the NeoSmelt partnership with Woodside, may undermine the development of a green hydrogen-based steel industry. By focusing on blue hydrogen (hydrogen produced from natural gas with carbon capture and storage), Australia risks getting stuck with fossil-fuel-based technologies that will eventually be phased out as green hydrogen becomes more cost-effective.
The global shift toward green hydrogen for steel production is already underway, with countries such as Canada, Brazil, and Oman beginning to position themselves as future leaders in this field. If Australia does not accelerate its transition to green hydrogen for iron ore reduction, it could be overtaken by these nations that are making significant strides in low-carbon steel production.
Metallurgical Coal’s Declining Role in Global Steelmaking
Despite the Australian government’s recent approval of new metallurgical coal projects, the long-term role of coal in steelmaking is shrinking. The International Energy Agency (IEA) has forecasted a decrease in global metallurgical coal imports, a trend that includes Australia. While coal remains a crucial component in current steelmaking processes, advances in green steel technologies are gradually rendering it less necessary. At the same time, the demand for metallurgical coal in countries like China is diminishing, adding to the uncertainty surrounding Australia’s coal exports.
The Australian government’s approval of coal projects may provide a short-term boost to the economy, but these decisions may not be sustainable in the long run. With growing concerns about the environmental impact of coal mining, the global push for cleaner steelmaking processes, and the emerging competition from green hydrogen-based steelmaking technologies, the coal industry is facing an uncertain future. If Australia’s coal producers do not pivot toward more sustainable energy sources and green steel production, they risk losing competitiveness as global steelmakers shift towards greener alternatives.
Conclusion: A Crossroads for Australia’s Coal and Iron Ore Industries
Australia is at a critical juncture for its coal and iron ore industries. While the approval of new coal projects may seem necessary to secure short-term economic benefits, the long-term future of these industries is uncertain. The shift towards low-carbon steel technologies, particularly green hydrogen, is poised to disrupt Australia’s current export model. As global demand for high-quality, DR-grade iron ore increases, Australia must adapt by developing technologies that can produce higher-grade ores suitable for DR processes.
Additionally, Australia must invest in green hydrogen production and explore alternative methods to decarbonize its iron ore industry. If it continues to rely on fossil fuel-based technologies like blue hydrogen, Australia risks losing its competitive edge in the evolving global steelmaking market. The time for action is now, as the global steel industry moves toward a greener future, and Australia’s traditional dominance in coal and iron ore exports may not last unless it adapts to these changes.
