Australia must keep its eyes on the green iron prize – the cost of inaction is untenable

As China’s construction slump and steel glut bite, the chairman of government-owned China Baowu Group, the world’s largest steelmaker, has warned China’s steel sector will enter a “severe winter” more challenging than even the major downturns experienced during the GFC of 2008.

This spells trouble for iron ore. Australia is the world’s largest iron ore exporter, and it is our number one commodity export, with over 80% going to China. The benchmark iron ore price has fallen below $US100/tonne, while prices for metallurgical coal used in steelmaking have dropped by a third to US$202/t in just 2 months. There is rising concern about the material impact of these numbers on the federal budget. 

Australia’s iron ore majors are well positioned to ride the downturn in the global steel market, with low operating costs and strong balance sheets on the back of five years of exceptional returns from high iron ore prices.

However, this slump is a stark reminder of the influence of China’s domestic steel industry, its market power on the global iron and steel value chain, and the impact of steel supply chain commodity prices on our domestic economic fortunes. 

China continues to grow its steel exports. It is likely to export more than 100Mt in 2024, including to jurisdictions implementing carbon pricing mechanisms, such as the EU’s carbon border adjustment mechanism (CBAM), and is looking to reduce the carbon intensity of its steel (steel production accounts for around 8% of global emissions). At the same time there is increasing supply of iron ore from high-grade, low-impurities jurisdictions in Africa and South America. 

These global iron ore and steel industry dynamics create an urgent imperative for Australia. Our future prosperity lies in providing higher iron-content products with low embodied carbon, and that requires a pivot to green iron, processed using firmed renewable energy.

This is our preeminent future-facing export opportunity, and the key to helping our trade partners like China decarbonise their steel mills as they respond to carbon tariffs and accelerate their climate ambition.

This means deploying at speed and scale renewables and common user electricity infrastructure in the global iron ore hotspot of the Pilbara, which requires a step-up in resource majors’ investments into decarbonisation and value-adding onshore. Fortescue is leading, but can’t do so in isolation. 

BHP is another story. Last week it reported a very strong set of FY2024 results, underpinned by an exceptional 61% return on capital employed in its Pilbara iron ore division. In contrast, its Climate Transition Plan 2024 shows a total lack of climate and decarbonisation ambition.

For example, it forecasts its global operating emissions (scope 1 and 2) will rise 3% from FY2023 to FY2030. Up is not down! BHP seems to think it can divest its way out of the responsibility of leveraging its brilliant balance sheet to lean into the massive opportunities of energy transition. Waiting until the entire current board has retired to act is the opposite of leadership – an epic fail.

Collective investment is needed now in electrification, decarbonisation and onshore processing if Australia’s resources leaders are to position themselves to capture value in the global green iron supply chain. Deferring the hard efforts until next decade is too late.

Australian policymakers, too, must keep their eyes on the green iron prize. Strategic national-interest policy and investment should be a top tier Federal priority.

As CEF has previously written, we urge the Australian government to collaborate with our key trade partners to encourage the formation of an Asian CBAM to extend and leverage the EU CBAM. This would provide the necessary price signal in global commodity markets to commercially underpin the >$100bn investment Australia needs to make to accelerate our green iron capacities, enabling us to benefit from the resulting ‘green premium’. 

We recommend three principal Budget interventions: a $10 billion green iron production tax credit, a $20 billion Future Fund mandate for value-adding strategic metals, and capping the federal diesel fuel rebate that largely goes to our big miners at $50 million per consolidated group per annum, with the revenues reinvested in transition of the resource industry towards zero-emissions power sources.

These initiatives would incentivise investment, electrification, decarbonisation and technological innovation in our value-added green iron sector before our global competitors steal the Pilbara’s massive iron ore ‘rivers of gold’.  

The clock is ticking. The opportunity cost to the Australian economy of inaction is untenable, and inertia is a punt we simply can’t afford to take. The government has a time-critical opportunity in the forthcoming MYEFO to put in place these policy measures and catalyse investment into this potential export behemoth at speed and scale.

Matt Pollard is CEF’s net zero transformation analyst. Tim Buckley is CEF director. AM Jonson is chief of staff.