Whyalla steelworks needs long-term viability. It won’t find it with gas

Earlier this month, Sweden’s Stegra announced €1.4 billion in new funding that will allow it to complete construction of its new steel plant that will run on 100% green hydrogen. 

This comes less than two months after gas producer Santos stated it had agreed terms for the supply of 200 petajoules (PJ) of gas to the Whyalla steelworks in South Australia over ten years. State Treasurer Tom Koutsantonis said that “gas is going to be king” at Whyalla.

In a post-Iran crisis world, in which the wisdom of over-reliance on fossil fuels is increasingly questioned, the contrast could hardly be starker. New IEEFA research highlights the risks involved in tying Whyalla’s future to gas, and how this situation can be retrieved.

In 2024, with South Australia in a world-leading position to benefit from the steel technology shift away from fossil fuels, the state government published its Green Iron and Steel Strategy.

Since then, however, despite the state’s advantages in renewable energy and the high-grade iron ore currently required for green hydrogen-based steelmaking, it has been retreating back to gas. 

There is nothing new or innovative about gas-based direct reduced iron (DRI) technology; it is a mature ironmaking pathway used at commercial scale across regions that don’t have metallurgical coal and where gas is cheap, such as the Middle East, North Africa and the US.

Iron produced via gas-DRI is a mainstream metallic commodity, not a differentiated “green” alternative. As a result, it will not attract a green premium. 

Meanwhile, Stegra has been able to lock in premiums of 20%-30% in long-term offtake agreements for its future steel production using green hydrogen.

With gas-DRI unable to secure such premiums, there are obvious questions as to how a gas-based Whyalla will be able to compete with countries that already use DRI technology and have much cheaper gas (Figure 1).

After years of uncertainty, Whyalla needs a plan for the steelworks to remain viable in a sector undergoing a global transition away from fossil fuels. Experience from Europe – where the steel technology transition is more advanced – suggests that capital grants for a switch from one fossil fuel to another (coal to gas) are not likely to achieve this.

ArcelorMittal’s transition plans for its German steel operations highlight this risk. The steel giant planned to shift from blast furnace-basic oxygen furnace technology to DRI using electric arc furnaces running on gas, before transitioning to green hydrogen at an unspecified date.

In 2024, the European Commission approved €1.3 billion ($A2.2 billion) in a direct grant from the German government to support this – more than the $A1.9 billion on the table for Whyalla in state and federal subsidies.

Despite this support, ArcelorMittal announced in 2025 it would not be going forward with the plan due to the high cost of energy, highlighting “natural gas-based DRI production not being competitive as an interim solution”. 

Early green hydrogen use has become the global benchmark for truly low-carbon steel

Despite a recent spate of bad news for green hydrogen developments globally, its role in the steel sector has progressed more than the South Australian and federal governments realise. Day one or early green hydrogen use is becoming the global standard for green iron and steel developments worldwide.

China Baowu – the world’s largest steelmaker – is now developing an offshore wind-powered green hydrogen project to supply its first commercial-scale DRI operation. And while DRI plants in Europe based on gas have struggled, projects targeting early green hydrogen use have progressed. 

Salzgitter’s new DRI plant will run on a mix of gas and green hydrogen that it produces itself. The German government recently increased its support for Salzgitter’s new DRI plant to EUR1.3bn (AU$2.2bn). Meanwhile, France’s GravitHy recently confirmed hydrogen’s role for its own DRI project, stating: “Our strategy is to start with hydrogen from day one”.

In Oman, Meranti Green Steel is still expected to make final investment decision (FID) on a new DRI plant by mid-2026. It will use 10%-15% green hydrogen from day one, before progressively increasing the proportion of green hydrogen going forward.

The Iran war and resultant fossil fuel crisis will now only make domestically produced green hydrogen look an even better energy security bet. China’s National Energy Administration (NEA) has reportedly raised the status of green hydrogen to a “pillar of national energy security strategy”.

South Australia’s retreat from green hydrogen for steel looks like a misreading of the global steel technology transition’s progress.

However, Whyalla can be put back on a pathway to long-term viability. Instead of just a capital grant along the lines of the one that failed to help ArcelorMittal in Germany, government support should target lower green hydrogen costs and promoting the offtake of steel made using it.

Green hydrogen can be made cheaper by lowering the cost of renewable energy, something that is already planned for the Tomago aluminium smelter in New South Wales via targeted government support. Offtake support could involve government procurement or green iron production tax credits. A government-backed Clean Commodities Trading Initiative has been proposed to support market formation for Whyalla green steel production.

Such support would enable a progressive increase in green hydrogen use at Whyalla throughout the 2030s, as a requirement of the steelworks’ next owners.

Steel is a strategic industry for any government. But government support for it should not be wasted on a plan that locks in fossil fuel use and is unlikely to deliver long-term viability for that industry.

A plan to progressively scale up green hydrogen use at Whyalla can restore South Australia’s advantage in the global green iron and steel race.

Simon Nicholas is a lead analyst, Global Steel, at the Institute for Energy Economics and Financial Analysis (IEEFA)